Can bank chiefs accept a fall in sales, decline in profits and lower share price?

I have a lot of time for Sir Richard Lambert. I worked with him on the Financial Times in the 1970-80s and after I left he rose to become a very successful editor of the paper. Then followed a stint on the Monetary Policy Committee, then a period as Chief Executive of the CBI. But I can’t help thinking he has his work cut out to change the culture of Banking.


Richard Lambert
Richard Lambert: seeking views on his consultation paper.

As head of a new body to try to establish a professional standards institute for bankers — one of the recommendations of the Parliamentary Commission on Banking Standards — he is being paid by the big banks. That might compromise the objectivity of a lesser man, but Richard is a strong enough character and, I’m sure has a good enough pension, to walk away if he feels he is being snowed.

He has issued a consultation document and is asking for views by March 7.

His problem, I believe, is that the banks, the big ones anyway, can’t change culture without changing their business model and no matter how much they want to — and a lot of lip service is being paid by Antony Jenkins of Barclays and Ross McEwan of RBS — there are huge forces against them.

Ross McEwan
Ross McEwan

To go back to a time when banks put the interests of their customers before the interests of the bank would mean accepting a very much lower level of profitability and  growth than they and their shareholders have become used to. It would mean lower dividends, which would meet opposition from pension companies and hedge funds, and lower salaries and bonuses, which hits the CEOs’ own pockets as well as those of their management teams.

“Words are easy. Real change is much harder.” Ross McEwan.

In 1986 a raft of financial deregulation allowed banks to expand their activities into areas which had previously been forbidden to them, from proprietary trading of financial instruments to selling insurance and investment products. Before that change, banks’ businesses had grown in line with the businesses of their commercial and corporate customers and the prosperity of their personal customers — reflected in the annual rise of GDP, which in a mature economy like Britain was hardly spectacular. The stock market regarded them as utilities, safe, reliable but unlikely to set the heather on fire.

But released from their financial shackles, bank chief executives saw the chance to make much more from their customers than they could earn on the modest fees and turn on interest rates earned from providing basic banking services. They could sell personal customers payment protection insurance — the infamous PPI — among other things, and sell their business customers interest rate hedging.

Margins were generous, verging on the obscene

In theory these products brought benefits to the people and firms which bought them, but in practice they were mainly designed to benefit the banks. Margins were generous, verging on the obscene (80% on some PPI contracts) and staff were incentivised with bonuses and other rewards, and/or threatened and bullied into selling them — whether customers wanted them or not.

Banks started to turn in spectacular returns and to be regarded as growth stocks. Share prices rose. Chief Executives commanded much higher salaries and bonuses, but in order to keep earning these stratospheric rewards they had to keep promising higher and higher growth. The rest is well known. The PPI scandal has cost the banks’ £20 billion in compensation and they are only now starting to deal with interest rate hedging mis-selling.

No-one dare sell PPI that way any longer, but as the £28m fine on Lloyds last year showed, banks have not given up their addiction to high pressure sales techniques.  Any bank which did genuinely put the interests of its customers first would inevitably suffer a fall in sales, a decline in profits and a lower share price. With so many share-based bonus schemes around, I can’t see many bank chief executives voting for that.

Lambert may succeed in establishing a new banking institute, but changing the culture of banking is a much harder job.