Which? opinion: Calling banks to account

Which? has called the banks to account in an article in The Times today.

Which? executive director, Richard Lloyd said:

“Bank customers could be forgiven for starting the New Year half-expecting a new era of consumer-friendly financial services. Hardly a day goes by without a senior industry figure saying banking needs to change.

But our hopes will be dashed without fundamental reform that goes further than the measures now before Parliament. And the signs are not good as news emerges that, despite the warm words, some things remain the same.

In recent days it has been reported that the Financial Services Authority has yet to take formal action against banks that still fail to comply with its three-year old rules on excessive bonuses. Consumers will be equally baffled that the man in charge of the FSA at the time of the Northern Rock collapse – which led MPs to describe the regulator as ‘asleep at the wheel’ – has been given a knighthood.

The full line up of MPs and Peers comprising the Parliamentary Commission on Banking Standards, chaired by Andrew Tyrie, today begins another round of hearings. Senior bankers – although it appears not, alas, a single one of their customers or anyone representing their interests – will be invited to discuss ways in which they might clean up their own act.

Their homework should include reading the 2010 report of the Which?-hosted Future of Banking Commission. Which? argued then that there must be new, high professional standards in banking enshrined in a code of conduct.

Three years ago some said this was unnecessary because of what was already in place. Since then the shameful list of scandals, from Libor rate-rigging to multi-billion pound PPI mis-selling, rather suggests that what already exists to tackle bad behaviour is nowhere near adequate.

Among the inadequacies we would include the box-ticking ‘Approved Persons’ regime that endorsed the ability of Fred Goodwin to run RBS, the ‘Treating Customers Fairly’ rules that were rarely enforced by a weak and often incompetent FSA, and the staff codes of conduct and customer charters already in place at many banks.

So along with much tougher regulation that is properly enforced, and an ‘electric ringfence’ to protect essential retail banking services from the corrupting influence of the riskiest investment activities, Mr Tyrie and his colleagues should give their full attention to two further priorities that will make banks behave better, not because of a detailed rule book but because of a big change of culture.

First, greater competitive pressure faced by banks genuinely having to work hard to retain their market share will help transform the culture of banking. That is why all the new regulators, including the Prudential Regulation Authority charged with safeguarding the stability of the banking system, should be given a clear duty to promote competition.

The banks all know that few people move their current accounts even when they have been treated badly or hit with unfair fees. Switching must be made much easier and quicker, with portable accounts for consumers to give people confidence their regular payments will not go missing.

But this will count for little if the entrenched market power of the largest banking groups is not undone. The dominant market position of the big banks has not come about because customers flock to them for their better service or value for money, but because they have had massive bail-outs and significant Government subsidies. Small banks and new entrants do not enjoy these benefits. The competition commission is the only authority with the power to restructure major banking groups to enhance competition.

Second, the astonishing lack of individual accountability in banking must also be tackled afresh if trust in this sector is to be restored.   The Parliamentary Commission should propose a new Code of Conduct, with statutory backing, to be established and then overseen by an independent body including consumer representatives.

In 2010 we proposed that this could look like a version of the General Medical Council – an authoritative body with a full range of powers and sanctions to bring to bear. It must have an independent chair and a majority of independent directors without a vested interest in the financial services industry on its board. It should have powers that include stiff penalties with the ability to bar bad bankers from working anywhere in the industry.

Everyone working for a British bank should receive basic compulsory training in an equivalent to a doctor’s Hippocratic Oath before they can start dealing with customers. This should spell out for bank staff their duty to put their customers’ interests first, to act honestly, and to blow the whistle when they see rules being broken. Banks should be required to report publicly on how they have complied with the Code and on which staff have received what sanctions for their failure to comply.

It will be interesting to see if the same senior bankers calling for change and the British Bankers’ Association, famed in the past for defending the indefensible, back these ideas. If they do, the reform ball will be firmly back in George Osborne’s court.”

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