Banking: Ethical banks cash in on switch from the mainstream

IF ACTIONS spoke louder than words, then the UK's biggest banks would have suffered a mass exodus of customers over the past three years. That hasn't materialised. But as anger lingers over the activities of our high street banks, not least the size of executive bonuses, evidence suggests a growing number of people want to bank with organisations that will use their money responsibly and with transparency. In other words, they want to know where their money goes.

The backlash against the sector kicked off with the credit crunch and the collapse of Northern Rock, reaching a peak with the taxpayer bailout of Scotland's biggest banks. The payment protection insurance mis-selling scandal, poor handling of complaints and the continued payment of hefty bonuses have eroded the public's trust in banks even further.

Julian Parrott, partner in Edinburgh-based IFA Ethical Futures, said: "This is certainly something that concerns lots of clients and also an increasing number of more mainstream investors, who are incensed at the bankers' bonuses and seeming ease with which they all seem to be back on the 'gravy train'."

Yet there remains a low level of awareness over what banks actually do with the money we deposit, save and invest with them. Recent research by Triodos Bank found that three in ten people admit to having no idea what their bank does with their money.

The same amount believed their bank locked the money away in a vault and simply added interest occasionally.

Just 40 per cent were aware that their money would be used by the bank to lend elsewhere, including to companies and organisations.

However, Parrott believes consumers increasingly want a say in how their money is used and a better idea of where it goes.

"I think there is a demand for greater transparency, lending to smaller businesses and some local accountability and this is probably why credit unions do so well," he said.

The Co-operative, which recorded a 79 per cent increase in current account switchers in 2010, described it as a "flight to trust, rather than a flight to ethics".

So if you're looking for greater transparency and want to know where your money goes, or just reassurance that it's not being used for means with which you're uncomfortable, where can you take your business? Here are some of the options:

TRIODOS BANK

What is it?

Dutch-owned Triodos has a presence in several countries in Europe and uses its customer deposits to fund sustainable enterprises. In the UK, it currently has 373 million in savings and has lent 309m.

What does it offer?

In the UK it only offers savings accounts and investments. Products include cash Isas, a child savings account and regular saver and fixed rate bonds. On the business side, it also offers current accounts.

How does it use your money?

Triodos uses customer deposits to finance local and ethical businesses, from community wind farms to arts organisations. It won't lend more than it has on deposit, nor does it trade in derivatives or other abstract investments.

It publishes a list of all the organisations to which it lends and can keep customers updated on projects their money has helped. You can search for Triodos-financed projects near you at www.triodos.co.uk/en/about- triodos/what-we-do/who-we-lend-to/.

It said: "The credit crunch has prompted frustration and concern among many with the established banking system, and made many consider for the first time just what their bank's doing with their money."

www.triodos.co.ukECOLOGY BUILDING SOCIETY

What is it?

The Yorkshire-based mutual has over 10,000 open accounts and more than 60m in assets. It specialises in personal and business lending on properties with environmental and ecological benefits.

What does it offer?

Savings and mortgages. The former includes a cash Isa and instant and notice accounts, plus a fixed rate bond.

How does it use your money?

It uses customer deposits to lend on ecologically-friendly properties, such as eco new-builds, traditional constructions and organic smallholdings and farms. Research found that 40 per cent of its customers want to support projects that improve the built environment; the same proportion said they viewed Ecology BS as trustworthy and ethical.

Many other small and medium-sized mutuals have reported increased awareness of their member-owned ethos and local links over the past three years.

www.ecology.co.uk

CHARITY BANK

What is it?

The Kent-based bank, linked to the Charities Aid Foundation, launched nearly a decade ago. It said its mission is to "finance charities and other 'social profit' organisations that address society's needs".

What does it offer?

It currently provides savings accounts, including Isas, child savings and bonds.

How does it use your money?

It lends only to social enterprises, charities and community organisations that have a charitable purpose. Customers are given details of the projects to which the bank lends and can meet local charities that have benefited from its funding. Since 2002, it has provided loans of more than 130m to some 900 charities and social organisations.

www.charitybank.org

CREDIT UNIONS

What are they?

Credit unions (CUs) are not-for-profit organisations owned by members who usually live or work locally, or belong to certain organisations. Membership in Scottish CUs has grown by 16 per cent since the banking crisis, according to the Association of British Credit Unions Ltd (Abcul).

What do they offer?

They typically provide savings, unsecured loans and current accounts. Some, including three of Scotland's biggest CUs, also offer mortgages.

How do they use your money?

All credit union lending is funded by deposits from members and they don't lend out more than they hold in deposits.

Abcul said: "Scotland's credit unions don't - and don't want to - gamble their members' savings in risky investments, but instead seek to build a sustainable local business, generating a surplus which goes towards reinvestment in the credit union's growth, paying a dividend to savers, and often to support other local community causes."

It claimed that Scots are increasingly attracted to the co-operative ethos as an alternative to mainstream banks.

"A growing and increasingly professionalised Scottish credit union movement is attracting ever more 'mainstream' customers, who are attracted by a financial services provider which is not only focused on service and not profit, but also has a product offering which can compete with the banks."

www.findyourcreditunion.co.uk CO-OPERATIVE BANK

What is it?

The Co-operative is the biggest name in ethical banking, with about eight million customers.

What does it offer

The Co-operative is the only operator in this market to offer a full range of services, including current accounts, personal loans, mortgages, savings and investments.

How does it use your money?

While it is a mainstream lender, the Co- operative Bank operates an ethical policy based on regular surveys asking customers about the areas they don't want it to work in.

For example, it will not lend to firms involved in the fur trade, arms, fossil fuels and animal testing for cosmetic purposes. It also favours lending in certain areas that customers want to support, such as renewables and climate change projects. Since 1992, it has refused more than 1 billion in lending on ethical grounds.

It said: "Since the financial crisis, we have seen a significant increase in the number of current accounts switching to us in what is typically a stagnant market. It has been a flight to trust more than a flight to ethics, after the reputation of the banks took a hit."