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The Chancellor of the Exchequer, George Osborne, has left banks in no doubt that “2013 is the year in which we reset our banking system.” In a speech delivered at JP Morgan in Bournemouth, the Chancellor set out his stall for a reform of the banking system and of its regulators. We have previously written about the effects of a toxic culture within the banking sector but if the results of this speech are as wide ranging as the speech itself then we make no apology for writing again.
In one of the starkest summaries of the crisis that we have seen, George Osborne said that:
“No-one saw it as their job to monitor risks across the whole system.
So no-one spotted the increase of debt.
Staggeringly, total debt reached five times the size of the entire economy.
The fire alarm was ringing when Northern Rock handed out 120 per cent mortgages.
The fire alarm was ringing when the Royal Bank of Scotland made its reckless purchase of ABN AMRO, after the credit markets had already seized up.
The fire alarm was ringing, but no-one was listening.
And when the crisis hit, the fire was then so great that the whole economy was sacrificed to put it out.
Ten per cent of the entire wealth of this country was lost.
Hundreds of thousands of people lost their jobs and their livelihoods.”
From April the FSA hands over responsibility for the regulation of the banks to the Bank of England with the new Financial Conduct Authority (FCA) stepping in to regulate markets. But these regulators will be presiding over institutions which are heading straight for compulsory breaking up unless the internal cultures and processes are radically reformed.
The Banking Reform Bill which has also been introduced into Parliament this week sets out a number of reforms, chief among them being the ring fencing of high street banking activities, thus divorcing ordinary deposits from the more risky investment arms of banks. The Chancellor has left bankers in no doubt that this ring fencing means that in future no bank is too big to fail and with high street processes protected, if a bank fails, then it fails.
Whether this decision will have the desire effect or whether traders will still continue to play fast and loose with investor’s money is a matter for conjecture but if the recent Barclay’s statement on ethics and conduct is followed across the industry then banking is in for sweeping cultural changes. Certainly George Osborne is expecting these changes. He has said that “the change to the culture and ethics of banking go beyond bonuses and fines.” He believes that we need to instil proper professional standards and has “asked the Parliamentary Commission to look at how to improve the professional standards and culture of the banking sector.”
Ironically, Mr Osborne has compared the standards required to those evidenced by doctors and lawyers, perhaps not a particularly timely comparison given the recent report into the North Staffs NHS Trust failings. However, adding ethical training into banking exams or training will only work if the culture change is lead from the top. And the change required goes far deeper than simply asking for a change in attitude or reminding employees that fixing Libor rates is illegal. There is no point in asking employees to behave ethically if failing to reach performance targets means their jobs are still on the line.
So, to succeed and meet the Chancellor’s aims means not just a cultural change but a deep seated innovative change throughout every banking department. This means changing the branch banking culture which puts employees on formal report if they fail to sell a set number of products or secure a set amount of investment, it means decoupling targets from pay and it means rewarding long term gains not short term hits. It will not be an easy change and will require everyone from top managers to team leaders to stop managing by target and fear and start rewarding engaged employees who work for the benefit of the bank, its customers and the wider country. But as George Osborne says:
“Our country has paid a higher price than any other major economy for what went so badly wrong in our banking system.
The anger people feel is very real.
Let’s turn that anger from a force of destruction into a force for change.
Change that will give us a banking system that will work for us all.”