A report on the Culture of British Retail Banking

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Posted in:Banking and Finance|November 27, 2014 | Join the mailing list

 A report released on 26 November 2014 (which can
be seen here
) by the Think Tank New City Agenda and Case Business School collected and analysed all of the major policy documents related to the crisis in the banking sector following the financial crisis of 2008/9. The Report analysed multiple sources
of documents, background documents financial promotion and non-financial promotion. It interviewed "26 senior representatives from 11 retail banks. This included 3 of the 4 major UK banks (RBS, Barclays and HSBC), 3 medium-sized institutions (Nationwide, TSB
and Santander), and 5 well-known “challenger banks “(First Direct, Handelsbanken, Shaw Brook, Metro Bank and Virgin Money).

The report found:

1.                  An aggressive sales culture was a major driver of bank failure. This is in regards to the culture of employees being rewarded, significantly, for "aggressively promoting financial products, irrespective
of risk and customer need."  This resulted in risky and toxic loans, bad practice, toxic loan books and significant fines.

2.                  £27 billion of the £38.5 billion in fines imposed on the banks was "due to the mis-selling of personal protection insurance."

3.                  "Policy interventions addressed structural issues, but leave culture change to the Banks." This is an issue that Berg has regularly commented on. This Report backs up our assertions that too little is being done in
order to force banks into conducting their business in a way that is accessible by all.

4.                  "All banks have some kind of culture change process under way." They found that this was in regards to regulatory and policymaker pressure. It did find that in the larger banks the change starts at the top and has cascaded
down but small and medium-sized institutions "think they broadly had the right culture to begin with, and are now seeking to reinforce it. A number of challenger banks are seeking to change the industry culture by importing models from other industries."

5.                  "Culture change of major banks remains fragile."

6.                  But "culture is better in challenger banks."

7.                  "Many expect bad practices to continue”. In their interview and they found that many businesses would not be surprised if there were more examples of bad practice being uncovered.

8.                  Of particular importance in this Report is the finding that "improving culture will take a generation. An overarching conclusion is that it will take a generation to create a new culture in the UK retail banks. An aggressive
sales mind-set had been rewarded and reinforced across the industry for over a decade. Making significant progress will take 5 years. This is going to be tough… The bottom line is that the banks should have made significant progress with their culture change
initiatives by the 2019."

The report then made a number of recommendations. This primarily sets out how the Report views banks as needing to change and how the regulators need to consider competition and improvements in culture. The report states:-

"Regulators should be wary of ongoing restructuring efforts which may impress investors but result in heightened risk within the firms. Finally, Regulators should play a role in encouraging industry level culture change. Their role is to ensure banks do not
get distracted from delivering the changes and values they have publicly signed up to.

"The Report is very welcome but it reiterates what Berg has been saying for the last few years, including in our last 2 Banking Reports.  The Report tracks the significant changes back to the 1980s. It ties most of the damage to the aggressive
sales culture within the banking industry.

Is this good news?

We have made a number of comments in the last two years regarding the banking cultures. However one of the principal issues that we have identified is that the Parliamentary Commission on Banking Standards issued a damning report on 19 June 2013. The Report,
entitled "Change in Banking for Good" demanded that the entire regulatory and authorisation scheme under the Financial Services & Markets Act 2000 be removed and a new regime implemented. The Report could not have been more damning of the banks, and the culture
within banks. The Government responded very quickly on these points on 7 October 2013 confirming that it would implement the majority of the Commission’s recommendations. 

Berg has commented a number of times that the Government, whilst accepting all of the recommendations (or the majority) of the Commission’s findings, little has happened since October 2013. The Commission issued a new Report
on 28 October 2014 considering what amongst their conclusions and recommendations have been implemented. On page 5 of the 28 October 2014 Report the Commission states:

"The [Commission] concluded that the reforms to bank regulation already in train would be inadequate to eliminate fully the tax payer guarantee. They would also fail to remedy the underlying causes of poor standards and culture.

This reinforces what Berg has been saying for a long time and echoes what is said today in the New City Agenda Report. Banking needs serious changes. The bankers are not going to change this culture themselves. We would refer to the recent evidence given to
the Treasury Select Committee on SME Banking at which RBS gave evidence and had to send a letter to the Committee 8 weeks later admitting that it had been "mistaken" in some of the answers given. Panorama aired a programme on Monday 24 November 2014, which
featured Alison Loveday, Berg’s Managing Partner, during which Panorama highlighted that RBS were less than truthful in the evidence given. RBS believed that it was simply a small error and the gentleman that made the "error" Derek Sach received a £400,000
bonus from RBS.

If the Government will pay lip service to the implementation of the Commission’s findings, continued fines being imposed on banks for bad practices and SME customers and retail customers continually find that the bank’s act against their best interests
it appears to us to be time for the Government start taking tough action. The taxpayer has underwritten the bank’s bad practices (according to the Commission’s report). Many of the fines imposed are simply going to be paid for by the ultimate customer of the
banks. The bonuses have not changed and the Government even went to the European Courts to challenge a cap on banking bonuses. It is time for a change. These Reports have continually had the same themes over the last 4 years, but without any significant political
intervention to implement their findings. Without a top to bottom change in the banking industry we will be in the same place again in 10 years’ time.

For more information about any of the above or for practical advice on this or any other aspect of banking and financial disputes, please contact
Kalvin Chapman of the Berg Banking Litigation Team on 0161 829 2599 or email him at

You can also download our
2014 Banking Report
, which digs deeper into why the SME Lending Landscape is a scary place to be at the moment.

(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.) 

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