Banking StandardsWritten evidence from Derek French

Executive Summary:

A brief summary, based on relevant personal experience, of structural changes which have contributed to the decline of banking standards in the UK including some pointers to where restorative action might be taken, including a registration requirement for individual practitioners and a community service obligation imposed on banks.

This submission is made in a personal capacity although drawing on 38 years of UK and international banking experience plus 14 years, in a voluntary capacity, as campaign director of the Campaign for Community Banking Services www.communitybanking.org.uk

1. The banking profession in the UK has been on a declining trend for many years in comparison to other professions such as accountancy, legal, medicine, surveying, etc in terms of professionally qualified staff, except in the area of sales of regulated personal finance products. The profession was never so exclusive as the other examples in terms of qualification as a barrier to entry but this absence was more than compensated for by:

The fact that it was a life-long career profession, usually with one employer whose culture was absorbed over time and passed on to the next generation.

Much importance was attached by the largest employers to qualification in banking subjects with the professional bodies, the Chartered Institute of Bankers, and its much smaller Scottish counterpart. The former was hi-jacked by the ifs School of Finance to become a commercially orientated provider of financial services qualifications including degrees but its value as a professional body, always less than the other professions, has largely been lost.

Movement of staff, within a career progression, across functions and between geographical locations, in the UK and abroad, ensured that the bank’s culture, ethos and professional standards (including attitude to risk, integrity, honesty, conscientiousness, customer focus, need to know the customer and the market in which he operates) were transferred by example to new entrants and to those joining the profession later.

None of these exist today in the banking structure which has been allowed to develop in the UK.

Although overall business generation and profitability of the branch or business unit was always the principal aim of banking services provision, the emphasis on specific product sales was not present historically and remuneration/promotion was not tied to specific targeted areas but to all round performance. Most of the ‘deals’, lending or trading, could not be achieved by an individual but are reliant upon the brand and/or the balance sheet of the employing bank but the present remuneration policies seem not to recognise this.

I am not an expert in other countries’ banking employment but I understand that some of what we have lost/abandoned in the UK has been retained in countries such as France and Germany.

2. Consumers, individuals and businesses, are better able than I to identify the consequences of the changed shape of the UK banking industry but from my discussions with both since leaving it is clear that consumers have lost trust in, and respect for, the experience, expertise and motives of most of those representing the bank they deal with and see little merit in moving to another of the established banks where the profile is perceived to be much the same.

Of the new entrants, Handelsbanken UK deserves a mention because, for the mid corporate businesses and high net worth individuals the bank has chosen to market to, it has managed to revive the sort of service that bank customers expected and received in the past from the established UK banks; interestingly it has done this by recruiting from the established banks’ middle rank managers, who had benefitted from the training and culture transfer I referred to earlier and has given them a meaningful level of discretion in matters of lending and charging that makes their job more satisfying and earns the respect of customers. I understand that reward is based on general performance.

3. See 2 above.

4.1 Incentivisation of risk taking, through excessive targeting and bonus rewards, leads inevitably, to irresponsible behaviour unless there is restraint exercised by the employer, the profession or the regulator with personal sanctions of a career damaging nature for non-compliance.

4.2 Some innovation is necessary and welcome but the product complexity needs to be fully understood by those responsible for selling it and those to whom they report. From personal experience of the early days of electronic banking and also derivatives, for both of which I had some management responsibility, I can vouch for the challenges, some would say insuperable, this level of responsibility can present.

4.3 Technology developments, especially the speed at which irreversible transactions can now be completed, is a temptation to take untoward risks or at least not think through the consequences. This has always been the case in fast moving markets such as foreign exchange but now the application is much wider and whether sufficient checks and balances are in place is questionable.

4.4 In my experience which includes some crossing of the border, investment and retail banking are separate businesses which call for different skill sets and to some extent different cultures. It makes the job of managing both effectively, at CEO and Board level, too big a challenge and this is made even more difficult by the disparity between reward structures. Complete separation of these businesses is the only answer.

4.5 In Retail Banking real competition between the established players is minimal. Product offerings and delivery structures are so similar that cost bases are virtually the same leaving little room to differentiate. In my present role I witness the complete absence of competition at local market level between the big retail banks. When one bank closes its branch others follow rather than actively competing for the business and in 14 years of monitoring the industry there have been only three cases where a ‘last bank in town’ has been replaced by a competitor bank—a period which saw many hundreds of communities rendered bankless, often with damaging impact on local businesses, especially retailers who can lose significant turnover as well as suffering considerable inconvenience in carrying out necessary banking activities. The banks, despite significant protests, will not reverse or modify a closure decision once made and the industry continues to refuse to adopt, or even trial, the ‘shared branch’ alternative to closure which is cost-effective and operates successfully throughout the USA. Full details are available on the website www.communitybanking.org.uk

5.1 Given the depths to which the industry has fallen, not only in the UK but especially so here, the path to recovery is long and difficult.

5.2 Culture needs to change from the top and regularly importing CEOs and Divisional Heads from other industries, cultures and countries does not help.

5.3 Personal sanctions for abuse need to be much stronger and some sort of professional registration process for banking decision takers at all levels, similar to other professions, merits investigation.

5.4 Banks need to have imposed upon them, in return for the considerable benefits they receive from authorisation, some community service obligations similar to the US Community Reinvestment Act.

6. The proposals are insufficient; ring fencing is not enough and more rules are necessary.

22 August 2012

Prepared 19th June 2013