Lord Turner, chairman of the Financial Services Authority, gave a speech today at Bloomberg on “Banking at the cross-roads: where do we go from here?”. The speech can be read here.
“Two weeks ago the Economist front page headline was ‘Banksters’. When a respected magazine, read throughout the world, suggests that banking is riddled with malpractice, its ‘credibility shot’, trust evaporated, we have a major problem”
Lord Turner analysed:
- what he perceives as the three key drivers of declining trust in the banking system (harmful economic impact, poor values and disregard for customers’ interests); and
- why banking is different from other sectors of the economy,
and then looked at the implications of that analysis for “prudential policy, for industry structure, for conduct supervision and, most crucially, for the management and boards of banks”.
Whilst acknowledging the progress made in changes to prudential rules and macro-prudential approach since the start of the financial crisis, and the importance of structural reforms on the Vickers Commission model, Lord Turner drew particular attention to the needs for cultural change in banks:
“There is no value in beating about the bush. Unless management and boards themselves shift the tone from the top in such specific ways, and in addition make effective controls against dishonest behaviour the highest priority throughout the organisation, then we are not going to change the external perception of bankers which led to the Economist headline”
And to “a central problem in UK retail banking”:
“But one important barrier to competitive entry into UK personal sector banking is obvious – the fact that the core product, the current account, is usually given away for free, sold at below cost of production. Which means that it may be difficult for a new entrant to make a business plan stack up unless they assume the sale in some future year of high margin ancillary products – products which if we are not careful may be for both the incumbents and the new entrants, the next PPI. UK personal sector banking has for years achieved reasonable overall profitability on the basis of large cross-subsidies between different customer segments: many who stay in credit get a good deal, subsidised by others who pay though, for instance, unauthorised overdraft charges and PPI insurance premiums. It is not a sound basis for a long-term trust-based relationship between a competitive banking system and its customers.”