Banking Standards Review: Reform and Redemption?

By Roger Davies, Principal Consultant, ea Consulting Group

The Banking Standards Review (BSR) consultation paper announcing proposals to reform the conduct of UK banks was published last month. The core action is to create a new organisation to act as an independent champion for better banking standards. It is hoped that a true banking profession will evolve over time. After only a short consultation period we are now promised the finalised plans by the end of March.

Roger Davies, ea Consulting Group

In many ways this review headed by Sir Richard Lambert is to be applauded for its recognition of the key issues and its focus on embedding new ethical standards. Public opinion is at an all-time low with bouts of bad press on mis-selling scandals and executive bonuses regularly fuelling dismay with the banking industry. It was against this background that the Parliamentary Commission on Banking Standards had originally called for the independent organisation now proposed with, subsequently, the full backing of the Treasury Select Committee. The situation is, however, far from straightforward.

First and foremost, Sir Richard Lambert has not been appointed by Parliament. The new organisation will, therefore, have no statutory powers. It must rely on the FCA for policing the industry and for individual banks to discipline their own staff. Although the proposed body is ‘independent’ it will be funded, at least initially, by the major banks. Indeed, it was the chairmen of the main UK banks that asked Sir Richard to set up the review. A cynical public may well view the creation of this new supervisory body, however good the intentions, as simply a promotional stunt by the Big Banks. Clearly establishing and proving its independence from its members, the leading banks and building societies, will be key. As membership is voluntary, anything but the blanket coverage of the main players will be judged a major failure. We should not forget that the face of banking is changing rapidly with the rise of internet and mobile banking and social media. Is a banking profession feasible?

The potential effectiveness of the new proposals is certainly not helped by the term ‘banker’ being applied to such a wide range of roles. A branch cashier on a limited hours contract has very little in common with an investment banker and a hedge fund manager is far removed from a pay-day lender. Yet all are perceived by the general public as ‘bankers’ and each is considered guilty by association. A ‘banker’ is now ‘anyone involved in the banking industry’. Whilst the FCA can relatively easily write high-level principles with universal relevance this is not true of standards and competencies whose development is core to the BSR proposals to enhance banker behaviour. Their accurate construction for such a diverse banking industry will be a time consuming exercise.

The review rightly attempts to limit its scope by excluding insurance and hedge-fund enterprises but the field of play is still enormous. It is still thought that delivering major behavioural change and monitoring progress across such a complicated industry, covering retail and investment banking, is overly ambitious. Why not focus initially on the activities of high street banks and building societies (ideally those areas that will fall within the Vickers ‘ring-fencing’) which have most relevance to the man in the street? If successful, expansion into the more complicated arena of investment banking can go forward as stage 2. The BSR also proposes taking a very active role in the approval of in-house training ensuring that ethical issues are always considered. As an alternative, a general guidance seems simpler and more appropriate as an approval process could prove a tedious paper chase? We also need a re-think concerning professional examinations and minimising the number of examining bodies. However, as recognised, there is a very important role that could be played in assisting the FCA in the creation of the new Senior Managers’ and Certification regime. This became law in December 2013 but was a last minute solution and received little Parliamentary scrutiny. A practical regime that is fit for purpose must be our goal.

To many, any new independent organisation will be attempting to swim upstream against a torrent of adverse material. If the primary goal is rebuilding customer trust then it cannot be helped by the annual furore against executive bonuses. While we do need to reward excellence and innovation, and to protect the City, it should be remembered that the vast majority in “austerity Britain” expect a moral code to apply too. The taxpayer bailed out the major banks during the recent crisis whilst not forgetting that banks are afforded a unique place in the economy and in society. The asymmetry of this relationship and lack of a moral anchor has led to the current situation. Trust can only be restored when banker reward mechanisms are thought fair by the electorate. Meantime, with a General Election in 2015, expect the banks and the ‘bonus culture’ to come under renewed attack from politicians and supervisors if only to hide their own poor track record in regulating the sector! We should all learn from the past then move on.

The Bank of England is currently considering 22 applications for new banking licences. We may see as many as 9 new challenger banks by early 2015. Will the threat posed by these new players finally induce new customer-centric policies and revised ethical standards in what have become very sales-orientated organisations? Long protected by inertia, Britain’s big banks have just one chance to get it right. The BSR proposals clearly could have a part to play. However, their effectiveness is 100% dependent on the banks and shareholders accepting the need for ethical reform and taking steps to ensure staff will always act in the best interests of the customer. It is ironic that the challenger banks will all wish to promote criticism of the traditional banks to bolster their own customer numbers. If Sir Richard Lambert’s reforms are to be successful he will also have to be a peace-maker amongst his unsettled members in this civil war!