EDITORIAL: Yet another major financial institution made the headlines recently with Lloyds Banking Group’s £218 million fine, paid to the UK Financial Conduct Authority (FCA) and various US financial regulators over its manipulation of LIBOR and the Special Liquidity Scheme, a rate used by the Bank of England. These follow similarly hefty fines by other “Too Big to Fail” banks such as RBS and Barclays.
A day after the above penalties on Lloyds were announced, the Bank of England (BoE) set out proposals for a much stricter regulatory regime in which reckless senior bankers could face the serious prospect of lengthy jail sentences, up to seven years, for failures of accountability and the banks themselves would be forced to delay payment of bankers bonuses for at least seven years after their award, with a possibility of clawback if subsequent losses accrued.
Two joint consultation papers from the FCA and the PRA (Prudential Regulation Authority) are considering a new approval regime for senior individuals at financial institutions whose actions could potentially cause a bank failure or harm the banks’ customers, while also looking at a new remuneration regime.
The UK financial sector has had to digest the recommendations of the Independent Commission on Banking and Standards, the Parliamentary Commission on Banking Standards, as well as the recent Banking Services Act 2013, and yet there is a need to consider further reform as set out in these papers (above).
As Andrew Bailey, Chief Executive of the PRA said: “We believe that enhancing individual accountability and improving the alignment of risk and reward should have a positive impact on behaviour and culture within banks…” Meanwhile, Martin Wheatley, Chief Executive of the FCA believes: “How a firm conducts its business and treats its customers must be at the heart of how it operates. This has to start at the top.”
Refreshingly, Anthony Jenkins, CEO of Barclays said he “[supported] the idea that where there is wrongdoing, there should be appropriate punishment. If it is criminal wrongdoing, it should be criminal.” Disappointingly the British Bankers Association criticised the proposals, saying they would disadvantage UK plc by undermining the City of London’s competitiveness.
Shadow Chancellor Ed Balls is very supportive of the need for a big culture change in banking, calling for banks which can serve its customers, business and the wider UK economy, but which also work in a way that is sound and fair.
While the above recommendations and reforms have been updated by the Banking Services Act 2013, important as they are, they only speak to prudential and regulatory concerns. What about the concept of Virtuous Banking? Where is the ethos that could underpin all aspects of finance, whether it is banking, pensions, insurance or investment? We can legislate for systemic controls, thresholds and leverage ratios, but what about the sense of duty of bankers, to their own institution, their customers and more broadly the common good?
A “Hippocratic” Oath for a New Banker Generation
Without properly understanding and addressing the “virtue deficit” in financial services, the latest reforms will almost certainly fail. Perhaps we need to seriously reflect on how banks don’t simply affect the macro levels of our economy but have a profound impact on the aspirations of each citizen.
Res Publica’s recent paper “Virtuous Banking: Placing Ethos and Purpose at the Heart of Finance” looks to offer a new paradigm where a virtuous goal can be embedded in a new banking ethos. Among the key components of this new culture would be an improvement in internal governance, placing the consumer at the focal point of standards and a deep commitment to a responsible creation of value.
To address the growing problem of low consumer trust in banks and financial services, bankers would have to swear a Bankers (“Hippocratic”) Oath. Meanwhile, shareholders would be empowered and have enhanced fiduciary powers, while small business customers would have greater protection along the lines of consumer rights.
This idea deserves further development and could have a significant impact on the shape of the finance sector in the decades ahead, complimenting the serious efforts to tackle the structural weaknesses identified by the Bank of England (see FCA and PRA papers above). However, the main problem of private debt servicing and the cost of living crisis highlighted by Labour can only be properly resolved when we grapple with the major issue of money creation as identified in a recent LFIG article by Ben Dyson. Combining monetary reform as outlined here with “Virtuous Banking” would truly transform the British economy.
True and Fair: Setting a Gold Standard for Investment and Pensions
Echoing the need for higher standards in banking discussed above, the same could be said for the investment and pensions industry, which does not seem to have served its customers’ best interests for decades. Greater transparency and simplicity is urgently needed to protect savers and pensioners in this sector. Gina Miller, Founder of the True and Fair campaign, sets out a prospectus for change and end the rip-off culture.
Banking Supervision Challenges for the UK
Away from the concerns of retail financial services, but of no less importance is the issue of banking supervision, where the tectonic plates of the whole banking system are decided. With the global banking crisis of 2008-9 still fresh in the collective memory, there is an urgent need to resolve concerns over the stability and solvency of banks. Ranil Perera reflects on the tensions between the view from Basel and how the Bank of England sees the world.
The Importance of Entrepreneurship
Entrepreneurs are key drivers of innovation and disruptive change in the economy. How should we nurture the next Steve Jobs or Anita Roddick? Sophie Earnshaw looks at the role of education, especially in the early years in supporting that potential energy and zest for discovery. Sophie also highlights the importance of mentoring and networks to empower women to set-up new businesses.
David Phillips, Editor