The long awaited report by the former CBI chief Sir Richard Lambert into banking standards has been released today. It will be no shock to those who are connected with the banking industry that he has recommended a radical programme of reform or that he concludes that there is a, “strong case for a collective effort to raise standards of behaviour and competence in the banking sector”. Interestingly, the report was released at the same time that the Financial Ombudsman Service (FOS) published their annual review. The statistics in that review highlight why the need for change is so important. In the last year alone FOS answered 2.3 million enquiries from consumers (40,000 every week) and settled a record 518,778 disputes – more than double the number in the previous year. It is clear the aims of the report are laudable; a change in culture and behaviour across the whole of the banking industry.
Investors interest in brand value of banks
The main driver for change maybe a desire for better consumer outcomes, but any change which brings about the elimination of poor values and malpractice, which have been witnessed on a massive scale, will also benefit business investors and stakeholders. So the plans are likely to be welcomed by investors as they have a significant interest in the brand value of the banks in which they hold shares. Reputational risk is harder to measure than solvency or liquidity risks, but as the events of the past few years have shown, bad behaviour and poor ethical standards can jeopardise shareholder value.
New independent body to drive continuous improvement
The most ambitious of the proposals is the creation of a new independent body to drive continuous improvement in the behaviour and competence of all banks and building societies doing business in the UK. The report suggests that the new body, which is likely to be called the Banking Standards Review Council (BSRC), should require continuous improvement under three main headings; culture, competence and customer outcomes. It is anticipated that the new body will set new standards on a voluntary basis, where statutory regulation is not required. The key to the success of such aims is the ability of the stakeholders of the new body to agree voluntary standards which benchmark good practice.
The objectives of the BSRC will include:
- Requiring participating banks and building societies to commit to a programme of continuous improvement under the headings of culture, competence and customer outcomes, and to report back on their performance to the public every year.
- Setting standards of good practice. That means identifying activities where voluntary standards would serve the public interest, and working with practitioners and relevant stakeholder groups to come up with agreed procedures. Examples could include whistleblowing protocols, the approach to retail sales incentives, banks’ processes for handling small businesses in distress, or the management of high-frequency trading.
- Publishing an annual report setting out where progress is being made both by the sector and by individual banks and building societies, and where more needs to be done.
- Having a meeting once a year with non-executive directors or, in their absence, risk or reputation committee chairs of the larger banks and building societies to discuss the institution’s progress relative to the previous year and to its peers.
- Working with the industry and its stakeholders to develop a single principles-based code of practice in alignment with the high-level principles now being considered by the regulators.
- Identifying and encouraging good practice in learning, development and leadership, with a particular focus on behaviour and ethics.
- Working with the professional bodies already active in the banking industry to increase the value placed on professional qualifications.
Helping the banks to meet the obligations being placed on them by new legislation, such as the Certified Persons regime.
The BSRC will face huge challenges, but it simply cannot fail; the cost of banking misdemeanours is simply too great for all concerned.