The retail side of banks’ business culture is of particular political significance; public disapproval of wholesale and shadow banking behaviour flow less readily into voter intentions. It is through the prism of experience of retail banking that politicians and the public believe themselves to be afforded insight into banks’ failure in these more remote areas – and believe the whole system to be rotten.
Unhappily for the banks, therefore, it is on the retail side of banking that ideas about what caused a deterioration in culture and what it would take to repair it are most fully developed.
It is a simple narrative: in the days before Big Bang (on 27 October 1986), the Big Five banks operated a simple business model of retail banking, in which banks’ profits were generated by interest on lending to businesses and individuals. The banks’ business was conducted through relationship banking: i.e. personal, long-term relationships between bank manager and borrower which afforded the bank an intimate knowledge of its credit risk. Such a business model depended on high levels of trust and on valuing the customer relationship over any individual transaction within it. Profit was accordingly measured over a longish cycle.
After Big Bang, by a process of acquisition, the Big Five became “universal banks”, which meant they also conducted investment banking. As investment banking was more profitable, this side of the bank’s management dominated at board level. Those investment bankers predictably did what they know – they introduced investment banking techniques into retail banking and centralised IT systems. A “relationship culture” was replaced by a “sales culture”, which valued transaction volumes and margins over relationships – i.e. numbers over people. Profit was accordingly measured over shorter time-cycles.
Customers noticed the difference. The justification for this “the-computer-says-yes”, sales-driven approach, lay – as it did in sub-prime lending in the US – in the argument that it spread wealth by making credit freely available where it was previously denied. But even by January 2005 – when the FSA decided to regulate general insurance to capture the mis-selling of PPI – a sense of abuse of power and corrosion of trust was palpable. When, in 2008, easy credit tipped into excessive debt, the credibility of the argument dried up along with the credit.
A member of my chambers, who was on the wholesale side of banking before coming to the Bar, tells me that the attitude of investment banking’s management can be summed up as follows: “as long as the boys are making money we are happy. If there is a problem, we will deal with it.” However appropriate that attitude might be to managing a trading desk, it goes down badly with customers who are being asked to trust brand names on the high street. So now everyone is finally quite clear what they want to move away from – a sales culture – and where they want to get back to, a relationship culture. Indeed stakeholders now agree they need to restore that culture to rebuild trust. The question for both regulators and banks is: how?
High-level pressure from a regulator can sometimes work. The best-known example of such an approach is the forced departure on 3 July 2012 of Bob Diamond, ornament of investment banking culture, from his position as CEO of Barclays. He left in response to the FCA’s report into LIBOR fixing – a report that the head of the FCA considered important enough to the career of the head of the FCA for him to lend it his name, “The Wheatley Report”.
Barclays duly elevated its head of retail banking, Anthony Jenkins, to the position of CEO. He established the bank’s new TRANSFORM agenda (Turnaround, Return, Acceptable Numbers, Sustain FORward Momentum). Mr Jenkins propagated its five new corporate values: Respect, Integrity, Service, Excellence, Stewardship. But by 28 October 2015, Mr Jenkins had lost the support of his investment banker colleagues on Barclays’ board, who re-installed one of their own, Jes Staley, as CEO.
High-level pressure is often short-lived. It can also work the other way. On 17 July 2015, Martin Wheatley himself succumbed to political pressure from the Treasury when HSBC threatened to move their headquarters abroad in the face of what they described as a hostile regulatory environment. His departure was part of the “new settlement” between regulators and banks that the Chancellor announced in his Mansion House speech the previous month against a backdrop of HSBC threatening to move its headquarters and taxes to Hong Kong.
The banks have tried to give the appearance, at a high level, of taking the initiative of driving cultural change by creating the Banking Standards Board. To the public, the BSB feels remote from their experiences on the high street. And anyway, the political impact of its creation was more than overshadowed by the FCA dropping its own review of banking culture on 31 December 2015. That read as a defeat for the FCA and a win for the banks. It is also appeared to be a signal example of the influence banks have over the regulators and government. All the more so of the banks’ own creature, the BSB.
Will public disaffection subside while such high-level arrangements agreed between banks and regulators are the only ones in play? It has not in Holland. There, a new left-wing government has been voted in. It has torn up the confidential settlements that banks had reached, under pressure from the AFM, the Dutch regulator, with customers who had been mis-sold swaps. The new government has now ordered the AFM to install four “wise men” to impose new, more generous settlements on the banks. That does not sound like the rule of law. It sounds like a mini revolution. It is not what one expects in Western Europe. But it is happening.
So is it wise for bankers in London be satisfied with always being on the back foot on culture – taking fine after fine from the regulator? Would it not be wiser for them to find a more compelling way to take control of the crisis in their reputation? If the banks decide it is, it will be because they realise that the cost of giving the impression of being unfair is greater than the cost of being seen to be fair. If they are looking for a way to give an impression of fairness to retail customers, they can find it in this CMLJ article.
Featured image credit: Macro economics by Kevin Dooley. CC BY 2.0 via Flickr.
In the first part of this article, Richard Samuel examined the political climate surrounding bank regulation since 2008.