Changing banking for good: aspiration or opportunity?
The possibility of jail for miscreant top bankers has hit the headlines following publication of the Parliamentary Commission on Banking Standards final report Changing banking for good. However, the document is a compendium of all that is considered wrong with both banks and the regulator as perceived by its eminent committee members, writes Roger Davies, principal consultant, ea Consulting Group.
We must, of course, await the response of the Treasury to see which recommendations will receive government support. The early signs are positive with talk of a ‘very impressive’ report but politically it would be suicide to imply otherwise.
Although the likelihood of conviction for reckless behaviour should a bank fail is thought remote, the Commission has made it clear that it believes existing corporate governance is poor. A short term sales culture has dominated the sector and the Commission believes a profound change is necessary to deliver appropriate customer-centric policies and a new banking ethos. This will not be easily achieved and shareholders anxious for dividends will be equally alarmed at any prospect of lower profits.
With the cost of PPI and IRS mis-selling compensation likely to exceed £15bn, banks will not need reminding that they must review all of their sales processes and product portfolios to minimise the risk of future mis-selling scandals. Regulation has in many ways become the enemy of face-to-face advice. Increasingly we will see automated online or non-advised processes to help minimise the cost of compliance and to reduce reputational risk.
The Commission has stressed that those who design and market products should be held responsible if these products are mis-sold. Banks will have a duty to ensure that their products are not sold to the wrong customers and flaws in design may, of course, not appear for some time after launch (eg IRS, guaranteed bonds). Banks and supervisors will need to create accurate MIS and dynamic databases. Banks will also be looking closely at reward structure and staff incentives extending the comprehensive monitoring of investment advisers to all sales staff, ideally on a common platform. In the aftermath of PPI mis-selling, consumer groups will claim that this new level of governance is long overdue.
Without doubt, all banks will find it very difficult putting the sales genie back into the bottle. Seller behaviours will not change overnight but they must be made immediately aware and constantly reminded of the standards set and the penalties for non-compliance. The imbalance of information between banks and their customers can only be rectified by the greater use of technology and by communication in the vernacular.
Senior bank executives will be desperate to ensure that their staff live up to the promises in the new customer charters. To this end, we can expect that future IT change programmes will be given added impetus by a new focus on improved customer service rather than the current sales bias. It is clear that staff training must improve with a greater understanding of product complexity and risk. Flexibility suggests that this will be delivered online with the training platform also responsible for regular testing of competency.
Financial capability is still in its infancy in the UK. However, there is scope for banks to educate their more unsophisticated customers online on an interactive basis. In general, we can anticipate more bank expenditure on mobile offerings and in the exploitation of social media.
The Commission is keen on the creation of new challenger banks and support for alternative providers as competition should deliver cost and service benefits to the consumer. It recommends that the major banks come to a voluntary agreement on the provision of basic bank accounts within a year or be subject to a new statutory duty. Portability of account numbers is being championed to ease bank switching and the Payments Council now sees value in developing a common utility platform. It remains to be seen if competition (such as Metro Bank) and the need for vastly improved customer account intelligence will force the main banks to update their legacy IT systems believed by many to be unfit for purpose. The new senior persons and licensing regimes, if adopted, will add red tape and require additional IT support for HR functions.
Many IT consultants will be rubbing their hands with glee at the thought of implementing the numerous recommendations in Changing banking for good. However, although the Commission states that the risk of exodus should be disregarded, many believe that the Treasury for fear of regulatory arbitrage will not adopt any major changes until the Vickers reforms and ring-fencing commence in 2019.