Ten suggestions to clean up UK banking

Ten suggestions to clean up UK banking

Farah Khalique

25 Sep 2012

A 492-page file of written evidence to the Parliamentary Commission on Banking Standards, released last week, offered insight into how the UK's banks are viewed by fund managers, university professors, think-tanks and bankers themselves.

The government-mandated Commission on Friday published written evidence from 47 institutions in response to its call for suggestions on how to fix the UK's broken banking culture.

 

Here, Financial News highlights 10 themes that emerge from the evidence, which can be read in full here [ http://bit.ly/QyLKYs ].

 

1) Whistleblowing

Banks should clarify their policies on whistleblowing and actively promote them from the top down, according to the charity Public Concern at Work, which has dealt with over 13,000 whistleblowers since its inception in 1993. The charity said that, despite the mass media coverage of banking scandals, it has not seen the rise in financial services whistleblowers that it has witnessed in other industries. It highlighted the US’s stance on whisteblowing – under the False Claims Act whistleblowers can receive up to 30% of any monies recovered by authorities.

2) Corporate governance

The UK should consider introducing an equivalent of the US’s Sarbanes-Oxley Act of 2002, the Chartered Financial Analyst Society suggested. The act was introduced in response to a number of accounting scandals – including Enron, WorldCom and Peregrine Systems – to clean up US corporate governance. “SOX-type laws have been subsequently enacted in [other countries] and have done much for improving the confidence of fund managers and other investors with regard to the veracity of corporate financial statements,” said the CFA.

 

3) Pay standards

Banks should be forced to disclose the pay ratios between executive directors and employees as part of annual accounts, according to Unite the Union, the UK’s largest trade union. Bankers should be incentivised on service, not sales, to avoid a repeat of the PPI mis-selling scandal, the union said. Many other respondents also agreed with this suggestion, including Lloyds, the Financial Service Authority and the Investment Management Association.

4) Bank boards

Banks need more diverse non-executive directors to challenge “strong and forceful” chief executives and automatically ban directors of failing banks, as per Lord Turner’s suggestion, said Virgin Money. Sir Richard Greenbury, former chairman and chief executive of Marks & Spencer, had said in 2009 that there was "a good chance" that a two-tier board would have prevented the collapse of RBS by challenging and curbing the actions of chief executive Fred Goodwin.

 

5) Retail vs investment banking

The Vickers report has proposed that banks should ring-fence their retail and investment banking activities, but professors Shyam Sunder from the Yale School of Management, and Stella Fearnley from Bournemouth University, as well as think tank Centre for Research on Socio-Cultural Change, want to take it one step further. They have proposed prohibiting investment banking and retail banking within the same organisation because a ring-fence cannot guarantee total separation of the two banks. Paul Volcker told the Daily Telegraph last week that ring-fencing does not work in times of pressure.

6) Set up a Chartered Institute of Bankers

In its submission, Barclays proposed setting up a new institute to oversee bankers and a register of approved bankers and their roles. It would be funded by industry subscription but would not act as an advocate for the industry, rather than take the lead in developing industry standards. It is not immediately clear how the institute would differ from the current set-up under which UK bankers must register with, and are subject to scrutiny by, the Financial Services Authority.

 

7) Beat bullying

Former Barclays banker Jan Duijsters said that industry behaviour such as forcing individuals to work alone, being labelled as ‘negative’ or as having an attitude problem for voicing criticisms has amounted to an “abysmal UK banking culture”. Duijsters worked at Barclaycard from 1980 – 2000, where he alleged that "traditional banking culture" was steadily replaced by “the Bob Diamond-type of culture”. He accused the bank of employing bullying tactics. Duijister said: “Cronyism was widespread. Several members of management sported extremely fancy job titles but did not have any discernable jobs to go with them, while others had no obvious knowledge of, or even interest in, finance and banking.”

A Barclays spokesman said: “We do not comment on individual submissions to the Parliamentary Commission.”

 

8) Scale down banks

The challenges in running big banks are so significant that they should be scaled down over time so they can be managed more effectively and to prevent the "too big to fail" problem, said fund manager Hermes. The Centre for Research on Socio-Cultural Change also called for smaller banks with new business models, in particular a break-up of retail oligopolies.

9) Abolish free banking

Banks should introduce cultural change programmes to move bankers away from a short-term sales culture to relationship-style banking, but this would be costly, said the Worshipful Company of International Bankers, a London livery company for financial professionals. Therefore, banks should start charging customers for retail banking services. Other respondents also called into question the free banking model while Lord Turner, the FSA chairman, Martin Wheatley, chief executive designate of the Financial Conduct Authority and Andrew Bailey, director of the FSA’s Prudential Business Unit, have all suggested in one form or another that free in-credit banking needs to be addressed.

 

10) Beef up criminal sanctions

Excessive risk-taking should be a criminal offence, said the Church of Scotland. “Many at the top in banking have reaped rich financial rewards, with no threat of prosecution.” The number of financial offences that can also be classed as criminal offences should be extended, said Robert Pringle, chairman and founder of Central Banking Publications. The Trades Union Congress also called for criminal sanctions for criminal misconduct in the management of banks.

 

--write to farah.khalique@dowjones.com