Banking Standards

Submission from the City of London Corporation (S012)



1. The City of London Corporation has as one of its main functions the promotion of the UK generally, and the City specifically, as the world’s leading international finance centre. The City is therefore appropriately placed to make a submission to the Parliamentary Commission on Banking Standards.

2. The banking industry is a vital part of the UK economy, providing finance to wider industry which in turn generates jobs and growth. The recent revelations about unacceptable practices in relation to LIBOR and other matters are thus all the more disturbing. This submission argues that:

· The public want to see evidence of change in the banking industry and the industry has it in its power to demonstrate real change by articulating and living by new objectives, vision, culture, values and ethics. Valuable work towards this is already under way.

· This process of change should include a review by the banks of their business models and product lines to ensure their policies and practices stand scrutiny when considered against these values.

· At the same time, remuneration policies and compliance processes at all levels need to be seen to be in line with the new values.

· Corporate governance needs to be strengthened, including the role of shareholders and non-executive directors.

· The need is for better enforcement of and compliance with existing regulations rather than the introduction of yet more new regulation.

· Banks should engage more actively with the public to promote better understanding of what they do.


3. The creation of the Parliamentary Commission on Banking Standards is timely, given recent revelations about the manipulation of the LIBOR rate-setting process and the sustained period during which the industry has been under unprecedented public scrutiny for a number of reasons. The actions of a number of individuals have damaged domestic and international perceptions of the UK-based wholesale financial services industry for which "the City" is convenient shorthand. Without trust and confidence, the City and its markets would struggle to function. Sound regulation and its effective enforcement provide some assurance to customers and clients, but confidence in the City’s proper standards and corporate culture is a necessary complement to this.

A Global Centre

4. Banking is an increasingly globalised industry for which London serves as a unique global hub. The industry in the UK is internationally owned, staffed and managed. This concentration generates significant benefits for the UK as a whole in terms of employment, tax revenue and, crucially, the financing of economic activity. In the context of the Parliamentary Commission’s work, problems such as those seen in relation to LIBOR should be seen as problems of an international industry rather than somehow London-specific. This is not to diminish their seriousness. Rather it is an argument for a sense of perspective. London’s reputation has already suffered as a result of the crisis. There is a need to guard against measures which do further unnecessary damage to London’s relative standing.

Immediate Action

5. Prompt and effective remedial action is now needed with the banking industry itself to the fore, taking the initiative to put right the damage to its reputation and with it the standing of the wider financial sector. Above all, if it is to regain public trust the industry will need to demonstrate that it imposes upon itself high standards of conduct, and follows them consistently

6. It needs to demonstrate not just that it is living by the letter of the law but that it is willingly living up to the spirit of new values and high standards of integrity, corporate governance and customer service. This will require a change of culture where it is found to be needed and there are areas where it undoubtedly is. The banking industry points out (quite rightly) that it is an essential part of the modern economy: that it facilitates job creation, that it finances commerce and supports economic growth. To win back the public’s trust, the industry will need to show that it is genuinely seeking to fulfil this role and that it is not putting its interests ahead of those of its customers. The public will want to see that products or business lines, even where they might be technically legal, would not be pursued unless they are clearly to the benefit of the clients to whom they are being sold. The culture and values of banks and other organisations need to support this approach to doing business and remuneration structures need to be designed to reflect the culture and values.

7. For this action to be effective the banking industry should be encouraged to renew its efforts to communicate actively with the public in order to promote a better understanding not just of the changes it is making but of its wider role in society.

8. Over the past four years, starting well before the exposure of the LIBOR issue, a number of initiatives both inside and outside the industry have sought to begin the process of restoring trust in the financial services industry. One such is an initiative of the Mayoralty looking at Trust and Values across the industry. This has included, for example, the development with Cass Business School of a ‘Leadership with Integrity’ foundation course and the formulation of a best-practice guide, ‘Performance for Values’, to help businesses embed values into management, recruitment and appraisal [1] . Much of this work has focused not only on the moral imperative – that behaving correctly is the right thing to do – but also on the business advantages of being trusted and respected both by business peers and by customers and clients. While a structure of sound regulation and effective enforcement is regarded as an asset for a financial centre, so a reputation for good conduct is a business advantage for a company and for the individuals working in it. Furthermore, it is a sustainable asset, likely to help retain existing clients as well as to generate new business.

9. It is worth highlighting the work of the Chartered Banker Professional Standards Board (CB:PSB). Launched in 2011 by the chairmen or chief executives of nine leading banks (with, between them, 350,000 employees), the CB:PSB has produced a Code of Professional Conduct and a Framework for Professional Standards. The first of these standards, the Foundation Standard for Professional Bankers, has now been published setting out how individuals in the industry can demonstrate that they take responsibility for acting ethically and professionally. The CB:PSB’s founding banks have all committed to implement this Standard. This type of initiative, driven from within the industry itself, will be an essential part of the industry’s work to restore the public’s trust.

Corporate governance and remuneration

10. These two issues are linked. Individual remuneration is a complex area. It is not the task of the state to decide how much employees in the private sector should be paid. However, the procedures for determining remuneration in banking, with its capacity to cause systemic risk to the financial system, are a matter for legitimate public concern.

11. Recent changes to the rules applied to variable remuneration, at national and EU levels, and the banks’ own decisions in this area, have gone a long way towards addressing defects in the system. Continuing work already under way to tie remuneration more closely to sustainable, long-term performance; to introduce a right of claw-back, payment in shares with only a limited cash element and deferred payment; and greater transparency over the packages paid to the highest earners in a business, will do much to change the culture.

12. Clearly there have been examples of a failure in corporate governance in some banks. These are complex institutions and the structures of reporting and supervision they had in place failed in this regard. That is an issue for banks’ leaders, regulators and those conducting other investigations, but the essential message for regulators and for the owners and managers of companies is that the size and complexity of a business are not, of themselves, excuses for inadequate or faulty internal processes.

13. There is considerable scope for the reassertion of the rights and duties of shareholders as owners of a business and for further development of the roles of non-executive directors as, ultimately, the shareholders’ representatives. The work of the Kay Review will be a useful contribution to this.

14. The role of non-executive directors (NEDs) in a complex financial services institution is difficult and onerous. Their legal and ethical responsibilities are heavy and, post the LIBOR issue and other failings of recent years, are likely to become more so. The pool of talented individuals, with the right skills and background in business and elsewhere to be an effective NED, is limited. NEDs should take a more active role but whatever new measures are put in place must not further discourage such people from taking on an NED position.

15. Another issue which this raises is the question of the procedures within financial services companies for risk management and how they might be enhanced and improved. Clearly, in the case of LIBOR they did not work. In some institutions, the prospect of any difficulties with the acceptance of LIBOR in the market as a whole never became an item on the relevant risk register. Boards and senior management will need to re-examine their whole approach to determining risk. This process is undoubtedly already underway across the industry and should be completed as soon as possible.

16. This raises a broader issue of whether the banking industry or the wider financial services industry needs to be restructured. The City of London Corporation does not believe that some form of "Glass-Steagall" type separation of the different parts of banking is necessary or appropriate to tackle effectively the issues that have arisen. The plans stemming from the Vickers Commission should meet requirements here by introducing ring-fencing within an organisation of the different areas of its business to ensure that taxpayer support is no longer needed or potentially available to investment banking activities.

17. However, following the Vickers Commission’s recommendations on improving competition in the UK banking sector, the Office of Fair Trading is looking further at whether there are any regulatory or other changes that can usefully be made in this area. This is likely to be a more fruitful course of action. Increasing competition in the banking sector is likely to be an effective way of ensuring that remuneration, as well as other key decisions, is subject to more rigorous market pressures and thus can be set in a way that is justifiable.

A Regulatory Response

18. Inevitably, there will be political and media pressure for new, stronger and more prescriptive regulation of banking and financial services in general. This is understandable. But the regulatory framework has already changed radically over the last four years and the priority now should be on the effective enforcement of existing regulations, rather than adding new ones, with adequate resources for doing so.

19. The City of London Corporation has no particular standpoint on possible new methods of calculating and setting interest rates such as LIBOR and a separate government review of LIBOR has begun work. But any new structure will have to be as transparent as possible and involve some form of oversight independent of the industry if it is to retain the confidence of market participants and other stakeholders.


20. The emphasis of this submission has been on the need for demonstrable change in behaviour in the banking industry. In the aftermath of LIBOR and other failures of trust and standards the restoration of proper standards within the industry is critically important, arguably more so than the imposition of new rules.

21. Political, media and public indignation over the LIBOR issue and over other regulatory or perceived ethical failings should not, however, cloud the importance to the economy and the broader national interest of the financial services industry. The existence of a competitive, efficient and diverse UK-based industry will make a significant contribution to economic recovery and the restoration of national prosperity.

23 August 2012

[1] Further information on these and other similar initiatives can be provided if it would be useful to the Commission.

Prepared 22nd September 2012