Banking Standards

Submission from Affinity (S031)

Affinity is the largest independent trade union in the Lloyds Banking Group. We represent 35,000 members working in all areas and at all levels of the Bank from retail banking to wholesale banking and from cashiers to senior executives.

The Commission has raised some interesting questions that go well beyond the Libor rate rigging scandal. We have focused our submission on those of the questions that concern UK retail banking and where we feel we have a meaningful contribution to make.

1. To what extent are professional standards in UK banking absent or defective? How does this compare to (a) other leading markets (b) other professions and (c) the historic experience of the UK and its place in the global markets.

1.1 It’s been steady but the decline in professional standards in UK banking can be traced back to the deregulation of the financial services market in the 1980’s. Before then UK retail banks had operated as quasi-cartels with a steady stream of customers coming in to branches to open new accounts and deposit money or borrow money. It was ‘narrow-banking’ but it was very profitable banking. Following deregulation, new entrants who had found it difficult to enter the market before the ‘Big Bang’ could do so more easily and that put substantial strains on the established banks, with their significant infrastructure costs and expensive branch networks to feed. That led the retail banks to seek alternative revenue streams and the one area they focused on very quickly was the highly profitable bancassurance model that had operated on mainland Europe, particularly in France, for many years. The idea of bancassurance was that a bank could ‘mine’ its existing customer base in order to sell new insurance and investment products.

1.2 From the beginning there was always the danger that trying to sell or market two different kinds of products was going to create tensions. Morgan, Sturdy, Daniel and Knights refer to this inherent tension between banking and insurance and say: "Bankers are generally risk averse; they seek to develop a long-term relationship with the client…Insurance sellers are concerned to maximise their commission based earnings…". (The Geneva Papers on Risk and Insurance, 19 no 71, April 1994). The introduction of bancassurance also changed the culture of banking from being largely focused on creating long-term profitable relationships with customers to one obsessed with ‘cross-selling’, ‘product penetration’ and ‘share of wallet’. In that period it is fair to say that the selling concept became significantly more pronounced with the introduction of ever more complicated incentive schemes for employees and aggressive targeting models designed to drive sales type behaviours. In many organisations at that time a predatory sales culture began to develop in key areas of the banks and the idea of creating long-term profitable relationships was replaced by a sub-culture, developed by senior management, which was, and still is in many organisations, obsessed with sales performance. In an interview in the McKinsey Quarterly, Peter Ellwood, then Chief Executive of Lloyds TSB said: "We don’t talk to them (staff) about warranted equity or economic profit; they wouldn’t know what we were talking about. Instead, what we say to the staff in the branches is that we can generate income only be selling more widgets. We set what we call key sales objectives, and we say ‘we want you to sell these products and if you sell more, you get paid more’." Professional standards, which had been the hallmark of the industry before that, began to deteriorate as this new sub-culture took hold and it’s no coincidence that the mis-selling scandals all happened post the deregulation of the financial services market and introduction of the bancassurance model.

1.3 We believe that the decline in professional standards is linked to the decline in professional qualifications in the industry. Historically the conventional qualification for banking was membership of the Chartered Institute of Bankers (and the equivalent organisation in Scotland) but these professional bodies which would also set the standards for the industry have been marginalised over the years and the vast majority of staff working in financial services have no externally regulated qualifications at all. For an industry of such importance to the UK economy and one that can do so much damage, as we have all witnessed over the last few years: that is simply unacceptable.

1.4 Gavin Shreeve, Principal of the ifs School of Finance said: "Modern banking is an increasingly complex, multifunctional industry which requires employees to have diverse skills and knowledge. One size does not fit all in terms of qualifications, but comprehensive knowledge of the industry, its regulatory framework and the risks it faces across different levels from front-line retail to executive level – developed through appropriate study and learning – is extremely important." Mr Shreeve is right about the complexity of banking in today’s world and we need to be careful to separate retail banking from the kinds of activities conducted by those involved in the Libor scandal and also those involved in the manufacturing and sale of structured products which brought the banks to their collective knees. However, he is wrong when he says that one size does not fit all.

1.5 If doctors, lawyers, accountants, engineers and architects can all have their own professional bodies with demanding qualifications and on-going assessments to determine their fitness to practice then there is no reason why a similar body cannot be given the task of doing the same for the financial services industry. That body would also have the objective of improving professional standards in the industry and a key mechanism for achieving that should be the improvement of training and the requirement for commonly recognised and externally regulated qualifications.

1.6 We would propose the introduction of industry-wide qualifications covering the range of roles undertaken within the financial services industry. The content of those qualifications would be generic but a significant part of the curriculum would be devoted to areas such as compliant selling and treating customers fairly. A number of organisations, including Lloyds Banking Group, make use of some of the existing qualifications in the market but that tends to be on a piecemeal basis and is implemented on a voluntary basis. Under our proposals there would be a clear career path for staff in the industry, with qualifications that were industry recognised and which were portable between organisations. In roles involving the sale of financial products, the achievement of the required qualifications should be compulsory. Without compulsion, any attempt to professionalise the industry will fall at the first hurdle. If customers are to regain confidence in the industry, and that process is going to take years, then it needs highly trained individuals who work within a strict code of professional standards.

2. What have been the consequences of the above for (a) consumers, both retail and wholesale and (b) the economy as a whole?

2.1 We will focus our attention on the impact of the predatory sales culture identified in our answer to question 1 on consumers and staff who work in UK banks.

2.2 Most customers believe their banks are interested only in selling them as many financial products as they can regardless of whether they need or can afford them. That’s been true for many years. In fact many if not most staff who work in those banks probably feel exactly the same as their customers.

2.3 The consequence of this predatory sales culture for customers has been a series of mis-selling scandals. Each of those scandals, whether it be the mis-selling of pensions, endowment mortgages, bonds, personal protection insurance, dual-amortising swap products and now, potentially, added value accounts, all involve customers being sold products they don’t need, can’t afford, can’t understand and which ultimately benefit their banks more than them. In 1997 the Treasury estimated that in total around 2 million UK citizens could have been mis-sold a personal pension with a compensation bill close to £11 billion. The latest scandal, which involved the selling of personal protection insurance to customers who didn’t need it or couldn’t use it, will cost the industry somewhere in the region of £9 billion, with Lloyds alone setting aside £4.3 billion to compensate customers.

2.4 Now staff in Lloyds Banking Group don’t generally wake up in the morning thinking: "How many customers can I fleece today?" but they do wake up worrying about how many loan appointments they’ve got in their diaries or how many sales they need to make to hit their insurance targets and preserve their jobs. That is the predatory sales culture that exists in most banks today and banks have devised ever more complicated and esoteric bonus and incentive schemes to drive that short-term sales culture.

2.5 The vast majority of bank staff want to do the best for their customers but can’t because they are under constant pressure to hit ever-demanding targets, which increase every year. A failure to hit those targets can result in staff being subject to performance improvement plans and in some cases being dismissed for under-performance. A number of management practices we have been dealing with are based more on humiliation than on positive motivation. Extreme pressure causes desperate people to do desperate things.

2.6 In that kind of environment, it is surprising that there have been so few mis-selling scandals.

3. What have been the consequences of any problems identified above in question 1 for public trust in and expectations of, the banking sector?

3.1 It seems that when it comes to the mis-selling scandals all the UK banks have been tarred with the same brush as far as customers are concerned. The problem is that customers who need financial advice or who would be best served buying certain financial products are reluctant to do so because they don’t trust their banks anymore. According to Gurria "Trust is the spinal cord of economics". (Gurria, OECD Role in promoting open market and job creation, 21st May 2009). If that trust is lost then according to Tonkiss (‘Trust and Confidence and Economic Crisis’, Intereconomics, July/August 2009) the effective economic functioning, which underpins the wider socio-economic system, is also lost

3.2 According to the consumer magazine Which, seven in ten people say that the banking "culture" hasn’t changed since 2007, and that trust in banks has deteriorated even further over the last year. Now it may be that’s not a bad thing given that some well-known non-banking brands such as Tesco and Marks and Spencer are looking to enter the market and provide a wider range of offerings to customers. However, these ‘challenger’ brands, whilst important, will only ever be small in comparison to the main players in the market and if that market is to work in the best interests of consumers and the wider economy then trust and confidence needs to be restored quickly. Alastair Darling, the former UK Chancellor of Exchequer, said: "Banks need to demonstrate to the public that they’ve learned the lessons from recent events" and continued "but in order to rebuild public trust, we also need to reform banks’ culture".

3.3 Of course banks are in the business of making money and there is no point in being coy about that. One of the ways they make that money is selling financial services products to customers. That’s good for staff, good for customers, good for pension funds and ultimately good for the economy. The UK’s banks employ 1.4 million people between them and contributed about £63 billion in taxes during 2011, equivalent to 21.1% of all UK Government receipts (The City UK, 2012). However, the predatory sales culture which we have described above and which is responsible for the mis-selling scandals needs to be dealt with once and for all. If the Committee fail to address that issue then it will have failed consumers. That means scrapping all the individual incentive and bonus schemes that operate in UK banks and investing part of that money into paying staff decent basic salaries. Where staff rely on bonuses and incentives to make up the shortfall in their earnings then that will inevitably drive individual behaviours that are unlikely to be in the best interests of customers. If we de-couple that link then staff can begin to do their job properly, which is to look after the financial interests of their customers rather than selling them products primarily to protect their own pay and jobs.

3.4 Lord Turner, the FSA Chairman, Martin Wheatley, Chief Executive designate of the Financial Conduct Authority and Andrew Bailey, Director of the FSA’s Prudential Business Unit, have all suggested in one form or another that free in-credit banking needs to be addressed. The argument they put forward is that free banking has been subsidised by aggressive cross-selling of other products. There are some merits to that argument but any change in the current system should come at a price. The quid pro quo would include the scrapping of ‘hidden’ fees. It will also require banks to stop the aggressive pursuit of cross sales and to change their whole retail sales cultures. Only in those circumstances should the scrapping of free banking ever be considered.

4. What caused any problems in banking standards identified in question 1.

4.1 Affinity will focus on the culture in retail banking and the impact of financial incentives in driving the wrong behaviours.

4.2 We believe the introduction of bancassurance changed the culture of banking from one focused on creating long-term profitable relationships with customers to one obsessed with ‘cross-selling’, ‘product penetration’ and ‘share of wallet’. It is fair to say that in that period of change, the selling concept became significantly more pronounced with the introduction of ever more complicated incentive schemes designed to drive sales type behaviours. That change in culture was also reflected in the recruitment of new staff, particularly amongst the management populations. The newer, lower cost replacements were predominantly from sales backgrounds and brought with them a more aggressive approach to sales management. In many banks at that time a predatory sales culture began to develop and the idea of creating long-term profitable relationships was replaced by a sub-culture developed by senior management, which was, and still is in many organisations, obsessed with short term, product led sales performance. In order to drive that sales performance the Banks have developed incentive plans, which drive that short-term behaviour. Moreover, the sub-culture we have identified is reflected in the way staff are managed locally. The kind of behaviours we see on a daily basis, with staff being routinely threatened with performance improvement plans underpinned by the threat of dismissal, as if they are the only motivational tool at the bank’s disposal, or being shouted at and humiliated for alleged under-performance have no place in any organisation. In a bank they are virtually certain to drive the sort of aberrant behaviours we have identified above.

5. What can and should be done to address the weaknesses identified?

5.1 We propose the following solutions:

· If trust and confidence in banks is to be restored the industry needs to be professionalised. There should be the introduction of industry-wide, portable qualifications for all staff required to sell financial products to customers. At the heart of that qualification should be the requirement to put the customer first at all time and in all circumstances. This is enshrined already in the outcomes required by the FSA’s Treating Customers Fairly regime.

· All financial products should be rigorously assessed to ensure they meet the requirements of customers. The banks should be required to show that their products will meet the needs of those customers to whom they will be marketed. If they don’t meet those needs then they must not allowed to be sold. Again, this is a clear requirement of the Treating Customers Fairly regime.

· All short-term incentive and bonus schemes, linked to the sale of financial services products, should be scrapped altogether and that money should be reinvested in increasing basic salaries for staff.

· Banks should undergo cultural change programmes to require them to move away from short-term, target driven, predatory sales cultures to ones based on a more relationship management style of banking. That change is going to be very costly and we believe that in exchange for a new, more customer centric rather than product focused banking model, the Commission should look seriously at ending free banking.

August 2012

Prepared 22nd September 2012