After the storm: reining in the bankers

The 2008 crash hit trust in the banking sector, particularly in the US and UK. But can responsible business practices and increased regulation repair the damage? Mark Leftly reports

The world’s biggest banks are under greater scrutiny, face more political criticism and public anger than at any time in their histories.The global crisis was essentially the banking industry’s fault, with ever more complicated financial products, like collateralised debt obligations and derivative swaps, unravelling so desperately that they eventually wreaked havoc on major economies.

Governments were forced to intervene. In the UK, the Royal Bank of Scotland is now 84% owned by the taxpayer, while Lloyds was asked to buy HBOS. The Halifax-owner was on the verge of collapse after it had granted so many ill-advised property loans that went into default almost as soon as the crisis emerged.

This was echoed across the world: in the US, Lehman Brothers collapsed; the Swiss state bailed-out UBS to the tune of around $60bn (£51.9bn); and the Belgian, Dutch and Luxembourg governments all poured money into Fortis, a once-proud 300-year-old institution.

Coupled with a number of rogue trader scandals – notably Jerome Kerviel’s E4.9bn (£4.2bn) losses at France’s Société Générale going unnoticed by his supervisors – allegations of fraud and huge bonuses seemingly continuing unabated, the banking sector’s reputation is at an all-time low.

An obvious way of at least partly cleaning up this tarnished reputation is for banks to improve their CSR programmes. Given the cynicism towards the industry, these would have to be policies that can show tangible results rather than the public relations-speak that so often dominates the City’s lip service to CSR. And one CSR aim will have to be the protection of everyday retail customers.

Banks need to show that they are now responsible lenders under reforms proposed by the Government-backed Independent Commission on Banking (ICB) in September. The coalition is seeking to put the reforms, which will be the most severe in the western world, on statute before the next election and have them working in practice by 2019.  The idea is to introduce a gold standard in global banking, so that investors will be more willing to invest in, theoretically, safer UK banks than their global rivals.

The most notable idea is ‘ringfencing’ high street deposits from what business secretary Vince Cable has termed ‘casino’ banking. This would see the big universal banks that have both risk-taking investment arms and retail divisions that lend to small businesses and individuals formally disentangle those operations. The aim is that high street deposits could never again be used to cover any losses incurred should an investment bank’s dangerous financial bet fail. The public would feel safer about their finances and banks would be forced to behave responsibly with the money it holds on their behalf.

Senior bankers have questioned the necessity of some of the reforms, and some have even suggested that the moves could prove counterproductive as leading institutions will move their operations abroad, costing the Treasury vast sums in tax revenue. Keith Bowman, an equity analyst at Hargreaves Lansdown, has argued that the UK is a “guinea pig”, a view that has at least some merit as the banks will require more capital on their balance sheet than their global competitors.

However, ICB chairman Sir John Vickers has pointed out that banks will be “safer and sounder”, meaning that major institutional clients will from now on feel more comfortable investing with a UK bank than a more lightly-regulated international rival. Guinea pig the UK may be but, should this prove successful, other major western financial centres are expected to follow suit.

As customers are dependent on banks, they essentially have had the power to do as they wish. That is why the Government believes that regulation has to be the main driver for reform. For example, after the Financial Services Authority failed to spot the banks’ systemic problems ahead of the crash, the body has been split in two to create greater oversight. At the end of next year, the Financial Conduct Authority will be established and regulate the provision of financial services such as mortgages, while the Prudential Regulatory Authority will become part of the Bank of England and act as a watchdog on banks, building societies and insurers.

“The financial services industry forgot that it was just that, a services industry,” says Bruce Packard, a banking analyst at Seymour Pierce. “If you asked people in the industry 20 years ago what the banking system was for, they would not have said it was for making a small number of people very, very wealthy and bum-rushing everyone else.”

Packard adds that banks will now have to be “judged by their actions, not their words – they have been talking about ‘customer-centric’ strategies for the past 10 years”.

However, he believes that there are signs that banks have started listening to their customers. A good example came in May when Lloyds announced that it was setting aside £3.2bn ($4.9bn, E3.7bn) to cover compensation to customers who were mis-sold payment protection insurance (PPI), which covered loan repayments if someone had an accident, lost their job or fell ill.

The British Bankers Association (BBA) had just lost a High Court judgement over whether or not the policies were sold correctly and had been considering an appeal. Instead, Lloyds said “right, we’re not going to mess around with this”, argues Packard, so undermining the BBA’s case that the body decided not to press ahead with further legal action.

Shortly after Lloyds showed itself in a good light, another institution that emerged from the crash with a far poorer image than it entered, Bank of America, released its first CSR report. This committed the bank to a number of initiatives, from soft reputational measures, like getting employees to donate 1.5m hours of charity volunteering, to fundamental changes, such as “building a fortress balance sheet”.

So, rather than trumpeting a change of strategy through a more traditional business review document, Bank of America used the CSR report to confirm it would strengthen its capital levels. Essentially, this means putting more money on the balance sheet to protect the bank – and, therefore, its customers – from being badly hit in the event of any further economic disasters.

The idea of a fortress balance sheet has been around for years, even at Bank of America. However, the changing attitude to the concept was demonstrated as Bank of America sold off what were effectively sideline businesses – its Canadian credit card fetched $8.6bn in the summer, when it also offloaded the Spanish equivalent – to raise cash to bolster the balance sheet.

This represents a change of attitude to CSR in banking, showing that it is more than just showing a caring side – “such a wild gambit of things,” as one industry figure sighs when talking about CSR – that such a programme is also key to a business’s future.

The “stand-out example in the banking arena”, according to Evolution Securities banking analyst Ian Gordon, is Standard Chartered. Unlike the other major UK-based banks, Standard Chartered tends to focus on emerging markets and it has introduced a number of CSR programmes in these regions to build up a strong profile that ultimately helps win the group significant business.

One eye-catching programme is ‘Living with HIV’. Over three years to 2010, Standard Chartered educated 1.4m people on HIV/ Aids, while the programme itself was introduced in 1999 following the impact of the virus on its workforce in African markets.

Gordon argues: “This is one banking organisation that has picked on causes that have genuine links with the communities in which they work. The proportion of employees that do personal fundraising or voluntary work is quite staggering.”

A senior banking figure points out that Standard Chartered’s reputation has survived the crisis intact and this can partly be put down to its CSR commitments: “The bank is very active in this area and I think that stands strong against the background events of the past few years.”

However, such measures can easily be seen as simple PR stunts. Not all can be so easily dismissed. For example, Barclays Banking on Change programme is attempting to empower 40,000 disadvantaged people in Africa, South America and Asia. The plan is to educate people on how best to access loans to build businesses, which would benefit Barclays by creating a new customer base.   

Even if they believed such business benefits did not exist, banks now have little choice but to implement stronger CSR policies as customers are now able to gather on social media and criticise them. As a result, many banks are now using social media to better communicate with their customers. Citibank, for example, has trained up 100 staff to handle customer complaints on a Twitter feed, while HSBC has publicly stated that it is looking to develop its social media strategy this year.

Banking, then, could be entering a new environment to five years ago. Its reputation battered, regulation that will only reward those who look after their customers and technological advancements mean that CSR will be a major plank of strategy, not just an annex to the annual report.

Mark Leftly is deputy business editor at the Independent on Sunday