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Another Financial Crisis Is Inevitable Unless Government Takes Steps to Tackle Short-term Business Culture

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Today Parliamentarians will be given just a few hours to debate a Bill that boasts the impressive objective of preventing another financial crisis ever happening again in the UK.

The Financial Services Bill amends the system of financial regulation introduced by the last government, gives the chancellor the power to veto certain decisions made by the Bank of England and abolishes the Financial Services Authority.

According to George Osborne, these changes will 'overhaul the failed system of financial regulation which allowed such dangerous levels of leverage to emerge'. But what the Bill fails to do is tackle a financial and business culture that made the financial crisis, with hindsight, inevitable.

The short-term business culture which dominates the UK and many other Western democracies led to unacceptable risk-taking and the prioritising of immediate shareholder return over sustainable, long-term business interests.

There are not enough incentives in the UK's economy to reward business that chooses to take a responsible, sustainable and long-term approach. Similarly, there is a distinct lack of disincentives to deter businesses from irresponsible choices.

Along with several parliamentary colleagues, I have tabled a number of amendments to today's reading of the Financial Services Bill, designed to go some way to ensuring that business takes a more long-term, strategic approach to its operations, both in the UK and overseas.

The amendments will expand the integrity objective of the new financial regulatory body, the Financial Conduct Authority (FCA) and mandate it to consider the ethical behaviour of companies listed on the London Stock Exchange.

This is not far-fetched or unrealistic. It is a necessity which many other stock exchanges around the world have already confronted. The UK is currently lagging behind countries including China, Turkey, Brazil and South Africa.

The purpose of such a change to the law is threefold:

1. To demonstrate clearly the Government's recognition that business has a responsibility to respect human rights and sustainable development.

2. To focus corporate behaviour on its wider social and environmental impact; and

3. To provide information to investors and all external stakeholders.

If government is to play any kind of role in preventing another financial crisis, it must accept responsibility for shaping the culture and behaviour of the markets. Markets are driven by information. If the information they receive is short term and 'thin' or insubstantial then these characteristics will define our markets. These amendments would serve to improve the information available to investors and all external stakeholders.

In a recent survey of global stock exchanges conducted by Aviva Investors, 57% of respondents agreed that strong sustainability requirements for listed companies made good business sense for the exchange; only 14% disagreed, pointing out that the immediate business case was in enhancing credibility. A lack of regulatory support was highlighted by over half of respondents as one factor that discouraged them from undertaking sustainability initiatives.

Stock exchanges play a vital role in economic development. They are one of the primary tools for the allocation of capital in both emerging economies and developed ones, yet at present there is no requirement on applicants to the London Stock Exchange to provide even the most basic information on their social or environmental impact.

If the government is serious about 'responsible capitalism' and protecting the long-term stability of the financial markets, it must take steps to ensure that business can demonstrate not only its short-term economic usefulness but its long-term social usefulness as well.

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