Our high street banks have hit the headlines again. While George Osborne has laid out plans to ring fence the essential operations of our large High Street banks, Panorama has revealed that consumer trust in our banks is still at an all time low.
The purpose of ring fencing is to insulate the essential operations of our retail banks from the high-risk activities of investment banking and securities trading, addressing the “too big to fail” question which led to the bank bail-out of 2007-8.
Osborne’s proposal will require retail banks to hold more capital in order to absorb any potential losses. Consequently, in the event of a major crisis, a retail bank could be hived off and saved by the Bank of England, at much less cost to the taxpayer, while the investment banking arm could be allowed to fail.
While we welcome effective steps to avert a repeat of the last financial crisis, Osborne’s announcement has been met with criticism in some banking quarters. Stephen Hester, chief executive of HSBC, has warned that requiring banks to hold more capital could raise the cost of banking to the consumer. He has also pointed out that “creating a protected beast that the government would support” could encourage excessively risky strategies within the ring-fenced operation.
Does the real problem, therefore, boil down to the issue raised by Panorama: can we trust our banks? As John Kay in the Financial Tines argues, “the core problem is that banks have no intention of abiding by the spirit rather than the letter of any regulatory rules.”
The FSA must be well aware of this. Despite the introduction of its Treating Customers’ Fairly regulatory framework 2007, an estimated 10,000 complaints against our banks made each day. Almost 50 per cent of these complaints are upheld by the Financial Ombudsman and millions of pounds have been paid out in fines.
Panorama showed Financial Advisors operating more like salesmen and sharp ones at that, incentivised through bonuses and foreign holidays. In a number of instances, undercover filming revealed the advice to be inaccurate, misleading and in direct contravention of FSA codes.
Banks have been criticised for developing highly complex financial products that few people really understand and this has been identified as contributing, not only to customer dissatisfaction, but also to the recent financial collapse.
In a bid to counteract that, the Financial Services Authority is due to publish a Product Limitation Paper next week. This is designed to control the products on offer in order to protect consumers. While any measure to protect consumers is clearly welcomed, it is mis-selling that really must be stopped. After all, most of the fines have been as a result of bad selling not bad products.
The failure of the FSA to implement its Treating Customers Fairly framework successfully would seem to bear out the words of John Kay. Until banks are forced to abide by the spirit as well as the letter of any regulatory framework, no amount of ring fencing or product limitation seems likely to prevent the banks from misleading us and taking excessive risks with our money. Until then, they remain along way from regaining our trust.
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