Men, Money and Morality – can it work?

You wouldn’t expect large numbers at a public lecture, on the evening of a World Cup semi-final. So I was astonished to find myself in the company of 1,200 people at St Paul’s Cathedral on Tuesday 6 July to hear Niall Ferguson’s lecture on Men, Money and Morality: How Can Trust in Banking be Restored?

The lecture was organised by the St Paul’s Institute, recently re-launched by Giles Fraser (Thought for the Day regular and the least vicar-like vicar you will ever come across).

The lecture marks the launch of Ferguson’s book, a biography of Siegmund Warburg that describes how he had to flee Nazi Germany and managed to re-establish his merchant banking business in London. The lecture focused on Warburg’s astonishing influence on the City of London, bank regulation and the management of banking and finance in the City.

Ferguson argued in the lecture that Warburg’s strong moral sense was essential to Warburg’s culture and central to establishing ‘relationship banking’ based on fundamental values of fairness, honesty and decency. Ferguson went on to argue that the City now needs a new generation of financiers who are educated in ethics and have a sound moral base to the way they work. He went on to argue that the swathes of new legislation that the US and EU are bringing in to regulate banking more tightly are doomed to fail without this strong ethical framework in financial institutions.

Ferguson’s argument was passionate and the insights into Siegmund Warburg’s life were fascinating. But his argument is unsustainable. While an appeal for greater ethics training has its place, it is not enough. How many of the bankers that presided over the recent crisis consider themselves devoid of morality or ethics?

Ferguson is right to be skeptical about the legislation direction, but is completely wrong in arguing so strongly against it. What we have seen from GoodCorporation assessments is that in areas of complex products where the regulator is always on the back-foot, principles based regulation is the answer, not lots of rules, which can easily be circumvented.

What we need now is new legislation that empowers the regulator to regulate properly. Take the example of ‘treating customers fairly’. This is a sensible principles based regulation, with woefully inadequate and wrongly directed backing. This type of legislation should be used to ensure that banks do not over-lend and ensure that the products provided to customers are tailored to the customers’ true needs, not the banks’ current sales targets.

The TCF regulation requires an intelligent regulator to review how banks sell to customers and to have the courage to make a judgment about whether sales are made fairly. Instead we have a regulator who asks banks for “management information” about how they make their sales, and the banks comply by sending the FSA lorry loads of paper.

This type of intelligent regulation will require money and very good people – with an independent mind. We therefore also need to address the current conflicts of interest where bankers are sent to the regulator for a spell before returning to the banks. We actually need to develop a set of professional regulators who remain independent. They should get their real banking experience at the banks’ expense. They should be auditors with courage, conviction, knowledge and power, with the courage to make judgments about how banks operate.

Of course Ferguson’s appeal to better moral and ethical standards is important and could be a part of the solution to the banking crisis. But the real answer we are seeking is strong, independent regulation and quickly please!