The Banking Standards Board is looking at how bank misconduct has called the “social licence” of finance into question and what can be done about it.
The UK’s banks did not cover themselves in glory in the run-up to the financial crisis of 2007 – and there have been many reforms in the ten years since that have aimed to fix the numerous problems. Wafer-thin capital has, for example, been boosted, and liquidity has been increased. However, as Mark Carney, the governor of the Bank of England, pointed out prior to a debate organised by the Banking Standards Board on 21 March.
“this immense progress has been overshadowed by a crisis of legitimacy”. The scandals that have dogged the industry have, Carney argued “undermined trust in banking, the financial system, and, to some degree, markets themselves”.
This is not just a problem for the banks, of course, but for society as a whole. Society needs financial services just as much as financial services need, in Carney’s words, “the consent of society to operate, innovate and grow”. He argued that “it ought to be of grave concern that only 20% of UK citizens now think that banks are well-run, down from 90% in the late 1980s”.
The Bank’s governor outlined a number of reasons for the “ethical drift” seen pre-crisis, including toothless standards, pay that rewarded short-term gain, and lack of awareness of what poor actions could lead to. He said that global banks’ misconduct costs top US$320bn “capital that could otherwise have supported up to $5tn of lending to households and businesses”.
The main question now, of course, is whether the ten years since the crisis have seen banks sharpen their ethical act. Carney says that Bank has been working with the Financial Conduct Authority and HM Treasury on standards and that it will present steps to be taken by the Financial Stability Board at the G20 Leaders’ Summit this July. He also admitted that no organisation can be complacent, referencing what the Bank itself can learn from the recent resignation of its Deputy Governor and COO, Charlotte Hogg.
What the Bank wants to see is cultural change and an industry-wide understanding of good practice that is “collectively enforced” and that keeps pace with developments in the industry. This will be supported by the stronger deterrents for misconduct that the Bank is planning – but the regulators do not want to rely on “punitive ex post fines” to get people to do the right thing, nor on regulating pay. What the Bank is aiming for is an industry where staff take responsibility for their conduct, both individually and collectively, within a “culture of openness and accountability” where people do not face disproportionate punishment for honest mistakes. What will help hold managers’ feet to the fire on that, the Bank hopes, is the Senior Managers Regime, introduced in 2016. It makes senior managers accountable for regulatory breaches that they could have reasonably prevented, and for the overall culture of a firm. “There are encouraging signs that it is making a difference,” Carney said.
The full debate, which is available online, goes more deeply into whether rules and regulations have bite and how good governance can be fostered.