Canary Wharf skyscrapers on the Isle of Dogs. Photograph: Getty Images.
Show Hide image

Why "skin in the game" could be the key to reforming markets

Those with the power to make decisions on your behalf should share in the risks, not just enjoy the rewards.

"We are all in this together" has become the political catchphrase of this parliament. The phrase has come back to haunt a government that has introduced tax breaks for millionaires in an era of austerity, but Labour’s critique runs wider than this. Our argument at the next election will be about the way our economy works so that we tackle the causes of the cost-of-living crisis, not just the government’s priorities on tax and spend.

The campaign for a living wage embodies this idea. The question is not just whether tax credits can be protected, but whether companies will pay people a wage they can get by on. The debate on energy prices is another example. The job is not just to fund winter fuel payments but to reform the energy market so that customers are not taken for a ride. Occupational pensions typify the challenge: the difference between a 1 per cent and a 1.5 per cent charge from a provider can be tens of thousands of pounds more in a pension pot at the end of a working lifetime. Sharing in prosperity is about how our economy works, not just what the government spends.

In this context, a new paper by Duncan O'Leary published this week by the think-tank Demos is a welcome contribution to the debate. The paper explores a new idea for reforming markets: "skin in the game". The phrase comes from Warren Buffet, who demands that people investing his money have some of their own money at risk. They must have some skin in the game. The principle is that people who have the power to make decisions on your behalf should share in the risks, not just enjoy the rewards. Only then can they be truly accountable.

In the US, the government is already experimenting with the skin in the game idea. Banks can no longer package up and sell on all the debt from the mortgages they offer. They must retain some skin in the game: 5 per cent of every mortgage must stay on their balance sheets. The idea is that lenders start to consider not just whether they can sell a loan on to others in the market, but whether the loan itself is a good one. The hope is that more skin in the game will encourage more responsible lending.

O'Leary explores what this idea might mean in different policy areas. Is it right, for example, that half of FTSE 100 chief executives are not invested in the pension schemes that more than 90 per cent of their new staff are auto-enrolled into? Would companies pay more attention to pension charges if they were coming out of the CEOs pocket too? Is it sustainable that ratings agencies are paid by the organisations whose financial products they are rating? Should at least some of the fees be held back and paid according to how accurate the ratings prove? Perhaps some skin in the game would lead to greater accuracy.

The idea has the most obvious applications in finance. Is it fair that all financial services companies should pay the same industry levy to fund debt advice, regardless of their lending practices? Shouldn’t the lenders who drive people to debt advice, through hiking up rates when people miss payments, contribute more? Some skin in the game might encourage lenders to adopt a less adversarial approach with their customers.

But O'Leary also examines what it might mean in other areas too. Could companies be given more of a stake in whether the staff they make redundant find work when they leave? Could the skin in the game idea improve back-to-work support for those who find themselves off work through illness or accident? In Holland, for example, companies must pay up to an extra year’s sick pay if they do not take reasonable steps to reintegrate staff who suffer illness or disability. Here we have around 300,000 people flowing from work onto state benefits each year because of health-related issues, adding to the welfare bill.

The value of the skin in the game idea is twofold. First, it avoids the kind of top down micro-management that belongs to the politics of the last century, not this one. The task is to ensure that we really are "all in this together", but through reforming the incentives within markets, not tying business up in complex rules and regulation. The skin in the game idea has a simplicity to it that is attractive. Second, the principle seeks to prevent problems occurring and to align power and accountability where they have become detached from one another. Both are organising principles of Labour’s policy review that I lead, whether in the public or private sectors.

For Britain to become the global standard for an inclusive economy we must create a system that is fair from the start. The policy review will need to look at the skin in the game principle in more detail. But at first sight it looks like a key ingredient in the "recipe for responsible capitalism".

Jon Cruddas is Labour's policy review coordinator and MP for Dagenham

Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
Show Hide image

Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

0800 7318496