Banking reform:
Four steps to restore trust

An Institute-hosted seminar tackles the idea that poor public understanding of banking is at the root of the industry’s negative reputation. LISA DRYSDALE reports.

As one member of the audience stated: “If the public knew more about banking, their opinions would probably be even less favourable than they are today.”

That’s typical of the trenchant self-analysis on show at the lively discussion about restoring public trust in banking, co-hosted recently by the Institute and the University of Edinburgh Business School.

Held under the “no names” Chatham House Rules designed to encourage frank discussion, speakers tackled head-on an impression that today’s negative public image of banking was largely due to a lack of understanding of the sector.

There were plenty of examples, participants argued, of an industry which hadn’t heeded the lessons of the banking crisis. Any other company charged with mis-selling, it was argued, might have been quicker to get its house in order than the banks did when dealing with PPI.

And, despite the fallout from the promotion of “synthetic CDOs”, the truth was that similarly complex structured products, including the autocall bond, were now being marketed to retail customers.

So, the problem wasn’t one of perception, but one of reality – specifically the structure of the industry. To reinstate trust, a fourstep process was proposed:

1. ring-fencing retail banking, as proposed by the Vickers Independent Commission. While many believed the effect would be essentially cosmetic, the Commission must initiate “a real, substantive change”.

2. a broader drive to separate investment banking functions and so reduce conflicts of interest.

3. establishing a more competitive structure by doing away with regulatory interventions that hinder entry to the industry. Instead of trading competition for market stability, what was needed now was innovation.

4. building a banking culture around relationships not transactions. Today’s wide range of banking services often said more about cross-selling opportunities than about helping customers. Most people had quite similar financial needs that could be met with a limited number of products.

Renewed customer focus was also seen as the key to rebuilding trust: “Bankers must be very open and transparent in learning the lessons of the last 10 years and be seen to acknowledge them,” declared one speaker.

“We mustn’t be seen as defensive and resistant to change. We must take risks with our thinking and make choices that break away from the last 10 years and bring to life customer-centred banking.”

Some felt change must come from inside – by establishing a new banking culture. Others argued the way forward lay in greater external regulation, tighter controls and genuine competition.

To rebuild credibility, regulators must get closer to the dynamic trading activities of banks. It would help to restore faith by putting in place intrusive and direct regulations to ensure that banks had clear contingency plans and balance sheet structures to absorb shocks, and to limit the earnings growth of a bank according to its ability to maintain its balance sheet.

Talk of bonuses continued to dominate the agenda: speakers saw the need to continue the development of remuneration frameworks more closely aligned to investor and customer returns.

Fundamental risk analysis must also be a core competence of every bank, it was suggested, with bankers at all levels investing in qualification and accreditation. In short, “the taxpayer must have confidence that the banking sector is able to absorb any future shocks”.

The introduction of portable account numbers, it was argued, was pivotal to promoting genuine competition between banks. The sector had seen the emergence of free banking and interest-free periods, but customers were more likely to switch allegiances if moving a current account involved minimal disruption.

Banks had to pursue different business models and serve customers in quite different ways to stand out from the crowd. Success meant investing in the quality of customer service and reducing the volume of complaints because, with easy accountswitching, customers would head for the bank making the most effort and providing the best value for money.

Whatever the strategy for rebuilding trust, the underlying message was the same: “Customers expect the very best and need to think the bank is acting in their best interests at all times.”

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