Banking StandardsWritten evidence from the International Academy of Retail Banking


Banking is different. It has yet to mature into a profession in the same way as law and accountancy... and it’s high time that it did.

A separated, independent retail banking sector should be led by professionally-qualified retail bankers, bound by an ethical code similar to those already in place for accountants and lawyers. This ethical code should, amongst other things, oblige retail bankers to act in a customer’s best interest. Bankers who persistently fail to comply would be barred from membership of the profession.

This is the guiding philosophy of the International Academy of Retail Banking (IARB) which believes that the foundation stone for a profession must be the complete separation of retail banking from both investment banking and large-scale corporate banking. Corporate banking has very little in common with retail banking and merits its own professional body. Investment banking, on the other hand, seems ill-suited in many of its current activities to being considered a profession at all.

The International Academy of Retail Banking was founded in London in 2011 with the objective of educating retail bankers worldwide to a high professional standard. During this time, it has enjoyed the support of senior bankers and regulators in many countries. In just a year of existence, retail bankers in some 20 countries have studied IARB programmes.

IARB is currently in the process of applying for recognition from OFQUAL in the UK and similar licensing and regulatory bodies in other countries. The current challenge is how to move British banking from its current sad state of affairs to one of true professionalism. We offer our recommendations to achieve this noble objective.


1. The foundation stone for the development of professional standards in UK banking should be complete separation of retail banking from both investment banking and large-scale corporate banking.

2. As a minimum, there needs to be complete separation of retail banking from investment banking because the culture of the latter is alien and destructive to the obligation of providing consumers and small businesses with high quality banking services for the long-term.

3. The chief executives of retail banks and all senior executives including individual branch managers should be professionally-qualified bankers who have successfully completed an accredited banking education programme. These professionals would also be bound to observe a demanding code of professional ethics similar to accountants and lawyers.

4. The predominant criterion for non-executive board membership of a bank should be in-depth risk management experience over several economic cycles.

5. The corporate culture of a retail or commercial bank must foster personal and business ethics and employee professionalism. These are absolute prerequisites for good customer service and employee retention.

Specific Questions

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

The UK banking industry has its origins in the clearing banks, building societies and merchant banks—and each sector had its own professional standards, although these were not codified or published in the way they have been for decades by professions such as accountants.

2. Until some 25 years ago, aspiring branch managers (and consequently most senior managers) of the clearing banks were generally expected to study for, and pass, the examinations of the Chartered Institutes of Bankers. This tradition was undermined as the shock waves of the so-called financial services revolution took hold in Britain in the 1980s and 1990s; not least in the wake of “Big Bang” at the London Stock Exchange in 1986 and the gradual repeal of the Glass-Steagall Act (separating commercial banking, the securities industry and insurance) in the United States in the 1990s.

3. By then, it was fashionable to talk about “financial services supermarkets” which sold all manner of retail and corporate financial services—with an accompanying assumption that there was no good reason for the continuance of the old industry barriers. The term “banking” gave way to “financial services” in industry discussions and before long the London-based Institute of Bankers followed suit, renaming itself twice in a decade—first as the Institute of Financial Services in 1997 and then as the ifs School of Finance in 2006.

4. As a result, the Chartered Institute of Bankers in Scotland (now trading as the Chartered Banker Institute) remained as the only traditional banking institute in Britain. Founded in 1875, it is the oldest banking institute in the world.

5. By the 1990s, bank branches and their managers had ceased to have anything like their former status in the clearing banks and this, in turn, resulted in a considerable fall-off in students taking the banking institute examinations.

6. While all this was going on, the process of deregulation in the financial world spread throughout Western Europe and to most other parts of the world as globalisation became manifest. It was around this time that Wall Street’s investment banking and securities trading houses moved to London en masse, spreading a distinct and aggressive sales culture. The London merchant banks were soon absorbed into big UK, US and European banks and the same banks later moved further afield to Frankfurt, Amsterdam, Paris—and more recently to Hong Kong and Singapore.

7. The process of UK financial industry convergence reached its zenith when the retail banking and investment banking sectors merged in the 1990s to become what are now known as “universal banks”. Before long, investment bankers had become the CEOs of these new banks and would claim to be providing all manner of services with great efficiency to all types of customers. A similar evolution occurred in many other countries’ banking systems.

8. Hand-in-hand with the emergence of universal banking, the phenomenon of mis-selling became endemic in British banking. As the many mis-selling scandals now show, staff members in branches and elsewhere were now employed to push products onto unsuspecting customers and were given powerful financial incentives to achieve sales targets. Many of these products were manufactured by the banks’ own investment banking, insurance or pensions divisions.

9. More often than not customers did not realise that they were not getting good advice. The inevitable scandals followed in country after country, particularly in the UK.

How does this compare to (a) other leading markets (b) other professions and (c) the historic experience of the UK and its place in global markets?

10. The UK leads the world in virtually every area of professional services—from law to accountancy, from medicine to engineering—and all of these are rightly admired for their world-class professional standards. Each has its own professional bodies—whose members must be educated to a high standard, pass examinations and observe continuous professional education (CPE) requirements.

11. They are also bound to comply with demanding ethical codes that provide a conceptual frame of reference to practitioners confronted by a host of compliance rules. The absence of professional standards in UK retail banking is broadly paralleled in other leading markets.

12. Like the UK, regulators in many countries have introduced detailed compliance and competency rules for retail banking staff who sell investment products, but these are a far cry from professional standards. Ideally, both go hand in hand, with professional standards providing practitioners with a conceptual framework to guide their interactions with clients.

13. More generally, it should be remembered that London has spawned some of the most egregious financial scandals of the last five years. In addition, it was the UK-based division of AIG that created credit default swap products that landed the group into severe financial distress after the Lehman debacle. The “London Loophole” label is not without merit. The net result of all these retail and wholesale banking scandals is that the reputation of Britain and London as an international financial centre has suffered considerably.

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

Both retail and wholesale banks have been forced to shrink their balance sheets by de-leveraging and de-risking in order to meet higher capital requirements. Shareholders have been reluctant to provide additional funding and many banks had to seek government bailouts. Banks reduced their loan books which had a negative effect on the real economy by virtue of lower spending on consumer durables and business investment. The result is a prolonged weakened economy with severe financial distress for citizens. The absence of a culture of professional standards in British banking has had serious negative consequences for consumers and small businesses—primarily because of the culture of mis-selling. As a result customers have often invested in investment products that are not suitable for their needs.

Consumers suffered in several ways. Unemployment increased and savings rates dropped close to zero as monetary authorities engaged in large-scale monetary stimulus; home prices collapsed in many parts of the country and labour incomes have fallen dramatically.

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

15. A recent report shows that over 60% of UK residents do not trust the country’s banks. This is not surprising when viewed in the context that consumers are continually hit by front-page stories ranging from LIBOR rate-fixing, technical problems with customer accounts and money-laundering accusations

16. This is one of the reasons why we propose a complete separation of retail banking from investment banking. It is easier to create an ethical culture and introduce professional banking standards when the dissonance arising from a clash of retail and investment banking is eliminated.

17. What caused any problems in banking standards identified in question 1?

the culture of banking, including the incentivisation of risk-taking;

It is ironic that investment bankers earn large fees advising industrial conglomerates to focus and dispose of non-core activities yet they refuse to apply the same logic to the universal banks they manage. They will argue that universal banking is good for shareholders, good for corporate clients and good for the country. In reality, the main beneficiaries of universal banking are typically the investment bankers who run the banks.

the impact of globalisation on standards and culture;

No comment

18. global regulatory arbitrage;

The consequences of banks exploiting sources of regulatory inefficiency for arbitrage profit have given birth to a series of scandals, many of which have their origins in London. The relatively mild regulatory environment in the UK is reflected in what US policymakers call the “London loophole”. Some believe that that is evidenced by JP Morgan moving its derivative business to London that culminated in the recent $2 billion trading loss (a figure which could rise to as much as $9 billion according to some sources by the time they fully unwind the position taken by traders in the bank’s London office).

the impact of financial innovation on standards and culture;

19. Financial engineering is a complex field where the level of mathematics involved presents a major hurdle, even for some very smart people. Indeed, it is not clear that the creators of exotic products—the result of complex mathematical modeling—understand the nature of the risk management features of their own creations. Therein lies the problem.

20. Financial innovation that is based on highly mathematical expertise is within the purview of a select few. The risk governance implications are clear. There is a gulf of understanding between the specialists who created exotic instruments and the executives and board members who must decide on the bank’s risk appetite.

21. Weak risk governance tops the list of potential causes of the recent financial crisis. In addition, corporate culture suffers in that “specialist stars” tend to be “born”, especially when they earn a run of high profits. Disaster typically follows. It is noteworthy that in a recent report by Forbes, a trader in exotic financial products from Goldman Sachs is described as a “rock star”.

22. A corporate culture that encourages star quality in specialists who engage in seemingly excessive risk-taking and trade products that are born from mathematical models is not conducive to customer care.

23. the impact of technological developments on standards and culture;

No comment

24. corporate structure, including the relationship between retail and investment banking;

Commercial banking (in particular, retail banking) and investment banking should never be allowed to operate within the same bank or even the same banking group via a series of subsidiary companies. Known as “Anglo-Saxon style universal banking”, this structure is fundamentally destructive to retail banking, as well as to the safety of the deposits of the taxpaying public.

25. Universal banking is also very often organized so as to bring extraordinary rewards to investment bankers, and abuse to the retail clients. (Universal banks that buy retail deposit-takers are typically looking for a “feeder” of cheap retail funds for their investment bankers to engage in excessive risk-taking).

26. Furthermore, the practice of transfer pricing between retail and investment banking within universal banks usually results in investment banking divisions taking all the spreads from interest rate, currency and options markets while leaving counterparty credit risk to be borne by the retail banking divisions.

27. Surprisingly, universal banking has also been a disaster for shareholders because of the value destruction that has been going on within these banks. If universal banks were totally broken up, it is likely that the retail bank would be where most, if not all, of the value is shown to reside.

Whatever investment banking CEOs of universal banks may claim, most bank profits come from retail banking. When bank annual reports say otherwise, serious questions need to be asked about transfer pricing, which is all about shifting retail banking income over to the investment banking profit pool.We emphasise that while the organisational structure of a universal bank is detrimental to retail banking, it is really the clash of cultures that requires separation of the two activities. A utility encased by a casino will bear the losses and give up any profits.

taxation, including the differences in treatment of debt and equity

The favourable tax treatment of debt relative to equity has a bias towards the use of debt by banks. There is also the mistaken belief by some banking leaders that the requirement by Basel III for more core Tier 1 capital to support risk will raise the cost of equity.

(b) Weaknesses in the Following Somewhat More Specific Areas:

the role of shareholders, and particularly institutional shareholders;

28. Institutional shareholders have an interest in exerting influence on excessive risk-taking by management since information asymmetry between bank managers and large shareholders is likely closer to zero. But there are benefits to these large shareholders arising from private control.

creditor discipline and incentives;

29. The economics of deposit insurance typically demonstrate that depositors have an asymmetric information relationship with managers and this could lead to bank runs and macroeconomic stability. It is likely that the provision of deposit insurance would reduce the urgency for depositors to monitor the risk-taking activities of managers. This creates a moral hazard problem where the existence of deposit insurance encourages managers into excessive risk-taking. The costs of such actions will be borne by the insurance authority and finally by the tax-payer.

corporate governance, including

the role of non-executive directors;

the compliance function;

internal audit and controls; and

remuneration incentives at all levels

30. Banks operate in a very complex environment with a web of agency relationships making corporate governance more difficult. This difficulty is increased in a universal bank where the personality of the bank is rendered amorphous and the seemingly exciting world of investment banking dominates. The role of non-executive directors is obviously critical since they are at the heart of corporate governance. But we caution on the selection criteria for non-executive directors.

Here is a case in point. The recent Liikanen Report recommends that the chief risk officer (CRO) in a bank should report directly to the Risk and Audit Committee of the board as well as to the CEO. This is fine in principle but misses a key point. It is not the CRO’s reporting line that counts. It is the background skill and experience of the board committee to whom he/she reports. Unfortunately the non-executives on these committees are more often than not people with top-level industrial experience in everything from whiskey to tobacco rather than finance or risk.

31. We recommend that the predominant criterion for board membership is in-depth risk management experience over several economic cycles.

recruitment and retention;

32. Banks should recruit on the basis of banking expertise and experience. New entrants to the banking profession (similar to non-executive directors—see paragraph 30 above) must have successfully completed an accredited banking education programme. The corporate culture must foster personal and business ethics and employee professionalism which are absolute prerequisites for employee retention.

What can and should be done to address any weaknesses identified? To what extent are such weaknesses subject to remedial corporate, regulatory or legislative action, domestically or internationally?

33. No comment

Are the changes already proposed by (a) the Government, (b) regulators and (c) the industry sufficient? Respondents may wish to refer to the Financial Services Bill and the Government’s proposals for the Banking Reform Bill. They may also wish to refer to proposals by the Bank of England and the Financial Services Authority on how the Financial Policy Committee, Prudential Regulation Authority and Financial Conduct Authority will operate in practice.

34. No comment

What other matters should the Commission take into account?

35. No comment

9 October 2012

Prepared 24th June 2013