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

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We're running out of time to stop a hard Brexit - and the consequences are terrifying

Liam Fox has nothing to say and Labour has thrown the towel in. 

Another day goes past, and still we’re no clearer to finding out what Brexit really means. Today secretary of state for international trade, Liam Fox, was expected to use a speech to the World Trade Organisation to announce that the UK is on course to leave the EU’s single market, as reported earlier this week. But in a humiliating climb-down, he ended up saying very little at all except for vague platitudes about the UK being in favour of free trade.

At a moment when the business community is desperate for details about our future trading arrangements, the International Trade Secretary is saying one thing to the papers and another to our economic partners abroad. Not content with insulting British businesses by calling them fat and lazy, it seems Fox now wants to confuse them as well.

The Tory Government’s failure to spell out what Brexit really means is deeply damaging for our economy, jobs and global reputation. British industry is crying out for direction and for certainty about what lies ahead. Manufacturers and small businesses who rely on trade with Europe want to know whether Britain’s membership of the single market will be preserved. EU citizens living in Britain and all the UK nationals living in Europe want to know whether their right to free movement will be secured. But instead we have endless dithering from Theresa May and bitter divisions between the leading Brexiteers.

Meanwhile the Labour party appears to have thrown in the towel on Europe. This week, Labour chose not to even debate Brexit at their conference, while John McDonnell appeared to confirm he will not fight for Britain’s membership of the single market. And the re-election of Jeremy Corbyn, who hardly lifted a finger to keep us in Europe during the referendum, confirms the party is not set to change course any time soon.

That is not good enough. It’s clear a hard Brexit would hit the most deprived parts of Britain the hardest, decimating manufacturing in sectors like the car industry on which so many skilled jobs rely. The approach of the diehard eurosceptics would mean years of damaging uncertainty and barriers to trade with our biggest trading partners. While the likes of Liam Fox and boris Johnson would be busy travelling the world cobbling together trade deals from scratch, it would be communities back home who pay the price.

We are running out of time to stop a hard Brexit. Britain needs a strong, united opposition to this Tory Brexit Government, one that will fight for our membership of the single market and the jobs that depend on it. If Labour doesn’t fill this gap, the Liberal Democrats will.

Tim Farron is leader of the Liberal Democrats.