Self-regulation – the myth of the Banking Standards Board

Beware when industry and trade bodies take it upon themselves to police their own behaviour. It won’t work. If they didn’t do it because it was the right thing to do why would they start when they have appointed an organisation made up of themselves to do it for them? The Banking Standards Board was a disaster from conception.

Set up by the banks it was intended to re-establish the trust of the clients in their banks by creating a set of standards. You do have to ask if that was not an invitation to reinforce the cabal that banks already have. Cartels do not work to the benefit of consumers. But the idea that banks should behave decently is neither novel nor exceptional. The difficulty is getting them to do so. A set of rules to make the playing field level seems a reasonable approach.

Look at some of the record. Goldman Sachs paid US$5.1bn two months ago because it had mis-sold mortgage-backed securities. More recently Spain’s Bankai dished out €2bn to investors who were mis-sold shares in its unhappy flotation. Shortly after that Lloyds Banking Group set aside €2.1bn to compensate customers who were mis-sold payment protection insurance. RBS has yet to pay for fraudulent repackaging of mortgages pre-2008. Altogether more than £30bn has been set aside in UK for its Payment Protection Insurance plan.

There are many more claims, fines and penalties. These are not fly-by-night institutions; they are at the heart of the world’s financial system. One is a leader in its field notwithstanding that it calls its clients ‘muppets’. (If I was Kermit I’d sue.) A senior banker from another once described his clients to someone I know as ‘clueless peons’. Lloyds and RBS are also businesses of substance that we trusted to look after our money. They failed.

When the regulator is paid for by the players and the weight of evidence to suggest wrongdoing is collected only from the players themselves there is no hope of discipline being enforced. The Banking Standards Board has worked hard on totally the wrong things. It has asked all its questions of the ten banks it approached, and their employees, but not a single question of a client. You may think that strange; I think it is symptomatic. It reaffirms customers’ beliefs that banks are in it for themselves and seldom for their clients. If you asked your boss “do you think you are doing a fine job?” would s/he answer ‘no’?

Let’s face it, trust has gone. Not from every individual. There are many in finance who we still trust and must trust if we are to be more than detailed accounts clerks. The appearance of the Chief Risk Officer (fall guy?) on bank boards merely confirms that trust of the institutions is dead. The Banking Standards Board merely fans the flames at the cremation.

Like you, I was under the misapprehension that the world was governed by its politicians. If they still believe that, it is time they demonstrated their power by disciplining the banks.

If they don’t we are in for one hell of a mess.