LONDON (Reuters) - British politicians should build on signs of a shift in investor attitudes since the financial crisis by becoming more vocal critics of short-termism, not by introducing more rules, the author of a government-backed review said.
More than a year after the publication of his report, economist and professor John Kay told Reuters that progress had been made in changing a "get rich quick" culture in Britain's powerful finance industry, but there was much more to do.
"What we need to do is to have a lot less rules and a lot better culture," Kay said. "I don't think we can regulate for the kind of things we're talking about."
"The government should use the kind of bully-pulpit more to get the kind of changes we want."
Britain suffered a longer and deeper recession following the financial crisis than most major economies, in part because of its reliance on a financial services industry which accounts for about 10 percent of national income and over 1 million jobs.
Politicians are keen to change a culture of greed which critics say led to excessive risk-taking at banks that then needed to be bailed out at great expense. But they are also wary of harming an industry so important to economic recovery.
The Kay Review of UK Equity Markets and Long-Term Decision-Making, commissioned by Business Secretary Vince Cable and published last July, made 17 recommendations to stamp out short-termism in the financial sector.
One of these proposals was put into action on Tuesday, as a group of top investors announced plans to set up a forum by June that will bring together major institutional shareholders in Britain's biggest companies to push for better corporate governance.
Kay said he was delighted with the development and that the idea of the forum had been a central part of his review.
Progress on some of the other proposals, such as on better business practice, was rather harder to pin down, Kay said, though he was encouraged by anecdotal evidence of change.
But while Kay acknowledged that financial firms were "moving in the right direction", he said a change in attitude towards the purpose of markets was still badly needed.
Trading activity, Kay said, should not be seen as a self-evident good, nor should it be seen as an end in itself. Rather, excessive activity, or "hyperactivity", should be seen as a measure of decay.
"The notion that liquidity is the goal of markets is absurd" as that only really benefits intermediaries, of whom there are too many, he said. Instead, markets should encourage long-term share ownership and good, sustained company performance.
Kay said the kind of attitudinal shifts he was pressing for would take a long time and would be difficult to monitor, but that the industry climate was more receptive to change than it had been when he started work on the report in 2011.
The recognition that many problems came from within the financial services sector had begun to take root, he said.
"Things like the Barclays Libor scandal and so on rather brought home to people that what had been going wrong was things built into the culture of the industry rather than just external events," Kay said.
Last year, Barclays was fined almost 300 million pounds ($490 million) as part of a global investigation into the rigging of the Libor benchmark interest rate.
The bank is now going through a reform process under Chief Executive Antony Jenkins, brought in last August, whose "Project Transform" strategy aims to repair Barclays' reputation by bringing about profound cultural change, with a warning that if staff do not like that, they can leave.
Editing by Mark Potter