March 30, 2017

Time to get over the financial crisis

Time to get over the financial crisis

The City has a crucial part to play in tackling the income inequality that’s affecting our country, says Cole Reifler. 

In today’s Britain, the gap between the wealthy and those ‘just about managing’ continues to widen. The truth is that the City of London is one of the few vehicles capable of tackling this.

Government has failed time and time again to improve the lives of ordinary people; the Brexit vote showed that those who are working hard to get by have lost faith in transformative capabilities of the political establishment. Relying on charity won’t solve the root cause of inequality either; it usually only papers over the cracks. If anything, it could make things worse by perpetuating dependency.

It’s time to get over the financial crisis

It’s easy to blame the City for people’s financial struggles. We hear the same things over and over again: bankers’ irresponsibility caused the financial crash in 2008. Hard-working people were left to struggle, while bankers walked away without taking responsibility, having pocketed their bonuses. The prevailing narrative is one of greed and excess personified.

Let me be clear. It’s shameful that people lost out in the financial crash, but we can’t afford to stigmatise ‘the bankers’ any more. The recklessness of a few shouldn’t write off our whole financial system. After all, our relative prosperity over the past three decades has been built upon free enterprise and wealth creation, with the City of London leading the way.

But rather than arguing that financial giants are the bane of our lives; that they are structurally incapable of doing anything but make the world worse, let’s ask some difficult questions. Let’s ask, instead, how we can funnel the power of the City to help more people out of poverty; help more people save for their futures; support young people to get on the housing ladder.

Government isn’t working

Finance is remarkably powerful. It decides who makes more money, and who makes less. The system is able to allocate more money and capital to one part of the country or segment of the population than another. This is a risk, but it is also an opportunity. It is an opportunity to shift the dynamics, and make sure that more money reaches our most hard-working people.

The real travesty is that millions of hard-working people are unable to save for their own futures, let alone those of their children. In many families, there are two parents are in full-time employment; they save the little bit of money they have left after food, rent, and bills, and still have to borrow at the end of each month.

One diagnosis of this problem is that these people aren’t making enough money to begin with. That the government needs to shift money from wealthier people in the form of taxes. But another one is that they are not getting the returns on their savings that they deserve in the first place – so all their hard work is going to waste.

Due to the miserly interest rates that many savings accounts now deliver, – the Bank of England base rate remains historically low – many families’ earnings and savings are actually being eroded by inflation.

Equality starts with equality of opportunity

How do we solve this problem at its root? How do we make sure that inflation doesn’t continue to erode the savings of millions of people? We need to give hard-working people the opportunity to make the most of their money. The best form of equality is equality of opportunity.

For decades, neither government nor the financial services industry have worked hard enough to provide this. A wealthy few have been offered access to exclusive, high-yielding investment opportunities, while limiting the middle class from participating in the same opportunities. The government allows the middle class to gamble and play lotto, but limits them from investing in specific opportunities that have outperformed ISAs and pension plans for years. If one could level the investment playing field by giving everyone access to the same opportunities it would make a big difference.

Over 10 years, a compound interest rate of 1 per cent on a base of £20,000 will become £22,092. 1 per cent is good for a savings account right now. Over that same period a compound interest rate of 8 per cent on a base of £20,000 will become £43,178. The difference is incredible. It is absolutely huge. It is the difference between a safe financial future, and a decidedly rocky one.

But investment opportunities at the 8 per cent mark have been keep off the books for many banks and investment companies, reserved only for wealthy investors.

The democratisation of good quality investment opportunities will be a truly disruptive force in finance over the coming years. This has been denied to millions of people for generations but a number of City firms are now trying to step into the void to change this.

Recognise the good in the City

The banks have been blamed for our desperate financial situation, but they also hold the solution. The average Brit has been removed from specialised investment opportunities for years, limiting their return stream.

The City can change that. But it also demands a new perspective from the government and the public. We need to recognise that as well as creating problems, finance has the potential to do a lot of good too.

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Cole Reifler
Cole Reifler
Cole Reifler is President and Co-founder of Forefront Income Trust. He founded the organisation in 2014 to give the middle class access to investment opportunities typically reserved for the one per cent. Cole serves on multiple corporate and advisory boards, including Arora, a financial platform whose mission is to empower the world to be equally powered by women.
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