Submission from Church of Scotland (S011)
Q1. To what extent are professional standards in UK banking absent or defective? How does this compare to (a) other leading markets (b) other professions and (c) the historic experience of the UK and its place in global markets?
1. Over recent years we have seen serious deficiencies in the professional standards and monitoring of banking which as a profession has been seriously lacking over other professions such as solicitors, teachers, doctors etc. Professional conduct has deteriorated over the last 10 years. At the level of individual employees, the bonus culture may have had a part to play in encouraging bank employees into mis-selling products to customers, but more concerning is the mounting evidence of systemic malpractice where scandals such as the mis-selling of PPI, the mis-selling of complex financial products such as interest rate swap agreements (IRSAs) to small and medium sized enterprises and the LIBOR rate-fixing scandal are all arguably driven by greed at a corporate level. We are particularly concerned with the apparent disregard for customers, especially small customers, displayed in the mis-selling scandals.
2. Other professions are policed by their professional bodies and we would recommend that something similar should apply in the case of bankers. We believe that the Chartered Banker Institute is well placed to undertake this task.
3. One of the problems has been that the Chief Executives/ Senior Executives of Bank’s have not actually been qualified bankers. We feel that there should be a requirement that Senior/ Chief Executives hold suitably certified banking qualifications, and that the Chartered Banker Institute (or other governing body) be given the ability enforce standards, including the ability to strike off those who do not come up to required standards of competence and ethics.
Q2. What have been the consequences of the above for (a) consumers, both retail and wholesale, and (b) the economy as a whole?
4. A healthy banking industry is founded upon trust, and it was precisely because customers trusted their banks that the banks were able to perpetrate betrayals of that trust, as in the PPI and IRSA mis-selling scandals. The result is the considerable erosion of trust in the banking industry. Excessive charging and sale of products which customers do not require or which are unsuitable for them has been part of the culture over many years. A lot of hard work will be required to regain that public trust- effort which the banks currently show little appetite for, preferring instead to concentrate on rebuilding their own balances.
5. Although many of cases (particularly of Interest Rate Swaps) involve mis-selling in breach of the FSA's Conduct of Business Rules, and of the EU Markets in Financial Instruments Directive ("MiFID"), such breaches are (on the whole) actionable only by private individuals and not by companies. The legislation was originally designed to prevent strategic lawsuits by Financial Services Professionals against each other. However, since the typical SME which will have been mis-sold an Interest rate Swap is a limited company, the practical effect is that such clients are deprived of any adequate redress for mis-selling. Although there are administrative remedies available in the form of a complaint to the Financial Services Ombudsman, this is limited to only the smallest of claimants, and subject to a relatively low limit of compensation which can be awarded.
6. The net effect of all of this is that it creates a climate in which Banks can be perceived as having breached the Conduct of Business Rules with impunity. The Banks are adopting an aggressive and hard-nosed attitude in resisting any claims on the basis explained above.
7. The financial instruments used by Banks have become so complex that even many in the market (including those responsible for running the Banks) did not fully understand the nature of the instruments, let alone their attendant risks. Regular education of executives, particularly in understanding investment risk, must be introduced.
8. Also even in a low interest rate climate the banks have not passed the benefits on to the consumer. The cost of credit cards for example has not changed despite the fact that interest rates are at their lowest level for decades.
9. We have also seen the rise in "payday loan" companies who are charging exorbitant interest rates and who in many cases seek to flaunt regulation in respect of advertising etc. As, in some instances, the banks are not willing to lend, we have seen an explosion in this market place. The FSA must ensure that existing legislation prohibiting the charging of excessive interest rates is properly enforced. We would recommend that, as is the case in some other countries such as France, a maximum charge for consumer credit should be introduced. The Church of Scotland Special Commission on the Purposes of Economic Activity, in their report to the General Assembly of the Church of Scotland in May 2012, recommend that this initially be set around 40% APR (please see http://www.churchofscotland.org.uk/__data/assets/pdf_file/0009/9765/Economics_Commission_email_and_web_version.pdf) - higher than the French rate (approximately 25%), but much lower than the thousands of per cent now being charged by some companies.
Q3. What have been the consequences of any problems identified in question 1 for public trust and in, and expectations of, the banking sector?
10. Public trust in banks is probably at their lowest level ever. The grudging acceptance of liability for PPI mis-selling (after protracted litigation) and the hard-nosed resistance by the banks of claims for mis-selling of complex financial instruments, such as Interest Rate Swap Agreements, serves only to compound public distrust.
Q4. What caused any problems in banking standards identified in question 1? The Commission requests that respondents consider (a) the following general themes:
· the culture of banking, including the incentivisation of risk-taking;
· the impact of globalisation on standards and culture;
· global regulatory arbitrage;
· the impact of financial innovation on standards and culture;
· the impact of technological developments on standards and culture;
· corporate structure, including the relationship between retail and investment banking;
· the level and effectiveness of competition in both retail and wholesale markets, domestically and internationally, and its effects;
· taxation, including the differences in treatment of debt and equity; and
· other themes not included above;
· and (b) weaknesses in the following somewhat more specific areas:
· the role of shareholders, and particularly institutional shareholders;
· creditor discipline and incentives;
· corporate governance, including
- the role of non-executive directors
- the compliance function
- internal audit and controls
- remuneration incentives at all levels;
· recruitment and retention;
· arrangements for whistle-blowing;
· external audit and accounting standards;
· the regulatory and supervisory approach, culture and accountability;
· the corporate legal framework and general criminal law; and
· other areas not included above.
11. The Church of Scotland Commission on the Purposes of Economic Activity was asked to look at how the Church could help bring a fresh vision to economics. In their report to the General Assembly of the Church of Scotland in May 2012, they argue that it is necessary to:
· Reduce inequality
· End poverty
· Ensure sustainability
· Promote mutuality
The full report is available to download here: http://www.churchofscotland.org.uk/__data/assets/pdf_file/0009/9765/Economics_Commission_email_and_web_version.pdf
12. We feel that even the Boards in many of the Banks did not actually understand some of the Treasury instruments being used to finance their books, so education is required here.
13. Financial innovation in banking for the benefit of the customer is at the lowest level with little of benefit to customers being introduced by Banks in the last 10 years. On the contrary, the new and innovative offerings introduced by Banks in the early 1990s through Egg, Intelligent Finance, Smile, and similar institutions have all been withdrawn or run down as the individual Banks build their capital base. We have seen a widening of interest rate margins, as a result of their desire to build their capital base. This has resulted in charges for credit remaining static throughout the years with the interest rates being offered to savers being drastically reduced.
14. By contrast, some Banks appear to have been assiduous over the same period in innovating for their own benefit and to the prejudice of customers. It appears that some LIBOR fixing was indulged in for the purpose of manipulating the perceived value of the Banks themselves. The principal driver for the sale of complex financial instruments was the perceived need for the Banks to increase their capital base.
15. The sale of IRSA's (Interest Rate Swap Agreements) and other complex financial products was not a case of isolated salesmen seeking to earn commission (though that may also have been a driver), but was systemic to the extent that it was frequently made a condition of the client being granted a loan that he should enter into an IRSA (whether or not that was a suitable or appropriate product for that client, within the terms of the Conduct of Business Rules and MiFID.) This situation might have been ameliorated by a greater separation between retail and investment banking divisions (though any such separation would also have to address devices such as the imposition of a requirement for a customer to purchase what might be an unsuitable product as a condition of obtaining a loan).
16. We would be in favour of legislation to separate Retail elements of Banks from investment banking , perhaps along the lines suggested in the report of issued by the Independent Commission on Banking chaired by Sir John Vickers’ in 2011. The much needed competition in the market place should be obtained through the acquisition and separation of Brands held by existing banks.
Q5. What can and should be done to address any weaknesses identified? To what extent are such weaknesses subject to remedial corporate, regulatory or legislative action, domestically or internationally?
17. We feel that recent scandals have shown that Chief Executives have often not had effective supervision from their Board of Directors, and that auditors both internal and external have also failed to identify weaknesses. The Board of Directors need to have more control over the audit functions and in banking the appointment of auditors should be jointly agreed with the regulator. Also the audit plans each year should also be agreed with the regulator to assist in preventing the problems of the past. We would also recommend that there be a requirement that auditors be changed on a regular basis (e.g. every 3-5 years).
18. Certain of the recent abuses, such as Interest Rate Swap mis-selling have been the result of what is arguably corporate misfeasance at a systemic level, and there is need of this being reined in. Arguably MiFID and the Conduct of Business Rules, if properly observed, would go a long way to achieve this, but so long as a significant number of injured customers are deprived of meaningful redress, it generates an atmosphere of apparent impunity. At the very least, the FSMA should be amended so as to permit all victims of mis-selling to obtain proper redress through the courts.
19. The FSA has shown significant weaknesses in policing Banks probably because of inexperience within their own ranks. Problems with recruiting and retaining and suitably qualified and experienced staff need to be addressed, as does the issue of "regulatory capture" which many banks have pursued.
20. We are also concerned that many tax havens, which are used by many institutions which operate within the City of London to deprive countries of their legitimate tax income, are British Overseas Territories and Crown Dependencies or are otherwise under British influence. It is inconsistent for the UK government to have committed to maintaining overseas aid while, at the same time, supporting tax havens which deprive developing countries of the tax funds that they need for their development
21. Bonuses, by definition, skew behaviour. The withdrawal of the bonus culture particularly at senior levels within retail banks would help the behavioural culture of Bankers. The Church of Scotland Special Commission on the Purposes of Economic Activity, which reported in May 2012, called for recognition of "the corrosive effects on business ethics of the current unhealthy dependence on the "bonus culture", and [a] return to more traditional forms of remuneration for work undertaken." (please see http://www.churchofscotland.org.uk/__data/assets/pdf_file/0009/9765/Economics_Commission_email_and_web_version.pdf)
22. Failing this, there is a need to at least rein- in bonuses levels. The idea put forward by the Hutton report, that an element of any putative bonuses should be at risk of being lost due to poor performances should be considered.
23. Taking excessive risk should become a criminal offence; many at the top in banking have reaped rich financial rewards, with no threat of prosecution. In addition, we feel that non- executive directors should also be liable to sanction, in the event of their failure of provide proper oversight.
24. Consideration should also be given to other changes to Board structures- for example a requirement that employees sit on Boards, along the lines of the German "mitbestimmung" model, and that shareholders have a real influence over appointments to Boards.
Q6. Are the changes already proposed by (a) the Government, (b) regulators and (c) the industry sufficient? Respondents may wish to refer to the Financial Services Bill and the Government's proposals for the Banking Reform Bill. They may also wish to refer to proposals by the Bank of England and the Financial Services Authority on how the Financial Policy Committee, Prudential Regulation Authority and Financial Conduct Authority will operate in practice.
25. That the Business Secretary could recently describe the banking sector and the City of London as being like a "massive cesspit" should be a matter of profound shame; however we shouldn't be content to lay blame and responsibility solely at the door of the financial institutions, but should acknowledge that we all have contributed to the decline in our economical prudence. There is an eternal relevance to St. Paul’s assertion that "the love of money is the root of all kinds of evil". When the love of money overwhelms the love we have for others, society inevitably erodes.
26. We would encourage UK government support for greater international tax transparency at the EU, G20, OECD and other relevant decision-making bodies, specifically including the disclosure of profits made and taxes paid in each country in which they operate, as well as the automatic exchange of information between tax jurisdictions on a global level. We would further urge the ending the UK’s support for tax havens.
Q7. What other matters should the Commission take into account?
27. The Church of Scotland Commission on the Purposes of Economic Activity was asked to look at how the Church could help bring a fresh vision to economics. In their report they argue that it is necessary to:
· Reduce inequality
· End poverty
· Ensure sustainability
· Promote mutuality
28. The way in which our economy is structured means that many people are marginalised by market forces. This is of concern to the church- that the weakest in society should be disadvantaged- or even taken advantage of.
29. Banks are not simply businesses, but provide an essential economic service. It is necessary that they operate on principles which are driven not simply on profit, but take cognisance of the wider effects which their actions have on society.