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What is banking for?

In advance of our event at the Bank of England on 21 March 2017, we asked interested parties to write on the theme: Worthy of trust? Law, ethics and culture in banking…

One of the most searching questions for any bank is ‘What are you for?’ or ‘What is your purpose?’. This question cannot be answered by listing the targets management have set, or by cribbing a line from neoclassical economics and claiming that the purpose of a bank is ‘to create shareholder value’. That, after all, could equally be said of any institution with shareholders: it is at most one among many purposes, and not the purpose of a bank. It is a purpose that many companies that are not banks share, and one that mutuals which provide banking services do not share.

Banks have many purposes, but they always include both corporate and public purposes. The corporate purposes of banks vary. For example, some make it their corporate purpose to provide retail banking services to a particular community or region; others are investment banks with multiple commercial purposes in many jurisdictions; others aim to provide specialised or ethically distinctive financial services. However, banks also have public purposes, such as enabling commercial life, providing capital for commercial and other purposes, or enabling long-term saving. These public purposes are the reason why governments, and ultimately taxpayers, give banks quite remarkable protections and privileges.

Banks (like other companies) are protected by limited liability: commercial life was very different before the days of limited liability, when an individual’s entire assets would be at stake and lost in the event of failure. Banks and their depositors also (unlike other companies and their customers) benefit from additional taxpayer-funded protection from the costs of failure. Public support protects depositors from the impact of bank failure (up to a certain level). Even more strikingly, publicly funded interventions protect banks themselves from some of the worst consequences of failure – even where that failure is in large measure caused by the action of banks and inflicts widespread damage. These publicly funded guarantees are hugely valuable protections. In return banks have duties to the public, who will bear much of the cost in the event of bank failure.

Some of these duties are spelled out in complex regulatory demands, but others go beyond duties of regulatory compliance, which other companies and institutions also carry. The quid pro quo of the distinctive protections given to banks demand more than compliance with the letter of the law and the fine print of regulation. They demand respect for the terms of a broader social licence to operate that banks must respect in return for the special protections they receive. This license demands that banks not take a caveat emptor approach to customers, or assume that it is up to customers to understand the minutiae of terms and conditions, or the risks created by complex financial products. The asymmetry of knowledge and capacity that is typical of relations between banks and their customers requires banking cultures that do not take advantage, but rather see themselves as carrying fiduciary duties to depositors, to borrowers, and to the public. These duties are a fair counterpart to the distinctive protections that societies and their tax-payers provide for banks.

Professor Onora O’Neill

Senior Managers and Certification Regime

Exploring how the SMCR - and especially Certification - can be implemented in the most effective way across the sector.

The Senior Managers and Certification Regime is a major regulatory change that will affect all banks and building societies. Responding to recommendations by the Parliamentary Commission on Banking Standards, the government and regulators have together developed a comprehensive framework to ensure better accountability and responsibility for behaviour, competence and culture in banks and building societies. The new framework provides an opportunity for the industry to focus on and demonstrate a culture of professionalism. We are working with firms and regulators to facilitate this, including areas where a common approach across firms could support both the objectives of the regime and the skills and development of the people covered by it.

Professionalism

Evaluating whether a more 'professional' approach to banking would improve behaviour and competence across the industry.

The Parliamentary Commission on Banking Standards found that 'banking culture has all too often been characterised by an absence of any sense of collective responsibility to uphold the reputation of the industry', and argued that a greater focus on professionalism could be an answer to this. Working with a leading team at the University of Leeds, we are researching the issues around professionalism in banking. In particular, we are reviewing how professional qualifications are currently used across the sector, and at whether a stronger role for professional bodies, along the lines seen in some other sectors, like medicine or law, would help raise standards. To inform this work and develop a rounded picture of 'professionalism' and what it means in banking, we are surveying banks and building societies, professional bodies and a wide range of other interested groups, including consumer bodies and investors.

Assessments

Providing an honest and impartial assessment to Boards of progress against objectives on behaviour, competence and culture.

The BSB assessment exercise presents Boards with an objective and impartial view of their firm's culture, identifying where things are working well and recommending areas for improvement. It draws on information not only from Boards and senior teams, but also from employees, investors (or members), trade unions, customer groups and other relevant bodies. In doing so, it will provide constructive challenge to each firm individually, while building a collective understanding of common issues across the industry, or sectors within it. We undertook our first annual assessment exercise in 2015 with ten firms (Barclays, Citi, HSBC Bank, Lloyds Banking Group, Metro Bank, Morgan Stanley International, Nationwide, RBS, Santander UK and Standard Chartered). The BSB itself will not publish individual assessment reports - each firm owns its own report - but key themes and messages will be set out in the BSB's annual report, the first of which will be published in Spring 2016. Given that Board engagement is central to the assessment work, only firms that have their headquarters in the UK are eligible for the full assessment exercise. All firms, including branches of firms headquartered overseas, will however be included in a focused membership-wide survey, which will allow each participating firm to benchmark itself against its peer group.

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HAS YOUR BANK FAILED TO RESPOND ADEQUATELY TO A COMPLAINT?

If your bank/building society has not responded adequately, or in time, to a complaint that you have already made, you can register your complaint with the Financial Ombudsman Service. Which offers a guide on consumer rights when taking a complaint to the Financial Ombudsman Service.

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ARE YOU CONCERNED ABOUT ACTIVITIES CONDUCTED IN YOUR INDUSTRY?

If you work in the financial services industry and are concerned about any activities conducted by your employer or any other firm or individual, you may find the Financial Conduct Authority and the Prudential Regulation Authority's guidelines on whistleblowing helpful. It explains what constitutes whistleblowing, and what procedures are in place to respond to blow the whistle and how your anonymity would be protected. Public Concern at Work, the whistleblowing charity, also offers support and advice to individuals and employers about how to report concerns and how to establish whistleblowing frameworks.

ARE YOU SEEKING AN INDEPENDENT FINANCIAL ADVISER?

If you are seeking the services of an independent financial adviser, Unbiased may be able to help, or if you are looking for more general financial guidance, the Money Advice Service may be a useful place to start.