Amber Valley Liberal Democrats

Lib Dems set out plans to bring the City to heel

Conference backs policy motion on Reforming the Financial Sector

Liberal Democrats Spring Conference has passed a motion attacking the failure of regulation of the financial services sector, and calling for the whole system to be rebuilt.

The motion, proposed by Charles Marquand from Camden Lib Dems, criticises reckless lending practices by banks and other financial institutions over the last decade. It accuses the financial sector of having spent its time speculating at the cost of losing sight of its primary function of providing investment funds to business. It blames government and the regulators for failing to heed Lib Dem warnings that they needed to act to moderate rising personal debt and property prices, and to rein-in excessively risky behaviour by lenders.

The Liberal Democrats are proposing a full reconstitution of financial regulation, including new measures to discourage financial institutions from excessive short-term risk taking. Organisations, like hedge funds, in the 'shadow banking sector' need to be properly and effectively regulated, the party says.

The party is also proposing a series of measures which would reduce the dominance of 'the City' and traditional big financial institutions in the financial sector. These include support for credit unions and mutuals, more decentralised banking institutions and improved access to financial services through the Post Office network.

An amendment to the motion was passed, adding in, among other things, a statutory duty on lenders to lend responsibly, and strengthenig consumer protection measures.

TEXT OF THE MOTION IN FULL

(This incorporates amendment one, which was passed.)

F6: Reforming the Financial Sector

Eleven conference representatives, Watford and Oxford West & Abingdon

Mover: Charles Marquand

Summation: David Hall-Matthews

Conference notes that:

A. From the end of the 1990s financial institutions increasingly engaged in highly risky practices, such as excessive lending to individuals, and creating and trading extensively in complex and poorly-understood financial instruments.

B. The financial sector has lost sight of its primary function of providing investment funds to businesses in favour of speculative activity and in so doing has become disconnected from the wider economy.

C. In 2008 the financial sector underwent a significant shock which pushed major financial institutions into insolvency, threatening systemic collapse and having severe consequences for businesses, ordinary consumers and their families.

D. These events were the direct consequence of acts, omissions and developments during previous years and in particular the result of:

I. Failures by government and the regulatory agencies to take heed of the warnings of the Liberal Democrats and to take action to moderate levels of personal debt, rising property prices and excessive risk-taking by financial institutions.

II. Remuneration policies in financial institutions which encouraged individuals within them to engage in excessively risky behaviour without regard to the consequences.

Conference believes that:

i) The failure of government and the regulatory agencies to take action flowed particularly from an attachment to the principle that financial markets and actors in them should be subject to as little regulation as possible, which became known as 'light touch regulation', and generally from an erroneous belief that free markets will always produce the best outcomes for producers, consumers and society as a whole.

ii) These principles and beliefs, as shown by the events in late 2008, were flawed in that they led to the privatisation of profit and the socialisation of risk, such that incomes of individuals and institutions in the financial sector soared whilst business and individuals in the wider economy were exposed to high risks of financial harm in the event of failings and defaults in the financial sector.

iii) Events in late 2008 and the role of the financial sector in producing them highlight the need to reform radically the financial sector.

iv) Far from retreating, the state will need to intervene to ensure effective regulation of financial markets in order to promote stability, counter short-termism and protect the interests of business and consumers.

v) Incentives within the financial sector should be better aligned with the broader goal of building a fairer society.

Conference therefore calls for a reconstitution of financial regulation so that:

a) Financial institutions and their staff are discouraged from excessive short-term risk taking, for example though remuneration policies which reward only long-term success and which ensure that those whose actions are harmful or cause loss bear the consequences of their actions.

b) Financial institutions make credit and investment available on reasonable terms to businesses and individuals in the wider economy.

c) 'Intermediate' financial institutions, such as hedge funds and private equity vehicles, are properly and effectively regulated and in particular are required to be transparent.

Conference also calls for:

1. The encouragement, support and promotion of credit unions and other kinds of mutual financial organisation.

2. The government and financial regulators to work for more decentralised banking institutions and a localised financial infrastructure.

3. Improved access to financial services thorough the Post Office network.

4. Free and independent financial advice to be made available to those on low incomes.

5. A statutory duty to be imposed on all lenders to lend responsibly, giving borrowers a statutory right of action in cases where there has been irresponsible lending.

6. Consumer protection to be strengthened with stronger penalties for those who mis-sell financial products using aggressive selling practices; with a statutory maximum interest rate to protect vulnerable groups from predatory loan sharks and doorstep lending.

Applicability: Federal