В настоящей публикации рассматриваются последствия неправильного поведения банков в период финансово-экономического кризиса и пути преодоления этих последствий после кризиса. Анализируются также некоторые факторы, повлекшие этот кризис, в частности: трудности управления большими организациями, недостатки этики и культуры в поведении банков, кризис доверия со стороны публики к банкам. Исследуется влияние штрафов, которые применяются регуляторами банковской деятельности к банкам за неправильное поведение. Автор приходит к заключению о том, что важнейшим путем преодоления негативных последствий финансово-экономического кризиса является восстановление доверия публики к банкам, повышение сознательного отношения банков к культуре их поведения, улучшение стандартов банковской деятельности и системы управления рисками.
‘The level of fines and other conduct costs now being imposed has demonstrated that practices that may inflate profits in the short term can turn out to cause substantial damage over a longer term horizon.’1
Introduction
Numbers tell a story. In the case of bank behaviour, they speak louder than words, and they tell a big, and scandalous, story. Research by the CCP Research Foundation 2 has shown that the ‘conduct costs’ of 15 major international banks for the five-year period ending in 2013’ exceeded £170bn. Conduct costs, in this context, include not only fines imposed by regulators but also other costs that relate to what we have come to know as ‘conduct’ (in effect, misconduct) .4 These could be, for example, sums paid by way of compensation to customers who have been ‘mis-sold’ products (such as payment protection insurance (PPI)) or the cost of repurchasing securities from the market at the behest of a regulator. They do not, however, include the associated cost of employing expensive litigation/regulatory lawyers, the cost of distracted management time or the cost of increasing ‘compliance’ manpower to cope not just with avoiding future problems but also the tsunami of consumer and SME claims that the conduct crisis has triggered. (Yes, at £170bn and counting, this is a crisis sui generis, not just an aftermath of the financial crisis.) If those associated costs (details of which are not in the public domain) were included, the percentage increase on that £170bn would be significant but, as we shall see, this is an area where accountancy practice and regulatory indifference result in banks being able to say ‘what goes on inside these four walls stays inside these four walls’. Table 1 sets out the ‘allocation’ of the £170bn among the relevant banks – the figure for the whole industry would, of course, be much higher.
Table 1
| Banks | Total Costs 2009-2013 (GBP bn) | Provisions as at 31 Dec 2013 (GBP bn) | Grand Total 2009-2013 (GBP bn) | Grand Total 2008-2012 (GBP bn) | Relative Position to 2008-2012 |
| Bank of America (now Bank of America Merrill Lynch) | 39.09 | 27.31 | 66.40 | 54.00 | <-> |
| JP Morgan Chase & Co | 26.61 | 9.17 | 35.78 | 24.65 | <-> |
| Lloyds Banking Group pic | 8.91 | 3.82 | 12.72 | 9.24 | up |
| RBS | 3.54 | 4.92 | 8.47 | 4.24 | up |
| Barclays PLC | 4.88 | 3.01 | 7.89 | 5.06 | up |
| Citigroup, Inc | 4.55 | 3.02 | 7.57 | 11.84 | down |
| HSBC | 4.97 | 2.24 | 7.21 | 6.25 | down |
| Deutsche Bank | 3.87 | 1.75 | 5.62 | 3.95 | up |
| UBS | 3.08 | 1.10 | 4.18 | 24.65 | down |
| GS | 1.48 | 2.17 | 3.65 | 3.95 | up |
| Credit Suisse | 2.00 | 1.58 | 3.58 | 3.00 | up |
| Santander | 2.42 | 1.15 | 3.57 | 4.14 | down |
| BNP Paribas | 0.62 | 2.92 | 3.54 | 1.89 | <-> |
| National Austrialia Bank Group | 2.01 | 0.33 | 2.34 | n.a. | n.a. |
| Société Générale | 0.12 | 0.58 | 0.70 | 1.28 | <-> |
| Grand Total (GBP bn) | 108.15 | 65.07 | 173.22 | 158.14 |
International Results Table
The research referred to above was, and continues to be, carried out by the Conduct Costs Project, a project that started life at the London School of Economics but is now located in the CCP Research Foundation (which also fosters other projects in the field of ‘conduct, culture and people’). It has been directed by the author and the two other directors of the Foundation ’ for some years and is now working on its third set of ‘rolling five-year’ figures (ie, for the period ending 2014). The three directors are supported by a very able and enthusiastic team of researchers.
This article aims to give a summary of the Conduct Costs Project’s work and its relevance in the context of the unfolding conduct crisis and the increasingly desperate attempts to improve bank behaviour that are now being seen in major financial jurisdictions; it discusses potential solutions to the burning question of how the industry might ‘account’ for trust-related issues and do so to the satisfaction of its stakeholders.
Rationale for the Conduct Costs Project
Why was the Conduct Costs Project started? It was developed from a concern, canvassed by the author in earlier articles, 6 that the many questions that commentators were asking about ‘sustainability’ in financial markets were ignoring a key, even fundamental, question: can the financial system ever achieve worthwhile sustainability goals if the business models of banks, and their behaviour, are not themselves sustainable? 7 To put it another way, what is the point of giving awards for, say, ‘sustainable bank of the year’ to a bank that has been fiddling the London Interbank Offered Rate (LIBOR), manipulating foreign exchange markets, laundering the ill-gotten gains of criminal gangs, allowing information technology systems to fail causing great inconvenience to customers or mis-selling unreliable insurance on a vast scale? Something seemed to be missing in the sustainability lexicon; the ‘ESG’ 8 activists were, it seemed, not looking very carefully at how banks ran themselves, just at what they did with the money. The scope of ‘sustainability’ (an overused word these days) was limited by the soft focus content of carefully polished public relations (PR) exercises, as typically embodied in ‘sustainability’ or ‘citizenship’ reports. Even now, many ‘enquiries’ and ‘research’ initiatives into ‘the sustainability of the financial system’9 appear to concentrate solely on how money is spent or invested at the expense of consideration of the sustainability of bank behaviour and bank business models.
We wanted to correct that oversight. We wanted the culture and conduct of banks to be brought to account when their ‘sustainability’ (and that of the financial system) was assessed. To this end, we felt we needed to devise some reasonably objective (or ‘concrete’) indicators of bank behaviour and work out how the behaviour of one bank could be compared with that of another. In this way, the public could be put in a position to assess how the fine words of bank chairmen and chief executive officers (CEOs) matched up with the reality of bank behaviour. Comparability was crucial. Indicators of behaviour do not convey much unless they enable the public to compare banks with each other and, ideally, an unassailable benchmark. The level of conduct costs seemed to us to be as good an indicator of behaviour as one could hope for; rather more reliable than customer surveys conducted by the banks themselves, for example. Of course, it could be (and has been) argued that banks come in different sizes with different business models, but our approach was to get the numbers in front of the public first and then let the banks themselves explain how, if at all, their numbers could be justified or why the comparison was not ‘fair’. So far, they have failed to do so.
Comparability was a result of the exercise not just in relation to banks but also in relation to different jurisdictions and different causes of cost. The tables also show how different years compare with each other. The story told by the numbers over rolling five-year periods varies for different banks and is an important aspect, as commentators continue to wonder if banks have yet ‘turned the corner’. Some are clearly doing better than others.
The initiative was timely in that it coincided with the watershed in public trust and perception brought about by the LIBOR scandal in 2012. Until then, public criticism of banks centred mainly on a combination of greed and recklessness (or incompetent risk management). After LIBOR, the agenda turned to shock at what appeared to be outright deceit (and, of course, criminal prosecutions have now resulted). The banks had to stop wishing for ‘the time for remorse to be over’ (to echo a phrase famously used by Barclays’ CEO, Bob Diamond, before a UK Parliamentary Committee) and start on the arduous, and still incomplete, task of ‘restoring public trust’. The Conduct Costs Project is directly relevant to the public trust question. And that, in turn, is directly related to concepts of corporate governance, as they affect banks.
Public trust and governance
In the post-crisis climate, commentary on any significant failure (whether of systems, ethics or just basic performance and whether in relation to private or public sector activity) is frequently accompanied by suggestions that there has been a collapse in ‘public trust’. We hear this in relation to, for example, the health service, the police, supermarkets and energy companies. We see it reflected in the current leitmotif of domestic politics: the mistrust of the so-called ‘Westminster elite’. But, most of all, we hear it in relation to banks. Six years after the collapse of Lehman Brothers and the onset of the worst financial crisis of the post-war era, there appears, still, to be an ongoing crisis of public trust in relation to how our banks are run. If we take the United Kingdom as an example, we heard, in 2014, calls for banks to ‘professionalise’ themselves,10 for bankers to be required to swear solemn oaths as to their honesty and behaviour11 and for businesses generally (but especially banks) to enter into a ‘covenant’ with the communities they serve. Public confidence in banks remains very low.
The idea for the ‘covenant’ was put forward in August 2014 by Lord Digby Jones (former UK government minister and former Director-General of the Confederation of British Industry) when he asserted that ‘as we come out of one of the worst financial crises this country has ever experienced, trust in business is pretty much at rock bottom’. As indicated above, the problem is not unique to banking but we hear concerns of this kind more in the banking context than any other, typically from the mouths of bank CEOs and chairmen. The Chairman of the UK bankers’ trade organisation, the British Bankers Association, said recently: ‘Restoring trust and confidence is the banking industry’s number one priority.’
This outbreak of ‘restore trust’ chest-beating was mainly triggered by the LIBOR scandal. The perception now is not just that the industry has been reckless in its habits; parts of it, perhaps large parts of it, have become downright dishonest. The ‘culture’ has been corrupted. The LIBOR scandal quickly led, in the UK, to the formation of the Parliamentary Commission on Banking Standards (which, ultimately, begat the Banking Standards Review), which held a series of searching interviews with senior bankers and published various reports on the theme of ethics and morality in banking. The Banking Standards Review Council (BSRC) has now been formed, with Dame Colette Bowe as Chair and (from April 2015) Alison Cottrell as CEO. We await further developments, following its report of May 2014.
The ethics/culture refrain has been widely taken up. But where does this leave the somewhat narrower, more technical, field of corporate governance? On 12 September 2012, Sir David Walker (who in 2009 had authored a government-sponsored review of bank governance12 and is currently the Chairman of Barclays) gave evidence to the Parliamentary Commission. He acknowledged that standards in banking were low (but also pointed out that there had been other times in recent history when they had been low). But one of the most telling remarks he made was, in referring to his bank governance review, that he was ‘struck’ that he ‘did not talk much about culture or reputation’ in that document. The biggest issues in 2009 had been (he said) concerned with the ‘survival of banks’ and associated risk issues. Indeed, re-regulation, immediately post-crisis, focused almost exclusively on financial stability, ‘overshadowing’ the questions of culture and reputational risk that the LIBOR scandal later brought to the fore (which Sir David acknowledged were ‘very serious’). This analysis by a senior, eminent banker of how public attention shifted, in 2012, from ‘classic’ governance issues (ie, focused mainly on risk management and responsibility for it) to the ‘morality/ethics/culture’ agenda demonstrates very neatly an important aspect of the relationship between what we know as ‘corporate governance’ and corporate culture. In the context of banking, it is no longer sufficient for policy-makers to allow focus on the former (important though it is) to exclude attention to the latter, which presents related, but different, challenges. While, in the context of banking, corporate governance may be more concerned with sound management of risks such as credit risk and other risks traditionally associated with market activity, corporate culture is more concerned with reputational risk and the bank’s own sense of what is acceptable (and unacceptable) behaviour. The ‘crisis of trust’, which is directly linked to corporate culture, relates, in simple terms, to how banks are run and, in particular, whether they are run honestly and respectably by people who feel they have some obligation to the society in which they operate that overrides the short-term desire to maximise profit.
Sir David has clearly developed his thinking further in this area since 2012. In December 2014, he gave an interview to the UK’s Financial Times (on the fifth anniversary of his bank governance review) in which he said that all bank boards should have a committee to deal with ‘soft culture’ issues such as conduct, operational and reputational risks. Referring to his review, he said ‘I did not propose, because I did not recognise the importance of, board level focus on culture – not hard risk but the soft stuff. The soft stuff now seems to be costing more money than the hard stuff. It is encouraging to see that positive and responsible organisational changes of this kind are being adopted. The problem remains, however, that since the proceedings of board committees are, of course, secret, the public cannot gauge the success of Sir David’s ideas unless we have some reliable indicator of‘conduct performance’.
Apart from the LIBOR scandal itself, we might reflect on some further examples of bad bank behaviour or culture that have led to the trust crisis (and the conduct crisis). In his evidence to the Parliamentary Commission, Sir David referred to three ‘strands’ that were relevant. The first was the widespread practice (fed by a ‘commission culture’) of mis-selling financial products to consumers (notably, PPI). The second was the desire of many banks, in the pre-crisis ‘go-go’ atmosphere, to increase market share regardless of price and risk considerations. Thirdly, the huge strides made in technological developments, with expectations of (for example) rapid responses to complex issues and questions (and the attractions of making quick returns) tended to prioritise ingenuity over integrity. Of course, in the time that has elapsed since Sir David was giving his evidence we have learned of other actual or potential scandals with ‘LIBOR overtones’ in relation to the foreign exchange market and other ‘benchmark’ rates such as Euribor.
Sir David’s remarks are consistent with a description of poor organisational culture at the Royal Bank of Scotland (RBS) provided by Ian Fraser in his compelling book, Shredded: Inside RBS, the Bank that Broke Britain. In Chapter 12 (‘The Fear Culture’) we hear of the concerns of a ‘retail banking executive’ (Jayne-Anne Gadhia) who was dismayed at the bank’s attitude to PPI selling:
‘when her bosses insisted on continuing to sell PPI policies even after they were aware that it was a rip-off for which they knew the bank would eventually be hauled over the coals, Gadhia told the Parliamentary Commission on Banking Standards that, in 2006, she spoke to a senior RBS colleague “about the need to withdraw PPI at that time from our – from RBS’s – marketing”. The reply was, “Yes, it’s clear that that should be withdrawn, but we can’t be the first people to do it because we w’ould be the ones who lose profit first”. Gadhia believes all the UK banks knew that PPI was rotten but “nobody was prepared to be the first mover to resolve it because they felt their share price and profitability would be damaged first”.’13
As we now know, the mis-selling of PPI has cost UK banks more than £20bn.
‘Accounting’ for conduct and culture is better than trying to regulate it
The ‘culture’ of banks declined with the arrival of aggressive sales cultures and leaders who encouraged what Fraser calls a ‘fear culture’, where sensible people become afraid to say anything that could be taken as criticism of those who wield power. But culture is a tricky, and very vague, concept. If banks are trying to restore the situation, it is important that we find ways of testing their success and examining the methods they are using to bring about change. Fine words alone are not enough.
The Conduct Costs Project offers one approach. If banks are successful in their efforts to improve their conduct, then the cost of poor conduct, as demonstrated by regulatory fines and compensation payments (for example), should start to go down. However, we cannot know if this is the case if we do not keep a log of such costs. That is what the Conduct Costs Project (among other things) seeks to do.
Banks, understandably, point out that many of the costs revealed by the project relate to what they now call ‘legacy issues’ but it is perhaps a little too soon to be confident that they really are ‘legacy’ and that the underlying problems have been solved. The Forex manipulation scandal, for example, included misconduct as late as the final quarter of 2013. Apart from conduct costs, other suggested approaches (seeking more ‘positive metrics’) can be found in the Banking Standards Review Report. It remains to be seen whether or not any of these proposals will mature into something more ‘concrete’. Unfortunately, the promising initiative represented by the Banking Standards Review and the BSRC has, of late, been proceeding very slowly.
If the trust crisis is easy enough to identify, finding a solution to it is rather more difficult. The Conduct Costs Project represents a civil society response. Each bank is developing its own response. There does not yet seem to be a crossindustry response but that may develop as the BSRC progresses in its work. What seems to be clear, however, is that, as regards culture, we have reached the limit of what conventional regulation can achieve. We can regulate for corporate governance, for the formation of organisational and reporting requirements and for appropriate risk management. To regulate for ‘honest behaviour’ and ‘better culture’, however, would seem to be fatuous. A dishonest man is likely to be dishonest whatever the law may say. What we can do is work more diligently on the ‘grey areas’ that still exist as to what is or is not acceptable behaviour and we should, it is suggested, encourage banks to do this in consultation with each other on a cross-industry basis.
Although the trust crisis and conduct crisis currendy preoccupy banks and industry commentators (at least in the UK), the reform process for ‘traditional’ corporate governance rolls on, gathering momentum in the process. The realisation that ‘banks are different’ has given added impetus to the need for a fresh look at what sound corporate governance means in the context of banks and an assessment of how, and to what extent, the rules that apply to ordinary corporates should be amended and amplified in the case of banks. The most important lesson we have learned from the crisis is that when banks go wrong it is not only shareholders who may suffer. Banks provide a fundamental service to the economy; financial intermediation and market-making is the life blood of the ‘real economy’ and essential to growth and prosperity. But, it probably remains fair to say that, as banks continue to benefit from the so-called too-big-to-fail implied subsidy and retain the benefit of depositor protection schemes they are indeed a ‘special case’. And, with this privilege so should come conditions; conditions that require heightened standards of conduct and the means by which adherence can be tested: we might start with ‘disclosure’ of an ‘objective indicator’.
Standards and ‘conduct performance’
In October 2014, the Bank of England, HM Treasury and the Financial Conduct Authority (FCA), working together as the Fair and Effective Markets Review (FEMR), published a consultation document entitled ‘How fair and effective are the fixed income, foreign exchange and commodities markets?’ The FEMR document not only used the Conduct Costs Project’s data in one of its charts but also acknowledged the potential value of the project’s work in relation to ‘performance measures’:
‘performance measures might… be used to incentivise better conduct risk management by firms as a whole – for example, by measuring conduct performance against public yardsticks. Some firms already do this on a stand-alone basis, but there may be scope for a consistent industry-wide approach, as proposed, for example, by the Banking Standards Review Council… A single, objective, industry-wide definition of costs arising from misconduct and its transparent disclosure in firms’ annual (and/or corporate social responsibility) reports could also be explored as a way of incentivising improved ethical behavior across the FICC14 sector.’
In the footnote to the above passage the document states: ‘The work of the London School of Economics Conduct Costs Project and the CCP Research Foundation… could provide a framework for further development in relation to industry-wide performance measures relating to conduct.’
This was, of course, pleasing reading to the Foundation’s directors!I5 We are firmly of the view that the way forward for improved bank conduct must include:
1. an industry-wide approach;
2. objective, ‘public yardsticks’;
3. an accepted definition of conduct costs; and
4. full reporting by banks of those costs in a manner that enables comparison of one bank with another.
One of the greatest incentives for improvement by an ethically challenged organisation must surely be that its shortcomings, when compared to its peers, are obvious for all to see.
The use of metrics or yardsticks can only be part of the solution to the conduct crisis. The proposals of the BSRC as regards ‘standards of good practice’ need to be developed into something that will help banks make ‘grey area’ ethical decisions in a manner that gains acceptance in wider society. In its May 2014 report, the BSRC refers to:
‘identifying activities where voluntary standards would serve the public interest, and working with practitioners and relevant stakeholder groups to come up with agreed procedures. Examples could include whistleblowing protocols, the approach to retail sales incentives, banks’ processes for handling small businesses in distress 16 , or the management of high-frequency traders.’
The BSRC report also encourages ‘training and development’ that will encourage bank employees ‘to think through ethical dilemmas, and to take responsibility for their actions’. This is identified as an area where ‘banks could learn from each other about good practice when it comes to mentoring and providing guidance on ethical issues in the workplace’. Standard setting, it is asserted, ‘has to be a collective effort if it is to be successful’.
So, what would a ‘standard’, as proposed by BSRC, look like? As to procedure, we are told in the May 2014 report that this is to be drawn up by working groups of both bank and non-bank members and that it should be presented to the BSRC for approval. ‘Participating banks’ (those that support the BSRC, which is a voluntary initiative) would sign up to conform to the standards on a ‘comply-or-explain’ basis.
As to the substance of the standards, an example might be considered in the context of‘distressed’ small businesses. A BBC Panorama programme in November 2014 examined the treatment of distressed SME loans by RBS and Lloyds. Among the various accusations levelled at the banks were that they substantially undervalued the property assets of their borrowers and that they on-sold non-performing loans to third parties, without consultation or consent, who turned out to be, shall we say, less than sympathetic and understanding to the hard-pressed businessmen and women. It also seems to be common practice for banks that deem loans to be distressed to take the opportunity to charge very high fees for ‘supporting’ the business in trouble (which, of course, has virtually no bargaining position). This programme resonated significantly with the ‘Tomlinson Report’ that had been published on the activities of RBS’s Global Restructuring Group some months earlier. The report triggered various enquiries and investigations, one of which (by the FCA) is ongoing at the time of writing.
Allegations of the kind referred to above are not uncommon. It cannot be assumed that they all have merit any more than it should be assumed that all bankers are villains and all small businessmen and women are paragons of virtue. However, the various scenarios that seem to develop around the question: ‘how should banks treat SME borrowers that get into trouble?’ suggest that this is an area where an industry-wide set of standards would be helpful. For example, when, exactly, is it acceptable for a bank to on-sell a distressed loan? It would not be realistic or reasonable to answer: ‘never’. On the other hand, there does seems to be a case for not only better practice as regards the kind of buyer to whom such loans are sold (not, for example, to a company controlled by the Mafia) and the degree of consultation that should take place with the borrower beforehand. It would seem to be idle for banks to adopt standards in relation to how they behave towards distressed borrowers but to allow loans to be on-sold to entities that will ignore such standards. It is not a straightforward issue and a cross-industry agreement on the appropriate response would assist in avoiding the kind of myopic response referred to earlier in relation to RBS and PPI, that is, no one wanting to be ‘first-mover’. (First-mover fear is, in reality, little more than the old, unconvincing excuse, ‘everybody else is doing it’ in another form.)
Are fines working? Carrots and sticks
So far, the sorry history of rising conduct costs has not been accompanied by a notable improvement in bank behaviour. It is, however, too early to say, one way or the other, whether or not the heavy fines being meted out by regulators are having an effect. The many earnest, and no doubt sincere, statements from senior bankers about the need to restore trust would suggest that some improvements must surely be taking place in some of the banks. We will know better when, from the vantage point of, say, 2016 or 2017, we are looking back at costs that originate from behaviour in 2014 and 2015.
It would seem sensible, however, to use both carrot and stick in reform efforts. If we assume that the BSRC’s ideas do eventually take effect, consideration should perhaps be given to a form of ‘rehab’ regime that participating banks could, in addition to ‘professionalising’ themselves (as encouraged by the BSRC), adopt. The advantage of opting for ‘rehab’ would be (it is suggested) that if a bank found that, despite all reasonable efforts to ‘turn the page’, it still found it had a serious ‘conduct incident’, it could expect more lenient treatment from the regulator. Not a multimillion (or billion) pound fine, but a more modest fine (or even no fine at all). The ‘rehab’ regime would be tough (at least for some banks) taking up, for example, some of the ideas that are used in United States deferred prosecution agreements. Apart from internal organisational changes (such as those imposed by the regulators on HSBC following its money laundering problems17), the regime should include full reporting, and explanation, of conduct costs and genuine engagement with all stakeholders as to how ‘conduct performance’ was being addressed, perhaps with published reduction targets. This might be by way of a stand-alone report or through the use of existing reporting channels such as the annual strategic report – in relation to which, disclosure (both as to form and content) is mandated by the regulator and/or reflects the fact that the finding(s) of misconduct represent a de facto ‘material’ risk to the bank (irrespective of balance sheet materiality) and thus require explanation. As mother might say, it would be painful but it would do them good!
The reluctance of banks to be candid and transparent about conduct costs is troubling, given that they keep saying they want to be trusted by the public. No attempt is being made to adopt an industry-wide definition of conduct costs or of ‘conduct risk’ (about which we hear a great deal, of course, from would-be risk management consultants). The numbers are often aggregated into larger figures that account for ‘litigation’ or ‘legal expenses’ as though they are all of a kind. When large fines are announced, they are rarely accompanied by any helpful clarification or explanation from the bank concerned. The corporate message is almost invariably: ‘Well, thank heavens that’s over and done with; now let’s move on and consign the whole sorry affair to history.’ It’s understandable: bad news management for beginners. But it is not conducive to learning the lessons of whatever misconduct took place and it is certainly not consistent with an expressed desire to restore public trust.
Conclusion: it’s a question of trust
The idea of ‘public trust’ is, in itself, an interesting one. The phrase is used, as we have seen, very frequently but there seems to be an assumption that its meaning is obvious and widely understood. If we try to break down the concept into manageable parts, we can see that the essentials of public trust and how it is applied are:
1. the ‘trusted body’ is well known and may be a single (usually large) entity or a sector;
2. the activities of the body involve significant engagement with the public; and
3. the public is used to a level of performance and honesty that results in a wide acceptance and expectation that what is promised will be delivered and, in marginal (and rare) cases of failure, the ‘benefit of the doubt’ is appropriate.
As we know, with banks, the last element is currently absent. Banks do not get the benefit of the doubt; the reverse is the case. The public is not inclined to cut them any slack. Over time, this may change (it is to be hoped) but, as things are, in an age dominated by social media and scandal- hungry 24-hour news services, there tends to be an assumption that every misunderstanding with any group of customers is part of a coordinated mis-selling campaign, that every customer in financial difficulties has been, and will be, victimised, that every financial product is designed to benefit the bank, not the customer and that bankers in general are only interested in manipulating markets and performance indicators to secure outrageously high, and undeserved, bonuses.
Correction is possible and it is clearly high on most banks’ agendas (although they will never please everyone). But winning trust comes at a price. Not only must performance be seen to be clearly improved over a fairly lengthy period, it is also a requirement that the entity that wants to be trusted has to be frank and open with the people whose trust is being sought. In the present context, this means (among other things) full accounting for the cost of misconduct, full explanation of the steps being taken to correct the problem and a genuine acceptance that this is not just a branch of ‘PR’. The public is entitled to expect more.
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1 From the Report of the Banking Standards Review, May 2014.
2 The Foundation is a Community Interest Company, of which the author is managing director. Its website is at http://ccpresearchfoundation.com.
3 The CCP Research Foundation has also published figures for the five-year period ending 2012 and is currendy working on the five-year period ending 2014.
4 The definition used by the CCP Research Foundation can be found on its website.
5 Chris Stears and Tania Duarte; the author gratefully acknowledges their assistance with this article.
6 See, for example, ‘What Makes a Bank a Sustainable Bank?’ (2012) 1(1) Law and Financial Markets Review 77 and, more recently (with Chris Stears), Banks: conduct costs, cultural issues and steps towards professionalism’ (2014) 8(2) Law and Financial Markets Review 134.
7 In this context, it is worth noting that last December the CEO of Barclays, Antony Jenkins, expressed the view that the universal bank model was ‘dead’. The rising cost of misconduct, a reflection of the difficulty in controlling very large organisations, is one of the factors that may be leading to fundamental adjustments in bank business models and ‘de-risking’.
8 A common abbreviation of Environment, Social, Governance.
9 See, for example, the United Nations Environment Programme Finance Initiative’s (UNEP FI’s) ‘Inquiry into the Design of a Sustainable Financial System’, which is concerned with ‘channelling capital to investments that would accelerate the transition to a prosperous and inclusive green economy’: www.unep.org/inquiry.
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8 A common abbreviation of Environment, Social, Governance.
9 See, for example, the United Nations Environment Programme Finance Initiative’s (UNEP FI’s) ‘Inquiry into the Design of a Sustainable Financial System’, which is concerned with ‘channelling capital to investments that would accelerate the transition to a prosperous and inclusive green economy’: www.unep.org/inquiry.
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8 A common abbreviation of Environment, Social, Governance.
9 See, for example, the United Nations Environment Programme Finance Initiative’s (UNEP FI’s) ‘Inquiry into the Design of a Sustainable Financial System’, which is concerned with ‘channelling capital to investments that would accelerate the transition to a prosperous and inclusive green economy’: www.unep.org/inquiry.
ndowtext 1.5pt; padding:0cm 0cm 1.0pt 0cm’>
8 A common abbreviation of Environment, Social, Governance.
9 See, for example, the United Nations Environment Programme Finance Initiative’s (UNEP FI’s) ‘Inquiry into the Design of a Sustainable Financial System’, which is concerned with ‘channelling capital to investments that would accelerate the transition to a prosperous and inclusive green economy’: www.unep.org/inquiry.
10 See the various publications of the UK’s Banking Standards Review.
11 See the July 2014 publication, ‘Virtuous Banking: Placing ethos and purpose at the heart of finance’ by the ResPublica think tank.
12 ‘A review of corporate governance in UK banks and other financial industry entities’, November 2009.
-language:EN-US’>11 See the July 2014 publication, ‘Virtuous Banking: Placing ethos and purpose at the heart of finance’ by the ResPublica think tank.
13 Ian Fraser, Shredded: Inside RBS, the Bank that Broke Britain (Birlinn Ltd, 2014), 130.
14 Fixed income, currency and commodities markets: described in the document as ‘huge in size and highly diverse’. They ‘lie at the heart of every aspect of the global economy’. (However, echoing a familiar refrain, the document observes that ‘public trust in the FICC markets has… been seriously damaged by a series of high-profile abuses involving, among other things, the attempted manipulation of benchmarks, alleged misuse of confidential information, the misleading of clients about the nature of assets sold to them, and collusion’.)
15 Unfortunately, it is far from clear whether the BSRC is in agreement with the FEMR as regards the value of conduct cost reporting. According to p 16 of the BSRC May 2014 Report, ‘Disclosure is not an objective in itself. The annual reports of big banks now run to several hundred pages, and it would be difficult to argue that the vastly increased size of these documents has led to a much greater understanding of its business’. This somewhat complacent rejection of the advantages of better disclosure is disappointing. The admittedly difficult (but far from impossible) task of making sense of very large documents can be eased by requiring that the disclosure of conduct costs is made, for example, in the Chairman’s statement, with an accompanying explanation. The report also rejects, unconvincingly, the use of ‘league tables’ on the grounds that they ‘lend themselves to gaming’. In the author’s view, that is not the case as regards the tables produced by the Conduct Costs Project. It is hard to see how the use of metrics in a way that enables a bank to be compared with its peer group could not result in some form of league table.
16 This example is considered further below.
17 HSBC now has a ‘Financial System Vulnerabilities Committee’, whose members must include two external experts, one with US and one with UK, expertise on ‘AML [anti-money laundering], sanctions, terrorist financing and proliferation financing matters’. Appointments to the Committee require the prior consent of the FCA.
The detailed terms of reference of the Committee can be found at wwvv.hsbc.com/ investor-relations/governance/board-committees.
Автор:
Roger McCormick
Managing Director of CCP Research Foundation CIC and Visiting Lecturer at the London School of Economics.
Источник: Business Law International. – 2015. – Vol. 16 № 2. – Р. 105 – 118.