Lost and gone: Scotland’s friend for life

Then he said something which seized my attention: ‘I withdrew £20 million today from Bank of Scotland to put it in a safe place.

In the autumn of 2008 I attended a black tie business dinner. I forget the occasion or the organisation responsible, they are all very similar and after a while the memories of each merge into one.

Next to me at the table was a man with whom I had little in common. He managed a commercial real estate company and, although he took a keen interest in the collapse of the property market then in free fall, it did not directly affect him. His portfolio was mature with established tenants paying good rents. I only half listened to his conversation, nodding and smiling occasionally so as not to appear too rude. Then he said something which seized my attention: ‘I withdrew £20 million today from Bank of Scotland to put it in a safe place.’

Marking the tenth anniversary of the world’s biggest financial crash, this is the preface from Hubris: How HBOS wrecked the best bank in Britain. Now out of print but still available on Kindle.

Under grey cloud, the former Bank of Scotland headquarters
‘The [Bank of Scotland] building is more museum than the beating heart of the self-confident and prosperous bank it once was.’ Alistair Darling

Solid as a rock?

There had been rumours for days swirling around HBOS, the unlovely conglomerate which now owned the Bank. (‘The Bank’, with an initial capital letter, might mean the Bank of England south of the border, but north of Berwick and Carlisle it had always meant Bank of Scotland). It was clearly in trouble, but the thought that it might go down, taking its depositors’ money with it had never occurred to me and came as a real shock. The Bank had been part of the Scottish landscape for more than 300 years, as solid and as tangible as the rock on which Edinburgh Castle stood. My wife and I had entrusted our savings to it. My sons had been Bank of Scotland customers since we opened Super Squirrel saver accounts for them as toddlers. The Bank had supported my own company – and countless other new start businesses – through thick and thin and when I sold it, that’s where I deposited the proceeds.

Now it was also banker to another small business I chaired. We had not been in business as long as my dinner companion and we did not have £20 million, but we had a substantial sum on deposit, hard- earned money which was keeping us safe through the recession. Britain had already seen the first run on a bank for 70 years.

Unsettling television pictures of queues of savers waiting to withdraw their cash had spooked ministers and helped to hasten the end of Northern Rock. I had no wish to do even a small part in pushing Bank of Scotland down the same path, but our company could not afford to lose that money, nor see it tied up in administration or liquidation proceedings for months or even years.

Headlong rush away from The Bank

I called my company’s chief executive the following morning and told him to open an account in a safer bank and transfer the money immediately. When I called him later in the day his news was not encouraging. It had taken him hours to get through on the telephone and when he did it was to be told that because of the volume of new accounts being opened, it could be days or even a week before our application was considered. The rush away from the Bank was headlong.

What happened to HBOS in the weeks following is part of this story, but only part. The excesses of bankers during the first decade of the twenty-first century are lurid enough to grip the interest of readers, but to dwell too long on them would be to lose sight of what we have lost. The Bank of Scotland which all but disappeared with the collapse of HBOS was not the same Bank that I and many of its customers knew in the last few decades of the last century – and bears no resemblance to the institution behind the Bank of Scotland name which is still over the frontage of hundreds of bank branches – merely another brand of the massive Lloyds Banking Group.

The Bank whose story I want to tell was quantitatively different to banks operating now. It was not insubstantial, it was after all a FTSE 100 company – one of the biggest companies on the stock market. But it was a fraction of the size of banks today and operated on a human scale. Customers could telephone branches and speak to people whose names they knew and faces they recognised. If you called back, you could speak to the same person. For Bank of Scotland managers ‘know your customer’ did not mean look at a computer screen, but recognise their names, remember their banking history, their businesses and perhaps their families too. A human scale meant that the chief executive could review all large lending propositions and all customer complaints, replying to them personally if he felt they had not been adequately answered.

A friend for life – not a joke

It looked after the millions of some of Scotland’s richest men and women, but was also one of the first banks in the UK to offer bank accounts for all in disadvantaged communities.

This was a bank which never called you at dinner time to try to sell you ‘products.’ Thirty years ago when I began my relationship with it, the Bank took the view that if you needed its services you would ask.

Later its managers were encouraged to try to sell to customers, but it was never pushy and sometimes they looked rather embarrassed in doing so. It seems incredible to me to write this now, but it was a bank which was trusted by its customers. When it adopted the advertising slogan ‘A Friend for Life’ it was not greeted with cynicism. People believed it meant it, and more importantly, it did.

To say the Bank was rooted in the community is an understatement. It had been part of Scottish history since before the Act of Union and there was no major historical event since in which it had not played a part. It acted as banker to a large proportion of the country’s employers and their employees. It banked charities and community groups, golf clubs and trade unions. It looked after the millions of some of Scotland’s richest men and women, but was also one of the first banks in the UK to offer bank accounts for all in disadvantaged communities. When The Big Issue wanted to open accounts for its homeless magazine sellers to deposit the cash they collected, the Bank’s Treasurer defied the money-laundering regulation which said that a bank had to verify the home address of all its customers and opened them all with the address of the Bank’s head office.

Don’t get the impression that this was some hick bank. It was one of the most innovative in the world, the first to bring electronic banking to Britain, a leader in leveraged finance back in the days when those were not dirty words, the first clearing bank to get its cost/income ratio below 50 per cent and a pioneer in getting others to sell its services so that it could extend its reach further than bricks and mortar would allow. It was at the same time a risk taker, known for backing entrepreneurs, and a prudent institution, maintaining high capital ratios. And it became the best-performing bank in Britain in terms of its return on equity. Its share price quadrupled in ten years.

Bank of Scotland was not unique. Many of its characteristics were shared by the other Scottish banks, The Royal Bank of Scotland and Clydesdale Bank, and they had once been replicated across the UK. But with the exception of Yorkshire, which kept its bank longer than most, other regions lost their financial institutions to a relentless process of consolidation during the twentieth century, which shrank competition and extinguished local responsiveness.

Meet the new ‘relationship manager’

Bank managers used to be among the most respected in their communities – and they were in the community because managers managed branches and branches were part of the fabric of small towns or city neighbourhoods. With the local clergyman and the school teacher, the bank manager was trusted to sign the back of your passport photograph or give you a character reference when you went for your first job. A retired manager writing in the Bank of Scotland staff magazine noted how ‘Bank men’ usually ended up as the treasurer of the golf club, the church committee or the parent-teacher association. I suspect that was once true of all bank managers anywhere in the UK – people knew the cash was safe with them. Part of the branch manager’s standing came because he (almost invariably ‘he’) could make real decisions. He could agree a personal loan or business overdraft and he made his decision not only on the basis of working out the figures, but also on his assessment of character based on years of local knowledge. Only in the case of large amounts would he need to get sanction from Head Office, which took into account his recommendation and the fact that since he was likely to be in post for years at a time, he would have to live with the consequences if the decision turned out to be the wrong one.

Now many thousands of branches across Britain have been closed and those that are left are manned by ‘relationship managers’, who probably do not live locally, do not have time after the stress of work to be treasurer of anything and will not be in post long enough to build a relationship with anyone or any business. Face-to-face meetings have given way to call centres, risk assessment to credit scoring. Personal recommendation has been replaced by ‘customer acquisition’, services replaced by ‘products’ sold to reach targets, rather than to answer the needs of customers. As recent fines imposed on the big banks by the regulator have shown, some products were ‘toxic’ – they did the customers who bought them more harm than good – and in some cases the banks knew this before they sold them. To meet constantly rising profit expectations, big banks have continually to drive down cost – mostly at the expense of customer service and satisfaction – and expand their sales, often by swallowing other companies to gain their customers. At each stage banks became more remote from their customers, geographically and by hiding behind automated telephone systems. What has been lost in this process is trust.

This is the story of how one bank went from being one of the most trusted, to one from which customers could not wait to remove their money.

Hubris: How HBOS wrecked the best bank in Britain is available on Kindle

See also the tenth anniversary series on Sceptical Scot, with further extracts from Hubris followed by extracts from Ian Fraser’s Shredded: Inside the bank that wrecked Britain