Fining bad apples won’t stop the rot in our banks

May 22, 2015 By: Christine Berry

On Wednesday, five of the world’s biggest banks (RBS, Barclays, Citigroup, JP Morgan and UBS) reached a much-anticipated settlement with US and UK regulators over charges including the rigging of the foreign exchange (forex) markets. The resulting fines – totalling £3.6bn – broke all the records. The £284m fine imposed on Barclays by the Financial Conduct Authority was its biggest ever – although still just a fraction of the £5.5bn profits the group made in 2014.

Nor can this be dismissed as the behaviour of a few bad apples. Right on cue, a survey of UK bankers has found that nearly a quarter have witnessed illegal or unethical behaviour by colleagues – a massive increase since 2012, when the figure was 12% – and nearly one in five felt bankers came under pressure to break the law to get ahead. This came on top of a Daily Mail investigation last week which found that Lloyds Bank’s promise to tackle mis-selling was beginning to unravel as it dawned on senior executives that this might actually mean not selling as much. So much for ‘changing the culture’ of banking.

In any other industry this level of scandal would be grounds for major upheaval. But in banking, we’ve become so inured to it that it barely seems to have caused a ripple. It’s simply mind boggling that, at the very same time UK banks were awaiting record-breaking fines for criminal activity, HSBC felt confident enough to throw its weight around with regulators, threatening to leave the UK unless post-crisis measures to separate retail and investment banking were watered down. Taking a leaf out of Bob Diamond’s book, it seems the banking industry has collectively decided that the time for remorse is well and truly over.

Yet these latest developments show the need for serious structural reform of the banking sector is as urgent as ever. Even commentators from the right think so, with one remarking that “the fines and stern lectures merely obscure a much deeper problem with an industry that needs change, competition and challenge”. Of course, the rub is what that challenge looks like: do we just need more of the same kind of bank, or do we need new types of bank altogether? Could it be that the UK’s monoculture of shareholder-owned universal banks is actually part of the problem?

One manager at Lloyds certainly thinks so. Speaking to the Mail, he said that the bank was “struggling to reconcile the customer culture with the fact it was a commercial organisation, owned by shareholders … which wanted to make as much profit as possible.”

NEF has long argued that the UK economy simply cannot afford to remain reliant on five identikit shareholder-owned banks with incentives to do whatever will boost quarterly profits, rather than to focus on their social purpose of serving communities and providing credit to the real economy. Until we fix this underlying problem, efforts to address market rigging and mis-selling will be swimming against the tide.

Instead, like every other advanced economy in the world, we need to build a thriving stakeholder banking sector. This means banks that are owned and run in a way that puts customers and the real economy first – and that simply do not engage in investment banking activities of the kind this week’s fines relate to.

In this context, Chancellor George Osborne’s eagerness to return the publicly owned Royal Bank of Scotland to “the good hands of the private sector” beggars belief.  The taxpayer has – yet again – just picked up an enormous tab for the misdeeds of the private sector (RBS’ fines totalled £430m). Our public stake in this bank – we own 79 per cent of it – gives us a unique opportunity to change its DNA before the next scandal or crisis emerges. Indeed, with ‘cultural change’ looking increasingly like a dead duck, and regulatory reforms being steadily unpicked by bank lobbying, it could be our last chance to stop the rot. Why don’t we seize it?

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