Lasting reform to the financial sector will not be achieved without tackling the price rigging and anti-competitive behaviour that is rife in the industry. The financial sector is one of the UK's great historic, globally competitive clusters. In 2010 the sector directly contributed 9 per cent of the UK's gross value added, paid £63 billion in taxes (or 12 per cent of the total UK tax take), employed over 1.1 million people (or more than 3.5 per cent of the UK workforce), and generated a trade surplus equal to 3 per cent of UK GDP. Its success is essential to the UK economy. However, the 2008 crisis and subsequent events have revealed significant weaknesses in the sector, triggering a debate on the increased role finance has played in the British economy over the past few decades. This debate has been polarised between those who argue that the financial services sector is too large, creating too much risk for the British taxpayer and crowding out other sectors, and those who argue that a competitive sector delivering many benefits to the UK economy requires financial institutions operating on a global scale. But the debate should not be about the size of financial services – there is no preordained optimal size for the sector. Rather the focus should be on how to address three critical sets of issues that have been highlighted by the crisis: 1. Protecting stakeholders, including depositors, borrowers, investors, and bank clients and shareholders. 2. Reducing implicit subsidies to the sector and future liabilities for UK taxpayers. 3. Addressing the excess economic rents extracted by the sector. The British government is making important progress on the first of these and is working to address the second. But on the third it has done very little – the need to tackle the excess rents extracted by the sector remains. Protecting stakeholders The financial services sector has many stakeholders with an interest in how it operates. These include depositors, borrowers, investors, clients who pay fees for financial services, financial sector employees and shareholders. The entities involved range from typical households, to small businesses, to FTSE corporations, to pension funds and other institutional investors, to banks who transact with each other. The government has itself become a significant stakeholder through its large shareholdings in the sector and its growing role overseeing the stability of the system. The past few years have revealed systematic and large-scale abuses of many of these stakeholder groups. For example: • The fixing of Libor rates probably led to higher mortgage and other interest payments by both consumers and businesses for the benefit of bank proprietary trading operations. This has resulted in a major regulatory overhaul of the Libor system and a £290 million fine for Barclays bank. With more fines for other banks yet to come, estimates suggest that total fines and potential legal liabilities for the industry could total $22 billion. • Banks were caught in the widespread mis-selling of payment protection insurance (PPI) to consumers, resulting in numerous fines and provisioning on a massive scale. Lloyds alone has set aside £5.3 billion