Trust in the financial sector is at an all-time low: only 10 per cent of respondents to a recent ITN poll believed that bankers told the truth. That places bankers even lower than journalists and politicians. Yet trust is the essence of financial intermediation. The core purpose of a financial system is to enable savers to have confidence in borrowers whom they do not know: confidence that they will earn the returns they expect and be able to realise their investment when they need funds. This is the issue I have explored in my review of UK equity markets, whose findings are published today.
In the equity investment chain, asset holders and asset managers need to be trusted stewards of savers’ money. Company directors need to be trusted stewards of the assets and activities of the corporations they manage. In the absence of such trust, intermediaries become no more than toll collectors.
It is hard to see how trust can be sustained in an environment characterised by increasingly hyperactive trading, and it has not been. Trust is essentially personal and cannot easily be found in a dark pool. Impersonal trust can be established only in a rigidly disciplined organisation – the kind that retail banks were once but are no longer – or by regulation of a ferocity that has not been achieved and is probably not achievable.