Submission from the Chartered Institute for Securities & Investment (CISI) (S007)
The Chartered Institute for Securities & Investment (CISI) is the leading professional body for securities and investment professionals. It is a not for profit organisation devoted entirely to raising standards of professionalism in the sector through a focus on individual practitioners and aspiring practitioners. Its three core aims are: to establish entry standards and initial competence; to maintain competence (continuing professional development); and to build trust in financial services.
The banking industry has suffered serious ethical failures in both the retail and wholesale areas, but even costly failures in wholesale standards ultimately affect the retail customer, who is always at the end of any transactional chain. Consequently, we all pay.
Accepted professional standards of academic achievement, professional competence, ethical behaviour and continuing professional development (CPD) are not a requirement of any part of the banking industry, except where they have been introduced recently (effective 1 January 2013) for practitioners providing investment advice to retail customers.
There seems no defensible reason why similar standards should not be mandated across the industry.
Two specific recommendations which we make are that:
1) All new products introduced by banks should be subject to a review process for ethical compliance, using a "traffic light" scoring system; and
2) Banks should have an Ethics Committee, reporting to the Board, which will review and monitor the firm’s compliance with, and adherence to, its own published standards of ethics and integrity.
We do not argue that these on their own provide a complete panacea, but they do go a long way towards ensuring that an industry which likes to think of itself as a profession is forced to behave like one.
We believe that a root cause of many of the problems displayed by banks was a change in culture, coupled with a devaluing of professional standards. The retail banking industry turned itself into a marketing operation with the adoption of a target-driven culture, emphasising product sales at the expense of customer service. The wholesale banking industry imported a lottery level bonus culture, without adequate consideration of the potential consequences, whilst strong barriers to entry prevented new corporate competitors entering the market and driving down super normal profits and pay.
These changes were compounded by advances in technology which changed the culture from face to face interaction, exemplified by the motto ‘my word is my bond’ to one that became remote from the end user of investment: the individual consumer. Ultimately, the consumer is the end user of wholesale as well as retail transactions. This meant that there should have been a strong focus on individual professionalism to mitigate the risks presented by massive growth, increasingly complex instruments and short term transactional remuneration, but instead the ‘light touch’ regulatory regime was also applied to requirements of professionalism.
These cultural changes, with the emphasis on short-termism, have left numerous wrecks, ranging from split capital trust, precipice bonds, PPI and LIBOR, to international money laundering. The culmination of almost continuous public censure has so corroded trust in banks and banking that every subsequently publicised "wrongdoing" is assumed to be the result of deliberate action, both individual and corporate, driven by greed.
As a result, the news of huge fines imposed by regulators even generates a kind of perverse satisfaction that banks (and bankers) are simply getting their just desserts, forgetting that once again, it is the consumer who bears the ultimate cost.
The fundamental question is: what, if anything, can be done to change this seemingly irreversible negative view? Is there something that the industry itself can do, or are we reliant on the "dead hand of regulation"?
We believe that an important part of the answer is that banking has to decide whether it is a profession or a trade. If it believes it is a profession, then it has to behave like one and accept or adopt the generally recognised requirements of a profession, based on four core standards:
1) Entry standards which cover academic standards and objective, relevant examinations;
2) Ethical standards both on entry and throughout one’s career;
3) Continuing professional development (CPD); and
4) Recognition that a licence to practice as a professional must be withdrawn in the event of failure to keep to the standards set.
This can be achieved through a multi-faceted approach, which would see action taken by individual firms and professional bodies working with the education providers, as well as the employing firms, backed by regulation, in a major drive to raise standards, particularly of ethical behaviour.
Professional bodies have demonstrated that they have a valuable role to play in providing an ethical framework of training and setting standards for individual behaviour, which does not contain any corporate bias. This has been acknowledged by the FSA when framing the requirements of the Retail Distribution Review (RDR), which has established a mandatory set of professionalism requirements. Its continued reluctance to establish similar levels of professionalism more broadly across the industry is a surprising and ultimately indefensible stance.
In terms of public acceptability, there needs to be a visible application of penal sanctions for significant failures. These sanctions should encompass the whole range of possibilities, from substantial financial penalties and/or banning from any industry involvement, to custodial sentences for serious wrongdoers.
One might ask why, if this can be an outcome of the Bribery Act, similar sanctions cannot be a part of any Financial Services Act, since the outcome of financial wrongdoing can be systemically destructive.
Highlights of our suggestions (set out in answer to Question 5) include the point that banks should create an Ethics Committee responsible for ensuring that the bank’s policies and procedures contain an ethical dimension (to act with honesty, openness, transparency and fairness), and that these are followed in practice.
To this end, the majority of its members would be from outside the bank and the Board (which has other duties, as well as ethics).
The Committee would:
a) Input into the bank’s remuneration strategy;
b) Produce an annual report to the Board (to whom it reports); and
c) Have the power to call for any information it requires to fulfil its duties.
1. To what extent are professional standards in UK banking absent or defective?
There are structural deficiencies, but there are also examples of ‘best practice’ both by corporate financial institutions and by individuals working in firms. The recent series of revelations about UK banking (PPI and LIBOR) shows that some parts of it have clearly fallen below acceptable minimum professional standards - although both these recent problems occurred some years earlier, while other parts of the industry e.g. infrastructure finance, have continued on a sound footing. This failure may, at first glance, be surprising given that there is no shortage of Codes of Conduct in financial services – the Lord Mayor’s "Restoring Trust in the City" initiative found more than 50 codes, but it is one thing to have a code and quite another to monitor and measure the extent to which any person follows it with a professional pride that goes beyond cursory compliance.
The fundamental problems are that:
1) Some individuals exist in isolation and do not understand the impact of their actions outside the bank (or even their department), a trend reinforced by technology limiting human contact;
2) Senior management does not do enough to promote adherence to such codes; and
3) Individuals feel they are rewarded more for short term financial results than for intangible factors, such as putting the customer first.
Professional standards are being formalised in the retail sector (through the RDR) and will be in place from 1 January 2013. However, no such standards are planned for the wholesale sector by the UK regulator. The table below illustrates the difference between the two sides of the industry.
Retail (from 1 January 2013)
Qualifications (Entry standards)
None needed. Used to be required, but it is now the responsibility of the CEO to satisfy the FSA that staff are competent. Those who do take exams take them at Level 3 (roughly similar to A levels).
Mandatory requirement raised from Level 3 (roughly A level) to Level 4 (first year degree) from January 2013.
Continuing Professional Development
None specified, apart from the requirement for staff to be competent.
Highly specified: 35 hours per year, of which at least 21 hours need to be structured. Regular audits by professional body.
Code of Conduct
General overarching rules.
Specific sign-up to Codes of Conduct of approved professional bodies, with the sanction of ejection for serious breach.
Membership of a Professional Body
In effect, a requirement.
1b. Comparison with other professions
Banking is split. The wholesale side of the business has fewer professional standards than many other professions. It has no mandatory qualifications, no integrity requirements, and membership of a professional body with its Code of Conduct and CPD requirements is voluntary.
This compares with solicitors, accountants, barristers, doctors and shortly, the retail investment advice sector, where the RDR has addressed exactly these issues. See detailed points on professionalism in Question 4.
1c. The historic experience of the UK and its place in global markets
Historically, many retail bank staff were qualified and members of a professional body. The qualifications were wide-ranging and included such subjects as law relating to banking, finance of international trade and practice of banking.
After 1986 (the ‘Big Bang’) this started to change, and qualifications increasingly focused upon the sales of products to customers. However, in those firms associated with stock broking, the legacy of high level qualifications continued as a matter of professional pride and competitive edge, linked to the historic legacy of the London Stock Exchange motto ‘my word is my bond’, so that two tiers of professionalism have existed within retail. So there are now mandatory qualifications in giving financial advice, mortgage advice and insurance, as well as in banking conduct (e.g. complaints handling, treating customers fairly).
Some banks selling PPI 10 years ago published internal ‘score cards’ or ‘name and shame’ lists of the percentage of ‘penetration’ of PPI when providing credit. The approach to staff and customers was "Why would you not want to buy PPI insurance for the loan"?
The culture of retail branch staff encouraged competition to sell products such as PPI, precipice bonds, endowment mortgages and structured products including interest rate swaps to business customers, to meet their short term internal targets, rather than to consider whether these products were actually suitable for their customers. As Martin Wheatley has said "This has been a sorry episode for many of us [total compensation has been estimated at £8 billion], but it is important that we all continue to deliver what is fair for consumers, and learn from the experience".
2a. What have been the consequences for consumers?
Both retail and wholesale customers have suffered and this has led to a breakdown of trust in banks.
3. What have been the consequences of any problems identified in Question 1 for public trust in, and expectations of, the banking sector?
The 2011 annua l Edelman Trust Barometer graphically demonstrates the huge loss of trust suffered by the banking industry in the UK between 2008 and 2011 (from 46% of the public who, in 2008, considered that banks could be trusted to do what is right, to 16% in 2011), and this was before the latest problems. This compares with a rating of 51% across 23 other countries. See Appendix A.
The practical consequences of this include a greater reluctance by individuals to deal with financial organisations for essential services, such as saving for a pension.
4. What caused any problems in banking standards identified in Question 1? The Commission requests that respondents consider (a) the following general themes [only relevant ones to professionalism selected].
· The culture of banking, including the incentivisation of risk-taking
After the Big Bang in 1986, there was a gradual cultural shift in investment banking. To quote the FT of July 7 2012, "As trading profits in securities and derivatives rose inexorably in buoyant markets, the power of the traders rose in their organizations at the expense of the more staid corporate financiers. The individualistic, bonus-driven ethos of the trading floor permeated institutions in which the idea of fiduciary obligation to customers was ebbing away."
We have a clear view on risk-taking and remuneration, particularly of bonuses. We support the concept of paying people an element of remuneration in recognition of achievements that are over and above what would normally be expected and/or a legitimate share in the profits of their organisations. However, the amount and method of payment should be subject to certain factors, such as co-operation with others, compliance with procedures and training of others, which should be relevant as well as profit; and that a bonus should take into account the contribution of the team/division and the overall performance of the firm/company, as well as that of the individual.
The huge difference in bonuses between investment and retail bankers is bad for the industry, for their firms and for society. For example in 2011 the average pay, including bonus, of investment bankers at Goldman Sachs was £157k ($235,787), JPMorgan was £123k ($184,589) and Morgan Stanley was £92k ($137,548). In contrast, Lloyds Bank employees (mainly corporate and retail banking) in 2011 had an average salary of £20k and enjoyed an average bonus of just £3,900. The simple answer is in the quotation above – investment banking can be much more profitable, and prudential requirements make high barriers to new entrants.
The influence of Wall Street with its fast paced technologically-led activities has provided a shock to the service-focused retail industry, whose individuals were believed to embody concepts of service and stewardship of the resources entrusted to them.
· Other themes not included in the stated questions:
The neglect of professionalism in banking
There is now no doubt that banking must become a profession, but it has a considerable way to go demonstrate that it meets the professional standards identified by the Professional Associations Research Network (PARN) in research undertaken for the FSA in 2009.
PARN found three core pillars of professionalism:
1) Entry standards, complaints and discipline;
2) Continuous learning; and
3) Ethical behaviour.
Applying these criteria to banking reveals:
a) There is no minimum entry requirement (except for the small category of retail investment advisers covered by the RDR);
b) A complaints procedure (but this is restricted to consumers and some small businesses);
c) Discipline by the FSA (very limited, since most banking staff are not Approved Persons subject to FSA discipline);
d) No CPD requirement (except for retail investment advisers);
e) Some support for ethics in the FSA’s Approved Persons Principles (but again, limited to Approved Persons and with a systems and controls focus); and
f) Comparatively low academic standards, lack of penetration in mainstream degree courses to encourage professionalism prior to entry to employment.
So, much remains to be done in a sensible and proportionate manner.
· The regulatory and supervisory approach, culture and accountability
The Regulatory and Supervisory approach
The FSA or the FCA should adopt a high visibility deterrence policy against individuals, including senior management, in firms which are disciplined – otherwise only shareholders (and arguably customers) pay the fines.
It is surprising how many banks are fined millions of pounds, but how few individuals who took the decisions are. For example not a single person has been disciplined by a regulator for PPI failures, or for institutional money laundering (where major banks have been fined many millions of pounds for failures to prevent it), or for data protection (where firms’ procedures have clearly not been followed). It is only in market abuse cases and in fraudulent trading where individuals regularly are disciplined.
5. What can be done to address any weaknesses identified? To what extent are such weaknesses subject to remedial corporate, regulatory or legislative action, domestically or internationally?
We have a number of proposals for the Commission. We would be happy to expand upon these in giving oral or written evidence.
"….and any poor practice which unr easonably shifts income to the ( wholesale ) industry is at the expense of some end retail customer. There are no free lunches, and shoddy wholesale practice is not a victimless act, even in those cases where it is not defined as a crime …."
Lord Turner at the FSA’s Annual General Meeting in 2012
In summary , we believe that the recent professionalism changes introduced to the retail advice sector should and could be applied right across the spectrum . This recommendation is especially poignant since the industry itself, via its trade bodies , opposed the decision of the regulator to abandon mandatory examinations in the wholesale advice part of the industry.
The retail advice part of the industry is about to i mplement comprehensive and rigorous standards that could be replicated very cost effectively in the wholesale area: the thinking and infrastructure has already been put in place for retail, so why not apply it right across the sector?
(a) Code of Conduct
We think it essential that everyone in the banking sector (wholesale and retail) should subscribe to an approved Code of Conduct.
A Code of Conduct without enforcement is ineffective; hence in the RDR there is an MoU between a number of accredited professional bodies and the regulator, with a duty on those professional bodies actively to enforce adherence by their members to an approved code, with the sanction that failure to do so could lead to suspension or expulsion of the member from the industry. This would go a long way in making individuals responsible for their actions.
(b) Ethics Training and Testing
Ethics training and testing can and should be undertaken, linked to scenarios based on genuine dilemmas faced by practitioners. More than 6,000 of our professional members have taken our online integrity test, which is designed for finance professionals, by finance professionals. The test uses a series of relevant scenarios with multiple steps and pathways, giving several opportunities for the individual to make the right decision if their initial one was inadequate or wrong. We have also delivered training seminars and workshops allied to this test in over 20 countries, to students and professionals, from a wide variety of backgrounds.
We propose that all banking employees, including senior management, should be trained and tested and be subject to regular refresher training. Additionally and ideally, an ethics test should be required prior to entry to the sector, which is something this Institute is actively planning to introduce in support of a greater visible commitment to ethics for the graduate recruit intake of major banks.
(c) Qualifications and Continuous Professional Development (CPD)
As mentioned earlier in the ‘Neglect of Professionalism’ we believe that there needs to be mandatory appropriate entry qualifications and CPD in banking (both wholesale and retail) if banking is to be a profession.
It is surprising that individuals who may routinely handle large sums of money may be unqualified, when private wealth managers who generally handle rather smaller sums, have to possess specific mandatory qualifications.
Competence is made up of knowledge, skills and behaviour (ethics). Qualifications can cover the first and third element – indeed the FSA has mandated knowledge and ethics for qualification curriculums as part of its RDR programme to raise behavioural standards in the retail investment advice sector. This is why our retail exams contain 20% of content which focuses on standards of ethical behaviour.
Why should not all individuals entering the wholesale banking industry take an ethics test as part of overall entry qualifications? This would not only restore the mandatory qualifications position in force before the FSA abolished it for the wholesale sector (in 2007, under its ‘light touch’ approach), but would also ensure that professional staff understand how their roles and responsibilities in the banking industry impact upon society.
We also suggest that everyone in the sector needs to maintain their competence through actively undertaking and recording relevant regular CPD.
We recommend that the Committee considers applying the same criteria to wholesale banking as will be the standard in some parts of the retail industry and for all individuals to hold a statement of professional standing (SPS), linked to compliance with a Code of Conduct and completion of CPD.
It is disappointing that the FSA and the FCA have the power to do this, but have failed to prioritise it, and two amendments which would have rectified this anomaly, in the Financial Services Bill have, so far, failed.
(a) Ethics Committees
We suggest that banks should create an Ethics Committee responsible for ensuring that the bank’s policies and procedures contain an ethical dimension (to act with honesty, openness, transparency and fairness) and that these are followed in practice.
To this end, the members would be from outside the bank and the Board (which has other duties as well as ethics). The Committee would have input into the bank’s remuneration strategy (as the Remuneration Code requires for Risk), would produce an annual report to the Board (to whom it reports) and would have the power to call for any information it wanted on the business such as an ethics review (see next). The BAE Committee is an example.
(b) Ethics Review
We also propose that the Ethics Committee should have the power to commission a periodic ethics review by outside experts to see how effectively its ethics policies are in fact working.
Elements to be checked might include procedures for ensuring that decision-making takes ethics into account, adherence to this requirement at all levels, ethics support and advice, whistle blowing and regular training as part of CPD. We see this report as giving the Ethics Committee the basic information which it needs. The report could be less frequent for smaller banks. The CISI has helped to develop such a programme which is now in use but we would expect there to be others also providing this service.
c) New Product Ethics certification
As part of the sign-off for any new loan, or product, the bank should add certification that the loan or product meets four fundamental ethical principles, namely, that it is:
c) Transparent; and
This can be simply shown on the marketing material in the form of a red, yellow or green indicator, where green indicates full compliance with the principles.
Ethical standards of banks and their employees are beyond normal rule making. Such standards have to be part of the culture of every firm and individual. But we can no longer rely on a tacit assumption that everyone knows the difference between right and wrong and so leave it to each bank simply to create its own culture of ‘doing the right thing’ - as recent events have shown. Therefore, structures are needed to encourage and support this culture.
Our proposals would help to instill and nurture this. The regulators’ failure to establish clear and minimum levels of professionalism, which can be monitored, measured and harnessed with real enthusiasm right across a sector that recognises its need to change, is puzzling, illogical and out of date. It also continues to pose risk to the ultimate consumer as the complexity of organisations, technology and products continues to develop so rapidly.
22 August 2012