Analysis: After one scandal too many, banks will have to face up to radical changes

By BILL JAMIESON
Published on 30/06/2012 00:00

LIKE victims of a torrential flash flood, Britain’s banks, their customers, staff and shareholders are surveying the damage this weekend – and barely know where to start the clean-up. One scandal on its own would have inflicted reputational damage. Three together this year have left no doubt that the culture within our banks is toxic and that thorough-going change is now urgently required.

A regulatory probe showing how Barclays had sought to manipulate a key lending rate for its own advantage triggered an avalanche of condemnation, with calls for the sacking of chief executive Bob Diamond and a criminal inquiry.

Two other scandals have deeply soured the public mood over banks and their leadership – or lack of it – in recent years. The mis-selling of personal payment insurance to people who did not need it, or would not be able to claim on it – or, in some cases, did not even know they had been sold it – has resulted in fines for Lloyds Banking Group and Royal Bank of Scotland totalling hundreds of millions of pounds. Yet the leaderships of these banks has remained in situ.

Now comes confirmation of complaints that Britain’s big four banks were found to have mis-sold complicated financial products to thousands of small businesses. The timing of this disclosure – when tens of thousands of small and medium-sized enterprises are complaining bitterly that they are unable to obtain loan finance from their banks – could hardly have been worse.

Pledges by Mr Diamond and RBS chief executive Stephen Hester to forego their bonuses barely begin to compensate for the damage done. Indeed, since a bonus payment is associated with exceptionally good performance, the implication here is that going without them is punishment enough. It leaves the normal level of compensation unchanged, even though huge damage has been done. As pop singer Adele would have put it: “Are you having a laugh?”

While political outrage has hit all-time highs of volume and intensity, it is the condemnation from within the financial sector at the highest levels that leaves one in no doubt the culture and leadership of our leading banks are unlikely to survive the storm. Bank of England Governor Sir Mervyn King has called for a sweeping change in the banking culture. Banks, he declared, had “let down” many honest and hard working people in the financial sector.

Such words from a governor are without precedent. They leave in no doubt that if there was an “old boys’ network” between the central bank and leaders of the commercial banking sector in the past, it has long since gone up in flames.

The criticism from business leaders has been no less scathing. Simon Walker, head of the Institute of Directors (IoD), said: “As well as ripping off their customers, they have also harmed the reputation of business as a whole – they should feel deep shame for the damage they have done.” The IoD said there should be a clear-out of leadership in many of the banks, with “new blood” brought in. These are more than just angry words. What they mean is Mr Diamond and Mr Hester now have few friends where it matters.

The issue now is not whether the culture and leadership of Britain’s banks will change, but how this change is put into action. What needs to happen is the break-up of the banks as recommended by the Vickers Report. But the question for many is no longer whether this goes too far but whether it goes far enough.

The second flank of attack for change comprises bank shareholders. It is they – not the directors and senior managers – who have effectively borne the cost of the fines and sanctions imposed for mis-selling and manipulation. This year’s “shareholder spring” that has seen successful revolts against excessive pay and bonuses in boardrooms will encourage activist groups to demand sweeping changes in bank boards and governance.

But it is the giant pension funds and insurance companies that hold the high cards. The losses they have sustained on their bank shareholdings over the past week will have convinced them radical change in culture and governance are now a vital precondition of a sustained recovery in the value of their shareholdings. For them, those losses are likely to have proved the last straw.