The financial services sector may have suffered a large dent to its reputation, but let’s not throw the baby out with the bathwater, Lord Hunt warns

Sometimes a spurious canard flies around unchallenged for so long that otherwise sensible people begin to believe it and treat it as gospel truth.

I fear the latest example of this may be the currently much-expressed sentiment that the UK has “relied too much on financial services”, with its implicit corollary that the financial services sector is somehow to blame for this alleged state of affairs and ought to be brought to heel.

Peter Mandelson has just used the phrase, and the FSA’s chairman, Adair Turner, probably fanned the flames with his talk of some financial activities being “socially useless” or “swollen beyond their optimal size”. This has further unsettled the sector in the wake of the reported statement in March by the FSA’s chief executive, Hector Sants, that “people should be very frightened of the FSA”.

Ever since the credit crunch began, it has effectively been open season on the financial services sector. Regulatory sanction can be very imprecise and, in this case, a malaise within the banking sector has somehow dragged insurance into the spotlight too, even though insurers have been in no way implicated in what has gone on.

Indeed, during the turbulence we have been enduring, effective insurance has been more important than ever. At times of uncertainty, experts in risk are at a premium, and any implication that the success of our industry has somehow “crowded out” other economic activity is totally spurious.

Let me dissect this calmly and logically. In June 2008, the financial services industry employed one million people in the UK, of whom around 300,000 were working in insurance and pension funding. A further 140,000 or so people were employed in roles auxiliary to financial services, such as independent financial advice and fund management.

Our insurance industry is the largest in Europe and the second largest in the world, accounting for 11% of total worldwide premium income, with investments that make up almost 23% of the total net worth of the UK economy.

In the 2006/07 tax year, it contributed almost £10bn in tax. This is a sector respected across the globe for its expertise, integrity and overall robustness.

As Lloyd’s chairman Lord Levene asserted so vigorously in a brilliant speech only last month, this is a success story we should be celebrating. The late Liberal leader Jo Grimond once remarked that only the British could regard Dunkirk as a triumph, and we do seem to find it difficult to laud, and take pride in, our own successes.

As Lord Levene asked rhetorically, can anyone seriously imagine the French, German or Swiss governments questioning the importance of their wine-making, automotive or pharmaceutical industries?

The fact is, saying we are “over-dependent” on financial services with a twang of disapproval can be interpreted only as a criticism of the sector itself. Yet one might as well criticise Wayne Rooney for scoring too many goals for his club or his country.

The danger of this kind of talk is that it will cause the regulatory regime to go in the wrong direction. I have just completed a year-long review of the regulation of law firms on behalf of the Law Society of England and Wales. This has given me the opportunity to reflect deeply on regulation in general and on the characteristics of professional regulation in particular.

Ideal regulation is voluntary compliance and, in a professional environment, there is a tradition of that happening on a large scale. In legal regulation there is also a longstanding emphasis on ethical standards and maintaining not only the integrity of the profession, but also its independence, inherited from the era of self-regulation that is now effectively over.

With several of our major banks now in state hands, the continuing independence of the insurance sector is more important than ever. We forget that at our peril.

I have long campaigned for greater professionalism in financial services and I do hope that, as this industry – through the sterling work of the Chartered Insurance Institute and others – comes to look and behave more and more like a profession, with a growing emphasis on integrity, standards and the wider public interest, so the regulation of the sector will evolve too, acquiring more of the appurtenances of professional regulation.

That would not be regulation based on fear, but regulation based on partnership, shared values and mutual respect. That is a very worthwhile outcome at which to aim.

I would encourage politicians, regulators and, indeed, everyone engaged in financial services to bear that model very much in mind as they debate not only the future of the FSA, but also the need for financial services to develop into the true and proud profession we all know it can – and should – become. IT