Banking StandardsWritten evidence from Accord

1. Executive Summary

Accord is the union representing the largest number of Lloyds Banking Group (LBG) employees and will remain so when the sale of the bank’s “Verde” business to the Co-operative Bank is completed in November 2013.

Accord believes the failure of the ICB Final Report to address the issue of standards and culture within UK banking—and the UK Government’s acceptance of this—was a serious error of judgement by both of parties.

Accord believes that acquisition of appropriate banking qualifications are a necessary and minimum requirement for those holding senior management positions in UK retail banking institutions.

Accord believes that the replacement of a professional service culture by a sales culture in UK retail banking—and the consequent crises and scandals this has resulted in—has led to a significant drop in public trust in the banking industry and of bank employees.

Accord believes that the country and bank customers both need retail banking to be a professional, advice-based industry, in which product sales flow from best advice to a customer, not a sales culture determining what advice is given.

Accord strongly believes that all customer-facing employees of retail banks should undertake appropriate professional courses to acquire the qualification necessary for them to provide the best professional advice to bank customers.

Accord welcomes the decision made by LBG earlier this year that all of its customer-facing employees will be required to attain the Institute of Financial Services (ifs) Certificate in Retail Banking Conduct of Business.

Accord believes that employee remuneration must be linked to customer service and satisfaction, not product sales.

Accord believes that there should be a fundamental review of remuneration and reward systems which are currently based upon individual performance and driven by sales targets.

Accord also agrees with the TUC that major UK companies, including banks, should be required to have worker representatives on their remuneration committees.

Accord believes that only full separation will provide retail bank customers with confidence that their hard-earned money is not at risk of being lost by highly-remunerated, speculative, short-term investment bank executives.

2. Introduction

2.1 Accord (formerly the Independent Union of Halifax Staff) was the largest union representing members within Halifax Bank of Scotland Group (HBOS). Accord now represents almost 30,000 LBG employees, following the takeover that was completed on January 19th 2009.

2.2 Accord is the union representing the largest number of LBG employees and will remain so when the sale of the bank’s “Verde” business to the Co-operative Bank is completed in November 2013.

2.3 In addition, Accord also represents employees of the Equitable Life Assurance Society.

2.4 Accord welcomes the opportunity to submit evidence to the Parliamentary Commission on Banking Standards. In its response1 to the Independent Commission on Banking (ICB) interim report, the union said:

“Accord does not believe that the ICB Interim Report has given enough focus on the need for cultural change within the finance and banking industry.”

2.5 The union’s response also said:

“Accord believes that there can be no return to what had been seen before the financial crisis as ‘business as usual’.”

“Accord believes that unless sufficient focus is put upon the cultural change required within the financial services industry, and certainly within the retail banking sector—which Accord’s submission will focus on—of it, the necessary lessons will not be learned and the seeds of the next financial crisis will be sown.”

2.6 Accord was therefore extremely disappointed and disturbed that the ICB’s final report2 made no mention of the need for cultural change within UK banking, particularly retail banking.

2.7 Therefore, whilst saddened about the revelations surrounding the manipulation of the Libor rate by Barclays and other banks that was the catalyst for the Parliamentary Commission, the union was not surprised that those in senior decision-making positions within those institutions believed that the standards and values to which they operated were acceptable. If the biggest investigation into UK banking in a generation did not challenge them why would they feel the need to change?

2.8 Accord regards the nostrum attributed to the esteemed management consultant Peter Drucker that “culture eats strategy for breakfast” is as true now as it ever was. Therefore, Accord believes the failure of the ICB Final Report to address the issue of standards and culture within UK banking—and the UK Government’s acceptance of this—was a serious error of judgement by both of parties.

3. To what extent are professional standards in UK banking absent or defective?

3.1 The lifting of exchange controls in 1979 and the passing of the 1979 Banking Act led to increased competition for UK banks from both foreign and non-bank institutions.3 Since then UK retail banks, including current and former building societies, have moved from a service-based culture to a sales-based culture. Accord members have seen this change at first hand.

3.2 The change to a sales-based banking culture led to a concomitant change in the training that retail bank employees received and how they were rewarded. Client-handling and sales-technique training increased, whilst the focus on professional banking qualifications diminished. Accord believes that this was a mistake.

3.3 Accord acknowledges that customer service is incredibly important in any competitive sector and banking is no exception to this. However the union’s view is that banking should be seen as a professional service first and foremost. Helping households and businesses to manage their risks and financial needs is the core role of retail banking and Accord believes that appropriate professional qualifications are required to fulfil this role.

3.4 Customers look to bank staff for professional advice on how to manage and invest their money properly, just as they do to other vital professional service providers such as accountants or surveyors. In order to become head of a major accountancy practice or major firm of chartered surveyors an individual has to possess appropriate accountancy or surveying qualifications: any additional service or management qualifications they may possess are ancillary.

3.5 Given the importance of retail banking to the functioning of modern society, Accord believes that acquisition of appropriate banking qualifications are a necessary and minimum requirement for those holding senior management positions in UK retail banking institutions. Like many others, Accord members were shocked when the Chairmen and Chief Executives of RBS and HBOS revealed to the House of Commons Treasury Select Committee in February 20094 that they did not possess a banking qualification between them.

3.6 However it must be acknowledged that the cultural changes and pressure on professional standards is not just a UK phenomenon: a glance at the website of the UNI Global union federation representing bank employee unions—of which Accord is an affiliate—shows that the trend towards prioritising sales rather than professional advice has been a global one. 5

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

4.1 It is important to say that not all of the consequences of culture change in UK retail banking over the past 30 years have been bad for customers. For instance, the increase in credit available to households and businesses up to the financial crisis fuelled economic growth, increased home-ownership and led to a rise in living standards during this period.

4.2 Therefore, whilst one can say with the benefit of hindsight, that growing reliance upon wholesale funding, derivatives and securitisation of mortgage and loan books to provide mortgages and other forms of credit for UK retail customers was ultimately unsustainable, there is no doubt it provided the platform for the growth in UK home ownership from 57% in 1981 to 71% in 2003.4747 This accorded with the policy of successive governments from 1979 until today.

4.3 Nonetheless, it is also undeniably true that this period has seen a series of mis-selling scandals which have devastated the lives of millions of bank customers. These include:

Endowment Mortgage mis-selling– which, by the end of 2008 had seen 1.8 million endowment complaints, and paid compensation in excess of £2.7 billion;6

High-Risk Precipice Bonds mis-selling—which saw fines levied on UK banks and building societies for mis-selling the products to pensioners;

Payment Protection Insurance (PPI) mis-selling—perhaps the biggest and most expensive mis-selling scandal, that Which? estimates could cost UK banks up to £10 billion in compensation7 and;

The mis-selling of complex interest rate hedging products—so-called “rate swaps”—to small sized businesses which have cost some of them “hundreds of thousands and even, in some cases, millions of pounds”.8

4.4 These sales scandals have had a deeply distressing and costly impact upon millions of ordinary retail bank customers.

5. What have been the consequences for public trust and in, and expectations of, the banking sector?

5.1 Accord believes that the replacement of a professional service culture by a sales culture in UK retail banking—and the consequent crises and scandals this has resulted in—has led to a significant drop in public trust in the banking industry and of bank employees. This has been particularly so since the 2008 financial crisis.

5.2 Where previously working for a bank had been regarded as a “respectable” job in the community, Accord members inform us it now often provokes a negative response. They report that, in the wake of taxpayers’ money being used to recapitalise the incipient LBG, the level of abuse they received from customers increased dramatically.

5.3 The pressure upon retail bank employees to hit product sales targets leads to resentment from customers and employees alike. From discussions with other unions representing retail bank employees, and consumer representatives, Accord believes that this is an industry-wide problem.

5.4 Accord notes that in a survey conducted by Which?9 this summer, 71% of respondents believed that banks hadn’t learned their lesson from the financial crisis. The union also notes that figure has increased from 61% in a similar survey conducted in September 2011. This suggests that the Libor and rate swap scandals—along with the IT system failures at Nationwide, Ulster Bank and NatWest—have further damaged public trust in UK retail banks.

5.5 Accord notes that, in light of the PPI, Libor and rate swap scandals, the LBG Chief Executive António Horta-Osório warned earlier this summer that the banking industry is facing a “deep crisis of confidence and trust” and “needs cultural change”.10 The union agrees with him.

6. What caused any problems in banking standards?

6.1 As stated previously, the lifting of exchange controls in 1979 and passing of the 1979 Banking Act led to increased competition for UK banks from both foreign and non-bank institutions.11 This led to UK retail banks moving from a service-based culture to a sales-based culture.

6.2 As also stated previously, this change to a sales-based banking culture led to concomitant change in the training that retail bank employees received and how they were rewarded. Client-handling and sales-technique training increased whilst the focus on professional banking qualifications diminished. Accord believes that this was a mistake.

6.3 At lower and middle levels of retail banking there has been a significant shift towards increasing variable pay—or bonuses as they are more commonly known—at the expense of core remuneration. Bonuses for staff are supposed to be linked to employees being assessed against a balanced scorecard of benchmarks in their performance appraisals, of which product sales is only one element. However Accord reps—and colleagues from other unions—tell us that all too often managers focus upon hitting sales targets at the expense of other benchmarks. As a result staff feel under constant pressure to sell inappropriate products to customers. Given that managers own pay packets and career prospects depend on this, one can understand the pressure they are under also.

6.4 Dealing with appeals against staff appraisals, particularly failure to hit sales targets, takes up a significant amount of Accord reps’ time. From discussions with colleagues in other unions representing retail bank staff we are aware that this is an industry-wide issue.

6.5 As Accord argued in its evidence to the ICB, the growth in variable pay in retail banking leads to a short-term mind set in all areas of banks and it is likely that, if this is happening in the branches, somewhere higher up and in a back office the same culture is likely be prevalent. Here the consequences for the bank, its customers and the country as a whole can be much more severe. An example of this is the irresponsible lending and speculation by the Bank of Scotland Corporate Banking Division. This Division’s speculation on the Irish property market, in particular, was instrumental in the failure of HBOS and led to its takeover by Lloyds TSB and bail-out by UK taxpayers.

6.6 Accord also believes that it is no coincidence that, in addition to the structural drivers previously highlighted, the increasing appointment of former investment banking executives to retail banking positions also led to a significant change in the culture of UK retail banks.

6.7 Investment banking and retail banking had different and distinct cultures and operational practices. The former was geared to short-term risk taking in the hope of large reward, whilst the latter was geared towards long-term, professional advice that garnered longer-term management fees. As has been stated earlier, this division has now been eroded, with the culture of investment banking becoming dominant.

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

7.1 Accord is disconcerted that some in the retail banking industry—both some new entrants and established banks—indicate that retail banking is a sales-based industry like other retail businesses. Whilst there is no doubt that banks can and have learnt from the retail sector—as stated previously—Accord does not believe that banking is an industry like any other.

7.2 Accord believes that the country and bank customers both need retail banking to be a professional, advice-based industry, in which product sales flow from best advice to a customer, not a sales culture determining what advice is given. As the financial crisis showed, the consequences of mistakes are far too great for this is not the case.

7.3 Accord strongly believes that all customer-facing employees of retail banks should undertake appropriate professional courses to acquire the qualification necessary for them to provide the best professional advice to bank customers. These qualifications provide the bank staff themselves with the confidence to make a professional judgement on which products best suit the needs of individual customers.

7.4 Therefore, Accord welcomes the decision made by LBG earlier this year that all of its customer-facing employees will be required to attain the Institute of Financial Services (ifs) Certificate in Retail Banking Conduct of Business. LBG is the first retail bank to make this step—following discussions between Accord and the ifs—and the union believes that other retail banks would do well to follow its lead. If widely adopted, the promotion of professional banking qualifications will, Accord believes, play a vital role in helping to restore customer confidence in the reputation and standing of bank staff and the industry as a whole.

7.5 Accord would prefer its members to be paid a guaranteed decent wage for doing their job professionally and responsibly. However LBG, like all the other retail banks, wishes to retain a performance-based element of remuneration. Accord believes that if this practice is to be continued that bonuses must be linked to customer service and satisfaction, not product sales.

7.6 Therefore, Accord believes that there should be a fundamental review of remuneration and reward systems which are currently based upon individual performance and driven by sales targets. Many companies within the finance sector favour rewarding sales figures which pay little or no regard to customer service. Remuneration must be transparent, accountable and open to independent scrutiny.

7.7 Accord also agrees with the TUC that major UK companies, including banks, should be required to have worker representatives on their remuneration committees. In addition, Accord believes that remuneration consultants should only report to remuneration committees, not to executive directors.

7.8 Finally, in its response to the ICB, Accord indicated a preference for a complete separation between retail and investment/wholesale banking. It is Accord’s view that the case for such separation has increased since then and that the cultures of the two are inimical. Therefore Accord believes that only full separation will provide retail bank customers confidence that their hard-earned money is not at risk of being lost by highly-remunerated, speculative, short-term investment bank executives.

August 2012

1 http://accord-myunion.org/6-june-2011-accord-responds-to-icb/

2 http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf

3 “Evolution of the UK banking system” – page 328, Bank of England Quarterly Bulletin 2010 Q4 http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100407.pdf

4 ..\Documents\Ken's 2012 Folder\Accord\Three Cliffs Treasury Com 100209.mov

5 http://www.uniglobalunion.org/Apps/uni.nsf/pages/finance_campEn

6 http://www.fsa.gov.uk/pubs/other/me_standards.pdf

7 http://press.which.co.uk/whichstatements/payment-protection-insurance-ppi-provisions-hit-10-billion/

8 http://www.telegraph.co.uk/finance/rate-swap-scandal/9364019/Big-Four-banks-admit-to-mis-selling-interest-rate-swaps.html

9 http://press.which.co.uk/whichpressreleases/five-years-on-and-three-quarters-of-people-say-banks-still-havent-learnt-their-lesson/

10 http://www.ft.com/cms/s/0/b64c756e-d727-11e1-8e7d-00144feabdc0.html#axzz24xyFqQET

11 “Evolution of the UK banking system” – page 328, Bank of England Quarterly Bulletin 2010 Q4 http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100407.pdf

Prepared 19th June 2013