Has Banking Been Changed For Good?

In the wake of the Global Financial Crisis, the LIBOR scandal,¹ and a succession of mis-selling and other high profile banking conduct issues, the Parliamentary Commission on Banking Standards was established to investigate professional standards and culture in UK banking. Following nearly a year of evidence and analysis, the Commission’s final report, Changing banking for good, was published in June 2013. Finding that banking standards and culture needed to be significantly improved, the Commission’s key recommendations aimed to increase confidence and trust in banking by:

• Introducing a new Senior Managers Regime to ensure individual, senior executive accountability for decisions and standards in key areas;
• Reforming institutional governance and risk management to improve banks’ safety, soundness, and culture; and
• Enhancing competition to give bank customers greater choice and impose greater market discipline on banks.

Many of the Commission’s findings and recommendations were replicated by similar investigations and inquiries in other jurisdictions. Action at the international level, led by the Financial Stability Board, aimed to ensure the resilience of globally systemically important financial institutions, and financial stability overall. Ten years on from the Parliamentary Commission’s report, and 15 years on from the Global Financial Crisis, has banking been changed for good? In the UK, I believe the answer is a qualified “yes.” The Senior Managers Regime has improved individual accountability; holding much higher capital and liquidity buffers, UK banks are far more resilient to economic shocks, as evidenced during the Covid-19 pandemic; and competition in the UK banking market has increased (albeit the “Big 4” UK banks still dominate). Globally, however, I’m not so sure, and recent events have demonstrated that at least some parts of the banking system still face some significant challenges. In fact, in this digital age, confidence and trust can evaporate more quickly than ever before. As billionaire investor Bill Ackman recently tweeted “confidence in financial institutions is built over decades, but destroyed in days.” 

As recent events have demonstrated, risk can never be regulated out of the system. Banking as a leveraged industry will always have a reliance on prudence, appropriate risk management and making the right judgments. This is balanced with preservation of capital and the need for a sustainable economic return for shareholders. In my opinion, if we really want to make banks and banking stronger, safer, and more resilient than the prescription offered by Changing banking for good and similar initiatives, we must go further. All have failed to adequately address the key issue of culture; in particular, how to develop, enhance and sustain a culture of customer-focused, socially purposeful, ethical professionalism within banking.

The answer lies not in policy prescriptions or regulation, but in the re-professionalisation of banking. We want to see banks and banking led by boards and senior managers who are highly competent, experienced, and expert professional bankers, who understand that banking is unique in its ability to be a force both for societal good and, conversely, to impend much societal harm both locally and globally. We want to see regulation that recognises, enhances, and sustains professionalism in banking, and values and promotes banking professionals. And we want banking that focuses on the long-term rather than the short-term, with the objective of creating genuine, shared, sustainable prosperity for current and future generations.

At the time of the Parliamentary Commission there was much debate about whether banking was a profession or not, comparing banking with the likes of the law, and medicine. That rather missed the point, which is that banking should be a profession, and policymakers and regulators should be actively encouraging high professional standards and professionalism in the banking sector. In terms of the three classic tests of a profession:

•  There is a defined body of knowledge and skill required to be a banker. Despite increasing specialisation and the emergence of new areas, including digital finance and ESG, expertise in core banking areas such as Asset and Liability Management, credit, and risk management remain key — as events in 2023 have demonstrated.
• There is an asymmetry of information between banker and customer (not just in retail banking, but in corporate and investment banking, too) which requires bankers to have a professional duty to act in their customers’ best interests.
• There is a clear public interest in the practice of banking; supporting economic growth and the ambitions of individuals, households, and firms. Plus — as the events in 2008-2012 demonstrated — a need for substantial public support when things go wrong.

Evidence conducted by Ipsos shows that the public tend to trust professionals such as doctors and other medical professionals, engineers, and teachers.² They are perceived as experts, who put their patients’, clients’, and students’ interests before their own. Following the banking crisis, the Chartered Banker Institute Professional Standards Board (CB:PSB)³ sought to understand the level of trust in bankers. Unsurprisingly, it found that public trust was at its highest when individuals viewed their relationship with their individual banker/branch. The trust level lessened for individual banking firms, and reduced further again for the sector as a whole. The most recent Ipsos research, has shown that progress in building trust in the overall sector has stalled, whether this relates to greater digitalisation and/or the distance between individuals and their personal banker remains to be seen. However, a more positive picture once again emerges when consumers rate their own provider. 

The UK’s Financial Conduct Authority’s survey ‘Our Financial Lives-2020’, found that people generally have higher levels of trust in their own provider than they do in the sector in general.  What this means is that, if we genuinely want to have confidence and trust in banks and banking, then we need to have confidence and trust in bankers, but this can only come about when those employed in the banking sector meet professional standards as a matter of course, not by exception.

This isn’t an argument for self-regulation. Most professions — medicine, for example — are tightly regulated, but regulation and oversight are supported by a strong professional culture and strong professional norms. In banking, regulation and oversight does little to encourage professionalism; in fact, it often tends to reduce decision-making to a question of “… what does regulation require?” rather than “… what is right?”[See also The Peer Perspectives Article An Interview with Admiral Michael Rogers]

Banking has become all too often a culture of compliance rather than one of ethical professionalism. Whilst many more bankers now choose to be members of a professional body — the Chartered Banker Institute’s own membership has grown from less than 10,000 in 2012 to more than 35,000 in 2022, for example — they are still in the minority. Banking has changed over the past decade, but not necessarily changed for good.

Banking has become all too often a culture of compliance rather than one of ethical professionalism.

I’m concerned too that this lack of focus on building professional cultures and standards in banking leaves banks and bankers not as prepared as they should be for some of the current and future challenges impacting banking, business, and society. For example, addressing the Triple Planetary Crisis of climate change, pollution and biodiversity loss, and the challenges of technology, especially artificial intelligence.

In terms of the former, as the main provider of credit and lending, the investment decisions of banks and bankers can shape a successful, socially-just transition to a net zero, nature-positive world. The transition isn’t straightforward, however, and finance professionals will face many ethical dilemmas which will require professional expertise and judgment to resolve, not a “tick-box” approach based on regulation. Avoiding greenwashing — both deliberate and inadvertent — requires bankers to exercise professional scepticism, again based on professional expertise and judgment, not pass a checklist between departments. [See also The In Focus Article A Greening of our Ongoing Conduct and Culture Journey]

Similarly, the rapid deployment of new technologies, especially AI, raises ethical dilemmas on data, privacy and automated decision-making that need professional expertise and judgment to work through and ensure positive outcomes for customers and society.

Confidence and trust in banking overall haven’t improved to the extent necessary.

Professionals can — and will need to — play a key role in providing a ‘trusted source of truth’ to separate AI-generated content from the facts.

Yet, confidence and trust in banking overall haven’t improved to the extent necessary. This is, at least in part, because the majority of policymakers and regulators did not take the opportunity to work alongside professional banking institutes to re-build strong professional standards and a culture of professionalism in banking. For the benefit of wider society, we have to transform and champion responsible banking, so that it becomes the catalyst for a just transition and sustainable future for the next generation. We still have much to do, therefore, if we are to continue to change banking for good.