David Fagleman is a Researcher at ResPublica.
Since the Coalition came to power we have witnessed significant policy activity directed towards creating a safer financial system. Considering the scale of the crisis and the importance of the financial sector to our economy, it was no surprise that this Parliament would see more time dedicated to financial reform than ever before.
As part of their programme of reform we have seen the Independent Commission on Banking Standards, The Financial Services Act 2012, The Banking Services (Financial Reform) Act 2013 and the Parliamentary Commission on Banking Standards. Focusing on prudential and regulatory issues, these new laws and inquiries are to be commended, and have put us on the right road towards creating a safer financial system in the hope of avoiding the same problems as last time.
However, apart from small elements of the Commission on Banking Standards, the prudential and regulatory approach fails to address what we see as the root cause of the crisis, the widespread self-serving culture that influenced the behaviour of the bankers.
It was this culture that led to the fixing of LIBOR and the mis-selling scandals that have bombarded the headlines and led to a gigantic £22.2 billion set aside for Payment Protection Insurance (PPI) compensation (enough to pay for the Olympics twice over), with the four biggest banks along with Santander responsible for about £19.6 billion.
What is particularly worrying is that this may well just be the tip of the iceberg. Andrea Leadsom, the Treasury Minister responsible for the City of London (and who previously worked in banking and finance), admitted early this month that there was a long way to go to change the City’s culture and warned that more scandals in the financial sector were in the pipeline.
Following her comments, a fresh mis-selling scandal came to light that involved firms being sold fixed-rate business loans to protect against interest rate changes and the banks secretly adding an “embedded swap”. These interest rate hedging products caused many firms to go bankrupt, and some estimate that that the payout in compensation could be greater than the £22.2 billion cost of PPI.
Although initially shocking, these new revelations do not come as a surprise when you consider the culture of personal and short-term personal gain that has been prevalent throughout the industry, especially in the larger banks. As with the PPI mis-selling scandal, interest rate hedging products were sold under an incentive and target driven atmosphere.
In our latest report Virtuous Banking: Placing ethos and virtue at the heart of finance, which is launched today at the Financial Times by Sir Richard Lambert, Chair of the Banking Standards Review Council, we argue that this culture is a result of an inherent lack of virtue amongst our banking institutions. Without this, bankers lacked a purpose and were influenced by culture of profits and personal gain, exemplified by the scandals outlined above, and failed to treat their customers fairly.
Addressing the culture of the banks should be vital to banking reform given the crucial functions they play in our everyday lives. We use financial services from the cradle to the grave: to support a family, start a business, become a homeowner and prepare for retirement. Advocating for more virtue in banking is a call for the re-introduction of an economic and social purpose to banking that favours long-term prosperity over short-term profiteering.
In an effort to instil the right type of culture and regain the trust of the public, we call for staff professionalism and personal responsibility to take a larger role in banking reform. This can be achieved by encouraging both strong leadership and “root-level” involvement and by implementing a “Hippocratic-style” oath whereby employees publicly voice their commitment to the stated values.
This was initially ruled out by the Banking Standards Review, but we believe it can play an important role in not only reforming the culture of the banks but signalling to the public that the banks have moved on from the past.
An oath offers more than rules and regulations, which were in place to prevent misconduct and failed to do so. Introducing a “Bankers’ Oath” would put bankers on a level of professionalism with lawyers, architects and doctors, where a professional motive exists to not only do the best for the client, but also adhere to the well-established principles of the profession.
We propose that a Bankers’ Oath would swear bankers to do their utmost to prioritise the needs of the customers; exhibit a duty of care above and beyond what is required by law; conduct their business in an ethical manner; confront profligacy and impropriety; and remember that they remain a member of society with special obligations to their customers.
Such an oath has been introduced by the Dutch Banking Association and we believe the British Bankers’ Association, Building Societies Association and the new Banking Standards Review Council should adopt our oath or one similar, for all of their members. It is this type of reform that will root out the cause of banker misconduct and begin to complete the programme of financial reform that has already begun.