The issue of culture and standards in banking has been much debated in recent years. Driven by mis-selling scandals, Libor rigging and a culture of reward at the top that is beyond the comprehension of most people, the question is asked what can be done to foster a different culture, one where the customer comes first and where responsibility and accountability are faced up to rather than avoided.
Partly this is a question for rule makers – for legislators, Governments and regulators. But partly it is a question for the banks themselves. As Sir Richard Lambert, who has been asked by the seven biggest UK lenders to review this issue, said this week, rules can only take you so far. There also has to be a self generating culture which fosters and reinforces responsible behaviour.
Before going further we should pause and ask why this matters. After all, the argument sometimes goes, hasn’t banking been bashed and prodded around enough. Shouldn’t it be left to get on with the job now or more seriously are we in danger of damaging a great British industry.
I think it is really important to face up to this question.
The UK is the world leader in banking and financial services. This is hugely important for our country. It also brings with it a number of associated services such as corporate law, accountancy and consultancy services.
We have a truly world class important cluster, centred in London but also providing important jobs throughout the country with other centres in places such as Leeds and Edinburgh.
I want us to retain our strength in financial services.
Properly run this can be a huge advantage and a huge strength for the UK economy.
But after the crisis, there had to be change in the way these industries were run.
Organisations that were too big to fail had to be bailed out at a cost of tens of billions of pounds.
The global consequences of a breakdown in financial services are still with us. They have left us poorer as a country than we were six or seven years ago and with families feeling the squeeze in their real living standards.
The work to put things right is not over and must not be regarded as some kind of pesky interference. It is, ongoing, necessary and very much in the public interest.
When it comes to cultural change, the first and most obvious thing to say is that talk is cheap. People can stick as many values statements and mission statements on the wall as they like. But if conduct doesn’t match them, they mean nothing.
I spent a good part of 2012 and 2013 serving on the Parliamentary Commission on Banking Standards which was set up in the wake of the Libor rigging scandal. This was the UK Parliament’s effort to examine what had gone wrong in cultural terms and what might be done about it. Other reforms had already been set in train on the structural question, most notably through the Vickers Commission which reported in 2011.
What we found on the Banking Commission was a culture with the wrong incentives characterised by both a reluctance to face up to responsibility and senior leaders whose defence when wrong doing was exposed was to plead ignorance about the organisations they were charged with running. Even worse, we found some cases where there was a positive incentive to remain ignorant lest the regulators come calling and you get caught in an email trail or a chat room list.
This culture gave rise to PPI mis-selling where front line staff were incentivised to sell insurance products to people whether they needed them or not.
It gave rise to a culture of reward which often put traders own interests above the banks they were working for.
And it contributed to a leadership culture whose usual response was to deny knowledge and talk about events which had taken place perhaps 12 or 24 months before as ancient history.
It was summed up by Paul Volcker as the triumph of transactional banking over relationship banking.
My colleague on the PCBS Lord McFall contrasted the world of manufacturing with finance in this way. If a car we own develops a problem, the manufacturer will issue a recall notice. The problem will be fixed at the manufacturer’s expense because they care about their reputation.
In a finance product goes wrong the more common pattern has been first to deny it, then force the customer through a lengthy redress process, possibly take them to court and do everything possible to avoid compensating the customer. The question is why are banks so comparatively careless about their reputations when compared with firms that sell more tangible goods?
So what did we recommend?
A new senior persons regime to ensure key responsibilities within banks are assigned to identified individuals;
A single set of banking standards rules to be drawn up by regulators;
Renumeration, especially at senior levels, to be deferred for lengthy periods to better understand risk and subject to bail in and claw back if things go wrong;
Tougher enforcement action including the potential new offence of recklessness in the stewardship of a bank;
Chairmen to oversee whistle blowing procedures and be held accountable if anyone suffers detriment due to whistle blowing activity.
And of course not having sales incentives for front line staff to push the wrong products on to the wrong customers.
There were other recommendations but these give a flavour of the thrust of the report. Some were for legislation and have been enacted through the recent Banking Bill. Others were for regulators.
This week Sir Richard Lambert published the first consultation paper for the new standards and conduct organisation that the leading banks have asked him to establish. Although he is focussed on the same problem as the PCBS his emphasis is different. Inspired by Warren Buffet’s warning that the five most dangerous words in business may be “everyone else is doing it” he is asking what the banks themselves can do collectively to foster a better culture, outside whatever is happening as a result of legislative or regulatory change.
Sir Richard’s work is welcome and I wish it well. Industry must play its part. But he will be only too aware that there is a weariness about claims to change and the value of this industry driven effort will be judged by what it does not what it says.
Sir Richard’s paper rightly points to the dangers for banks in conduct failures. Some £20 billion has had to be set aside for PPI claims. Small firms are taking banks to court over allegations of the mis-selling of interest rate swaps.
And now, after Libor, we have allegations of manipulation of the daily fixings for foreign exchange markets.
These allegations are extremely serious. If Libor was in some ways an esoteric subject, foreign exchange is not. This is a market worth some $5trillion a day, 40% of it centred here in London.
It affects pension funds, savings, businesses who import and export as well as of course the general public. In short it is one of the foundations of the whole market economy.
If the foreign exchange market is being manipulated that is an allegation of the highest order of seriousness.
It may be that groups of traders who exhibit their stunning intelligence by calling themselves things like “the mafia” and “the cartel” were engaged in entirely innocent activities and have not broken any law. But the allegations centre on the possibility of collusion in the run up to the daily 4pm London fix which serves as a crucial benchmark for calculations around the world. These allegations must be investigated with thoroughness and determination.
The FCA has confirmed it is investigating these allegations. And just this week the Deputy Governor of the Bank of England told the Treasury Select Committee that he understood the seriousness of what had been alleged.