Banking StandardsWritten evidence from the Institute of Business Ethics

The Institute of Business Ethics was established in 1986 to encourage high standards of business behaviour based on ethical values. It was launched for business people the day after Big Bang by the then Lord Mayor and concerned business leaders that the concept of “my word is my bond” would not withstand the new regulatory and market environment.

Today the IBE, a charity, leads the dissemination of knowledge and good practice in business ethics, though helping organisations strengthen their ethics culture to encourage high standards of business behaviour based on ethical values. More information is available including a list of our subscribers on www.ibe.org.uk.

Summary

It is a pity that the arrogance of the few and their misdemeanours have led to a public perception that there are no professional standards in the banking sector at all.

Mis-selling cases have been perpetrated by the industry, not just a single institution which has caused such a collapse in trust in the sector.

Public expectations of the sector are generally low.

In both retail and wholesale markets the problem has been the mismatch of knowledge and understanding between the parties to a transaction which gives power and influence to the party selling the product.

Few firms in the sector effectively embed their codes from the board down.

Boards ought to have an Ethics Committee to look at culture and ethical matters specifically to ensure the firm is following best practice.

Decision-making processes should be reviewed to take into account, not just financial and legal issues but ethical issues too.

Proposed regulatory changes may be sufficient but change will only come about by the firm itself, the board, the senior team and every member of staff committing every day to do the right thing by all they come into contact with, because it is the right thing to do.

The Regulator could call for evidence of ethics training of employees working in the wholesale market.

Detailed Response

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

To say professional standards are absent and defective is too sweeping a statement given the vast majority of those employed in the banking sector are indeed working professionally as they conduct their day to day jobs. It is a pity that the arrogance of the few and their misdemeanours have led to a public perception that there are no professional standards in the sector at all.

This arrogance has developed over time. Any poor behaviour has not obviously been stamped out by firms due to the competitiveness of the market, not only in the UK but globally. This is particularly the case, it would appear, in the investment/wholesale side of the market where remuneration/bonus schemes have clearly driven behaviours—the quantum of potential success was too big, not to go for it, for some.

Historically those in the sector were seen as professionals and respected as such because the markets were more personal, both in retail and wholesale. One knew one’s counterparties and if you did not trust them, then you did not do business with them but given the electronic and global nature of today’s markets that personal touch is long gone and so the nature of business moves from being relationship driven to transaction driven. This is a very different basis where care and attention to one’s counterparty and the concept of mutual benefit in doing a deal is lost, and so is trust.

2. What have the consequences been for consumers and the economy?

The consequences have been serious for both retail and wholesale customers given the number of mis-selling cases there have been over recent years. Such cases have been perpetrated by the industry, not just a single institution which has caused such a collapse in trust in the sector. This has hit public confidence in a sector that is needed in the economy—banking services are not an option, they are an economic requirement, unless we return to a system of barter.

3. What have been the consequences for public trust in the banking sector?

Due to low public trust in the sector the expectation of many is that they will not be treated fairly and every banker is out to feather their own nest. This is probably a collective view (media view) as often the day to day experience of someone of their High Street branch is likely to be more positive. Expectations are generally low.

4. What caused the problems and weaknesses in the banking sector?

One of the issues, in both retail and wholesale markets is the mismatch of knowledge and understanding between the parties to a transaction which gives power and influence to the party selling the product. In the retail market it has also been proven that the sellers did not necessarily understand their products or their effects properly either! In both cases if the pressure is there to meet targets, achieve bonuses, then the seller can take advantage of the buyer. In the wholesale market this can be compounded in specialised areas of finance such as tax.

With knowledge comes power, and arrogance leading to a culture epitomised in phrases such as calling customers “muppets”.

Specific weaknesses identified include lack of knowledge by senior staff/Boards as to the actual culture and behaviours of their staff through a lack of governance and corporate awareness.

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

All firms have codes of conduct (usually rules based) but few have codes of ethics (principles based on the firm’s values), and even fewer have codes or train about expected behaviours. Few effectively embed their codes from the board down, which can be remedied through training, communications, awareness raising using a combination of face to face training, e-learning and other media mechanisms to engage with all employees.

The importance of this should be led by the board by setting up an Ethics Committee to look at these matters specifically to ensure the firm is following best practice (to date banks tend to rank themselves in this arena against each other and not against the best international commercial firms globally, many of whom are more advanced in their approach and management of doing business ethically).

Decision-making processes should be reviewed to take into account, not just financial and legal issues but ethical issues too. The same process should be followed for all decisions—new products, M&A, taking on new customers etc in order to create a consistency in decision making within the firm, so it becomes part of the firm’s DNA.

Speak Up processes (often called Whistleblowing) need to be reviewed. Using a positive term, such as speak up, is a way to encourage employees to raise their concerns and help create an open culture, not one of fear that if “the deal fails, so do I” which can lead to poor behaviour and ultimately outcomes for the individual and the bank.

Internal audit needs to be up-skilled to be able to “audit” non-financial matters effectively. There are many indicators which can be reviewed to see if an organisation is “living up to its values”.

The combined effect will be to strengthen the firm’s ethical approach to doing business. This is proven to enhance the long term bottom line, improve recruitment and retention and develop customer brand loyalty.

6. Are changes proposed sufficient?

Proposed regulatory changes may be sufficient but change will only come about by the firm itself, the board, the senior team and every member of staff committing every day to do the right thing by all they come into contact with, because it is the right thing to do. This should be placed above doing the deal for the sake of it or because of its return, either to the individual or organisation. It is such deals that in our 24/7 world that are the causes of failure in reputation.

Responsibility needs to be taken by all, individually and corporately.

7. What other matters should the Commission take into account?

Professionalism is being strengthened in the retail market through the introduction of RDR, perhaps more should be done, by the Regulator asking for evidence of ethics training in the wholesale market—either via professional bodies in setting examinations or in-house training modules.

31 August 2012

Prepared 19th June 2013