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The Actuary The magazine of the Institute & Faculty of Actuaries

Other People's Money, by John Kay

Other peoples money
The system Kay describes is becoming history, its excesses, which he documents, the seeds of its undoing

Publisher: Profile Books
ISBN-10: 1610396030
Price: RPP £16.99

What is it all for? John Kay’s excellent book is purportedly an attempt to answer this question, where ‘it’ refers to banks’ enormous balance sheets, the vast volumes of financial activity, the huge rewards on offer in finance and the activities of financial services in general.
But the question is rhetorical, and as the book progresses, Kay repeats the question as a forlorn refrain at the pointlessness of it all.

“In the City, they sell and buy.
And nobody ever asks them why.
But since it contents them… they might as well.” The book argues that it does matter to the rest of us, because the City diverts resources to itself, does not do what it is there for and generally mis-allocates capital.

Professor Kay’s methodology is to examine financial services as he would any other industry and judge it by how well it provides to end-users. When Kay was growing up in Edinburgh, a typical male bank manager’s skill was chatting to clients at the 19th hole of the golf club. He has been replaced by the highly paid, smart alpha males we know and love today.

However, the job of a bank is to lend money to businesses and individuals, and the stalwart of the 19th hole did that a lot better than the current crop of flash boys, who predominantly trade with each other –  now only a shocking 3% of lending goes to firms and businesses.

The book starts with a history of how we got where we are, documenting de-regulation, the economic and technological trends that created opportunities for financial intermediaries, and the generally malign consequences of financialising on the economy. The middle section analyses how financial services meet the needs of the economy, and the last section proposes how finance could be reformed.

One of Kay’s main culprits is the rise of trading culture, with its “I’ll be gone, you’ll be gone” ethos replacing long-term relationships. He dismisses the often-cited reason for increased trading volumes. “People who applaud trades for providing liquidity to markets are often saying little more than trading facilitates trading – which is true, but of little general interest.”

The book is an extension of the Kay review of equity markets, which was commissioned by the Department of Business, Innovation & Skills and then universally ignored. The review was criticised because its recommendations did not match the scale of the problem.

Other People’s Money devotes nearly 100 pages to policy. The main focus of the section is addressing culture and, in some ways, attempting to turn back the clock; regulation should be simpler, but we should move away from trading and back to a long-term stewardship culture. Kay does not mention it, but the IFoA provides a possible model – the Actuaries’ Code and disciplinary scheme is a methodology for facilitating a culture of professional standards.

Yet this is the book’s weakest section. Memorable phrases, witty aphorisms, and wonderful anecdotes occur in the first two sections. Here he is not that interesting; the switch from defined benefits to defined contributions transfers risk to the employee; Kay’s generation is lucky and an increased retirement age would be a good idea. Not quite thought leadership.

Kay would argue that his recommendations are not backward-looking, as the financial system we have today is not what we need.

We do not need all this complexity and we would be better off
without the highly paid intermediaries.

However, I think he is backward-looking in another way. The system Kay describes is becoming history – its excesses, which he documents, the seeds of its undoing.

The current financial service providers do not serve the end-user, which makes them vulnerable to new entrants. They are already here; crowd-funding, peer-to-peer lending platforms, digital currency exchange and a thousand others, most of which cut out the middleman. This is the future of finance, not a reformed version of what we have. 

The book is worth reading, it is wry and wise and witty, a summation of the author’s considerable thinking on the subject. And it does raises an awkward question, which we really need to address – is what we are doing of any use, and if not, how can we make it useful?.

Nick Silver is a director of Callund Consulting Ltd