Banking StandardsWritten evidence from CBI

1. The CBI’s submission to the Parliamentary Commission on Banking Standards focuses on the challenges facing the banking sector around culture, behaviour, and standards. It sets out the “business user” view on what matters, and how CBI members believe these issues should be addressed.

2. Our starting point is a need to restore confidence that banks are working for the economy. Banks do, and will continue to, play a critical role in all parts of the economy and society, so it is vital that they are working effectively. The situation today, though, is that an expectation gap currently exists between what business is getting from banks and what banks perceive they are delivering for business. A change in culture within banks is required to help repair the breakdown in this relationship, which, if left unaddressed, will hold back the ability of business to drive economic growth.

3. Driving this change starts and finishes with culture. So change needs to focus within individual firms, where culture first takes root. Boards need to instil the right culture and behaviours throughout the firm, underpinned by effective corporate governance with the right internal controls and incentives. Individuals need to be held accountable for their actions, with the right penalties in place to deter any individuals from erring from the values and standards set from the top. There are many structural reforms already underway in the banking sector, particularly in the UK as a result of the Independent Commission on Banking ring-fencing proposals. These will primarily help drive financial stability, but the separate governance structures under the Vickers’ proposals will also have an important impact on culture on each side of the ring-fence.

4. Business is clear it wants the banking industry to change, and in this paper we attempt to give some suggestions for ways in which this could be achieved. But the industry itself also needs to set out a vision of what success would look like five years hence; built on responsible behaviour, rooted in a culture that places the customer at its heart, and focused on delivering for Britain’s businesses and citizens.

5. In this paper, the CBI argues that:

The breakdown in the relationship between business and banking is impacting on the ability of business to drive economic growth and prosperity.

Increasing levels of trust, which must be underpinned by a change in culture, is key to ensuring banking can support business’ needs.

The biggest drivers of a change in culture will be a re-casting of the values that banks seek to represent. This culture has to be driven by putting the customer front and centre of everything; trust will only be earned by sustained behaviour change and consistently delivering on promises about products and services. For this to happen:

(a)Systems and procedures within firms must drive values throughout the organisation.

(b)Individuals need to understand the behaviours expected of them and be held accountable for their actions.

Beyond the important structural reforms already set in motion, we think a continued focus on competition is important, but do not believe that further structural reforms will be effective in driving culture change.

The Breakdown in the Relationship between Business and Banking is Impacting on the Ability of Business to Drive Economic Growth and Prosperity

6. The recent scandals in the banking industry that have lit the touch-paper for the Parliamentary Commission are different from the issues that contributed to the financial crisis, the response to which rightly demanded an explicit focus on financial stability. The manipulation of LIBOR; interest rate swap and PPI mis-selling; accusations of money laundering and the breaking of sanctions against foreign nations—all strike at a deeper malaise, at a culture in parts of the industry at odds with much of that which is positive about British business and society.

7. Beyond those scandals, businesses’ everyday interactions with banks also point to an erosion of trust in the relationship between business and banking. Frustrations over constantly changing terms and conditions; a lack of price transparency that undermines choice and competition; and the outright mis-selling of products and low customer satisfaction, have all fuelled mistrust in banks’ advice and ability to support business. Against a back-drop of sluggish economic growth and constrained access to finance, this creates a perfect storm.

8. This trust deficit is rooted in a deficient culture in parts of the banking industry, based on standards and behaviours that do not stand up to scrutiny.

9. The breakdown in the relationship between banks and business impacts in two main ways: firstly, it becomes harder for banks to play their proper role in the economy. But secondly, the reputational spill-over from banking to business is also hurting trust in business more broadly, questioning its “licence to operate” and increasing the threat of broad-brush regulation. This is neither good for economic recovery, nor for the long term health of the UK as a place to do business.

Increasing Levels of Trust, which must be Underpinned by a Change in Culture, is the Key to Ensuring Banking can Support Business’ Needs

10. Increasing levels of trust in banking will be the foundation to improving relationship with business and ensuring banks can play their full part in supporting the economy. The level of distrust that exists in the banking industry acts as a block to an effective relationship between banks and their customers.

11. UK businesses and the wider economy need a strong and stable banking system. CBI members are also clear that they need the banking industry to fulfil a number of specific functions, including:

Providing basic payment mechanisms and cash management.

Providing lending and other forms of finance for working & investment capital.

Facilitating access to capital markets.

Helping businesses manage risk.

Offering real choice and diversity in products and services.

Working for their customers, helping them to overcome problems and get the products and services that are in their best interest.

12. The provision of these core services is fundamental and essential to the operation of the economy. Indeed, many of these products and services are already available to business, provided by the UK’s financial services sector. But their provision is neither universal nor consistent, and a breakdown in trust occurs when widespread availability and accessibility of these products, on which business relies to survive and thrive, is not the norm.

13. Solutions to these problems need a forensic approach. The big picture is that the transition to a “new normal” in bank finance, caused by tougher regulation and changed risk appetite, is altering the lending landscape, rather than these constraints being driven by culture and standards.

14. That said, business is clear that it is not currently getting the service it needs from the banking industry. In large part this is because banks have over time lost the values that placed the customer at the heart of how they did business.

15. Banks need to re-establish their core values, so that they are re-focused around delivery for customers.

16. These values need to be honest and realistic; they need to be driven through the organisation from top to bottom; and deviation from these has to be both unacceptable and, when this does occur, a priority issue for the firm’s leaders.

17. What are the values that business wants from the banking industry? In one sense, they are not too dissimilar from those that the wider business community aim to hold themselves.

18. One of the key drivers of trust in business of any kind is whether the business consistently delivers what it promises. It is striking that the banking industry does exceptionally poorly on this count; both compared to a number of other drivers of trust (for example, “treating staff well”) and compared to other industries (for example, four times the number of people think supermarkets consistently deliver on their promises compared to banks).

19. Business also wants a number of specific things from banking, all of which are rooted in banks acting in the customer’s—rather than their own—interest, including:

(a)Being offered products they want, rather than those that the bank wants to sell them.

(b)Transparency around the price of products and services, rather than the opaqueness that can come from cross-subsidisation.

(c)Accessible, straight-forward, and honest communication.

20. A large contributor to the trust deficit in all of these areas—and therefore a key area on which the Commission should focus—relates to a lack of transparency in much of what the banking industry does. For example, not only would better transparency of pricing increase the possibility of real choice and competition, it can help build the trust that comes from the idea that what you see is what you get.

21. The banking industry undoubtedly needs to change. Some of this will happen (and already is happening) through self-assessment and a desire to improve on the part of the industry. But other elements may need some prompting from policymakers, legislators, and regulators to see real change delivered that improves the relationship many have with their banks.

22. Care should be taken, however, to avoid any new proposals cutting across the extensive list of reforms already taking shape, many of which are now in the implementation phase. We would therefore urge the Commission to consider in its deliberations any reforms already underway in these areas—either in the legislative or implementation phase, in Europe or domestically—before it considers any additional measures that could supplement these efforts. This would help to avoid duplication and unintended consequences, both within the financial system and to the economy more widely.

23. We need to be clear what success looks like here: the return of the values and behaviours which promote customer-focused banking that supports business and plays its full part in UK society.

The Biggest Drivers of a Change in Culture will be a Re-casting of the Values that Banks seek to Represent and an Increased Focus on Ensuring the Good Behaviour of Individuals

24. Changing the banking industry must be rooted in changing the culture in firms and the behaviour of their employees. We believe that a focus on firm level systems and the responsibilities and behaviours expected of individuals is an area which has the potential to effectively drive change.

25. Culture is influenced by many things, but we believe the reforms required can be broadly framed around the following themes:

(a)Systems and procedures within firms:

(i)Corporate governance structures.


(iii)Relationship with customers.

(b)Accountability of the individual:

(i)Code of conduct.

(ii)Personal and professional development.

(iii)Enforcement and sanctions.

(a) Systems and Procedures within Firms Must Drive Values Throughout the Organisation

26. The culture at the top of a firm affects the behaviour throughout. The tone is clearly set by individuals, but the systems and processes surrounding the way a firm conducts itself, including how messages are cascaded down throughout the organisation, clearly have a significant impact on the overall behaviour of the staff.

(i) Corporate Governance

The trust that stems from strong risk controls, compliance, and internal audit is key to restoring banking’s reputation; so these functions need to be more visible at all levels, from board agendas to managerial objectives.

27. The clear values that should drive the organisation and its employees need to be set and monitored by the board, with those values that are crucial for trust between customer and bank to remain strong being given higher priority than currently the case:

(a)Risk: if a risk is too complicated for a well-composed board to understand, it is too complicated to accept.

(b)Compliance: failures of compliance are drivers of the loss of trust in banking and so must be given greater visibility at the highest level in an organisation.

28. In addition, individual members of the board should be clear about the roles and duties for which they are responsible—whether concerning risk, compliance, or internal audit. These should be well explained from the outset, and aligned with the expectations of the regulator.

29. Corporate governance structures need to ensure that the right values are cascaded down throughout the organisation, rather than being focussed solely on board level activity.

(a)Systems for upward challenge need to be clear and respected, including clear procedures for escalating problems to more senior levels when they occur.

(b)Compliance needs to become more independent to avoid conflicts of interest that may arise through an employee’s desire to satisfy senior colleagues rather than raise compliance issues.

(c)Internal audit should be brought forward to be “live” in decision making rather than being post-decision and process focussed, elevating it to a “partnership role” with other senior decision making.

(d)Corporate governance structures need to be flexible enough to take account of differing ownership characteristics.

30. The FSA “Significant Influence Function” should promote the right credentials and help avoid “group think”.

(a)We welcome the FSA’s more intrusive SIF process, and believe it should now be increasingly concerned with roles relevant to business conduct.

(b)This may require employees below senior management to go through the SIF process, especially in large firms where there needs to be a realisation that thorough monitoring of important procedures around compliance, risk, and internal audit may require an increased level of responsibility at business unit level.

(ii) Incentives

Remuneration strategies should be based on more rounded metrics

31. Rewards (both in terms of career progression and remuneration) should have greater emphasis on behaviours & non-financial metrics, including outcomes for customers and adherence to codes of conduct.

32. Incentive triggers should be based on organisation-wide performance, helping to deter individuals or teams from acting purely in their own, rather than their customers’, interests. Furthermore, the trend for longer time horizons for performance-related elements of pay should continue, in order for banks to be able to use claw-backs for individuals at board level and below (for example, for material risk takers).

(iii) Customer relationships

Increased collaboration between banks and their customers must be encouraged

33. Greater emphasis should be placed on fostering a mutually beneficial relationship between customer and bank. Bank staff taking the time to mentor businesses through the application for finance process is an important step in improving this relationship, and work is already underway here to assist this by boosting relationship manager skills and ensuring there are robust appeals processes for businesses that are initially turned down for finance.

34. Increasing the overall financial literacy of customers would reduce the risk of issues occurring—both regarding attempts to secure finance and concerning episodes of mis-selling.

(b) Individuals Need to Understand the Behaviours Expected of Them and be Held Accountable for Their Actions

35. The behaviour of a significant number of individuals in the banking industry is repeatedly highlighted in Parliament, the media and society at large as being out-of-step with the norms and standards we expect from members the business community, as well as perhaps from members of society in general. In short, banking appears to have fallen far from the days of “my word is my bond”. Individuals need to understand the behaviours expected of them in the industry, and be held accountable if they fall short of these.

(i) Code of conduct

36. The implementation of a professional code & ethical standards with “teeth” is required. A single standard of baseline ethics is required across the entire industry, which firms can then use as a minimum standard on which they can base their own individual, firm-level codes of conduct. Although individuals at more senior levels in an organisation may be required to adhere to stricter standards, the underlying code of conduct must be universal. The code needs to be observable, and deviation from it needs to be punishable.

37. Codes of conduct must be “live” in banks—constantly evolving and being refreshed—and the code and foundation standard should be compatible with the extensive number of technical qualifications on offer in the industry. This is especially important to keep the UK open to the international workforce.

38. Punishment needs to be a significant deterrent. Many professions operate along the lines of a register, from which individuals can be struck off if their behaviour fails to reach the standards expected of them. More work needs to be done to construct something appropriate and workable for the banking industry, but the idea behind such a register is simple: someone who has been struck off should not be able to find employment in the banking industry again.

39. In parallel, the FSA approved persons code of conduct should be updated and consideration should be given as to whether it should apply to lower levels of management in firms.

(ii) Personal & professional development must be improved

40. Internal training should include increased explanation of behaviours expected at the relevant level—including regulatory duties. These sessions should be regularly updated, including through discussion with the regulator as to their expectation of required behaviours.

41. Human Resources have an important role to play in promoting the culture throughout a firm, and should ensure conduct is a mainstay of development programs and clearly outlined in induction training, including the relevant punishments for inappropriate behaviour.

42. A number of other professional bodies require individuals to undertake compulsory continuing professional development (CPD), with a set number of hours required each year, as one way to maintain professional standards in the industry. The medical and accountancy professions both provide relevant examples of this.

(iii) Enforcement and sanctions must act as material deterrents

43. There should always be—and indeed already are—tough criminal sanctions for those engaging in fraudulent or unprofessional behaviour, but such behaviour should be dealt with by the criminal authorities rather than the regulator.

44. The FSA already has extensive powers that can be used as material deterrents, including the ability to fine, suspend, or revoke approval entirely, of those who engage in unprofessional behaviour. If the Commission believe that further steps are necessary in this area, we believe an exploration of whether the authorities are currently using the full extent of their powers would be beneficial before consideration of further powers.

45. It should be noted, however, that there have been significant changes in the regulator’s approach in recent years. Working in partnership with the industry, the regulator has been able to take a more robust approach to investigation and prosecution of wrong-doing—which we applaud.

Beyond the Important Structural Reforms Already set in Motion, we think a Continued Focus on Competition is Important, but do not Believe that Further Structural Reforms will be Effective in Driving Culture Change

46. The systems and frameworks within firms are integral to fostering the right sort of culture, and to encouraging behaviour that the public and business can be confident is in line with the standards we would expect of those who work in one of the UK’s pre-eminent, globally facing industries.

47. There are, however, a number of structural tweaks that could be made to the industry to improve the relationship between business and banking. Implementing reforms already underway to the structure of the banking industry itself, bringing a renewed focus on the level of choice the industry offers to customers, and improving the way banks are regulated are all vital elements to ensuring a vibrant sector that serves those who rely on it.

(i) Competition in the right areas needs to be boosted

48. As consumers of banking services, businesses are more concerned with being offered a wide range of products and services that meet their needs than by the absolute number of providers. A diverse range of products and services for business to choose from is more likely, however, when there are a diverse range of finance providers in the industry. Lowering barriers to entry on both the demand and supply side should therefore be a priority.

Supply side barriers

49. Capital and liquidity requirements, and the FSA authorisation process, are onerous for smaller firms—”challenger banks”—as well as “challenger brands” (for example, mutual and co-operatives), giving large incumbents a significant advantage. The Commission should consider how to reduce these regulatory barriers to increase competition, without sacrificing financial stability.

50. Significant investment is required in infrastructure to break into market, including to establish branch networks, which are especially important for attracting SMEs. Greater infrastructure sharing should be encouraged, for example by increasing the types of transactions, such as deposit taking, that bank branches will execute for other banks’ customers.

51. Mutual and co-op models operate for the benefit of their workers or customers, and tend not to have high return expectations (reducing risk taking behaviour)—a more diverse range of ownership models would be beneficial for the “banking” market.

Demand side barriers

52. Reducing the current opaqueness in pricing and products would improve dialogue and shared understanding between banks and customers, and increase comparison of products. Efforts to increase transparency should be high up the agenda of the Commission. Data also needs to be made more accessible for effective use on comparison websites.

53. Changes due by September 2013 will increase the ability of individuals to switch their bank, increasing competition for customers. Increasing awareness of these changes is important.

Non-bank finance

54. Bank finance should not be the only source of working or growth capital for businesses. Encouraging a diverse source of finance provision through boosting non-bank finance options should be a continued objective. For example, increasing the use of equity finance and deepening the use of non-bank debt, such as corporate bonds, would increase real choice for businesses when seeking finance.

(ii) The powers and approach of the regulator should be constantly reassessed and fine-tuned to counter inappropriate behaviour, but wholesale change is not required

The regulator should focus on product governance in an attempt to head off potential consumer redress episodes at an earlier stage

55. Whilst there is a need to balance financial stability and conduct of business with the desire to allow for innovation, we believe consideration should be given to whether the balance should now be redressed from recent years back towards favouring product certainty over innovation.

56. Ensuring products are fit for purpose before they reach market and during the sales process—rather than rely on ex post-facto consumer redress—would help increase trust that products were appropriate for customers, and reduce the number of episodes of consumer redress for banks that do much damage to trust between business and banks.

57. The Financial Conduct Authority should therefore focus on product governance throughout the product life cycle, rather than the products themselves. This would include focusing on the process of designing new products including the approval process; financial promotions and marketing; the sales process; and customer satisfaction and complaints monitoring.

The regulator should take an increased interest in internal systems that contribute to culture

58. As well as being concerned with the products on offer in banks, the regulator should also take an active interest in incentive structures and cultural behaviours within the industry. It should take a macroprudential view of how incentives are shaping behaviour in the industry, including by conducting on-going reviews of incentive structures as part of its wider regulatory duties.

59. This will also help take account of incremental changes to incentives, which over time may have contributed, for example, to the creation of a sales driven culture in parts of the industry.

60. However, if the regulator is to take on the above objective, and therefore be given more power over banks’ systems and structures, the accountability and scrutiny it itself faces will have to rise. This is an area where Parliament can provide a welcome boost.

(iii) Altering the physical structure of banks will not prove an effective driver of cultural change

61. The proposed reforms to the structure of the banking industry, based on the Independent Commission on Banking’s recommendations, provide the background to any debate on structural reforms to the industry, and are an integral part of the future of the banking industry and how it interacts with its customers.

62. The governance aspects of ring-fencing will be an important driver of behaviour change, providing both sides of the ring-fence with governance structures tailored to the specific business lines included in each. And the competition measures included will further help to increase choice for business customers.

63. The Independent Commission on Banking took extensive evidence on the idea of full separation of retail and investing banking and, after careful consideration, rejected the idea. We believe that the expert Commission reached a sensible conclusion, and recent events do not change the fundamentals of this position.

64. Indeed, we consider the culture of consumer retailing—or, more specifically, a sales obsessed culture—to be a bigger driver of behaviour in retail banks than any perceived culture being transmitted from investment banks. The over-extension of a number of pure retail banks in the period leading up to the financial crisis would support this view.


65. Culture is at the heart of many of the current problems with the banking industry, and the Parliamentary Commission’s work on this is a welcome step to improving the relationship between business and banking.

66. There clearly must be a change in culture in the banking industry. But change will only come if the outcome from reform is greater than the sum of its individual parts—a wholesale change in the values that drive individuals and banks in the industry, with the tone set at the top and cascaded down through firms, is needed.

67. Practical changes are required; designed for the long term and allowed time to bed in.

68. Only then can we realise a sustainable future for a successful banking industry: one built on values and behaviours that promote customer-focused banking; committed to providing real choice to consumers and delivering what it promises; and one that plays its full part in supporting UK business and contributing to the wider well-being of society.

69. CBI members are keen to be involved in the on-going work around the standards and culture in the banking industry—an issue that, notwithstanding the wider economic challenges facing the economy, is undoubtedly a top priority for the business community.

18 September 2012

Prepared 19th June 2013