Banks have to move fast to restore faith

The country’s financial institutions are getting a good kicking — perhaps deservedly so.

Calling them out as pantomime villains is the easy part.

How best then to start undertaking the task of fundamentally rebuilding them as viable organisations with real futures in an industry where the competitive landscape could be set to undergo huge change?

Let’s start by agreeing that our banks are not out on their own when it comes to the mistreatment of the customer base.

Energy companies, phone companies, transport entities, so many have acted as monopolistic purveyors of
indifference and misery, though in recent years this has started to change as investments in broadband and new equipment start to pay off.

Elsewhere, the picture has been less gloomy.

Irish grocery retailers have by and large done far better — hats off to Feargal Quinn and to Dunnes Stores.

Our stores have been transformed in appearance. Irish prices are higher than in nearby countries, but given our size and location, they are hardly excessive.

The country’s top food entities, Kerry Group in particular are now global players, having got there through hard graft & tight customer focus. This in turn can be put down to a focus on management development.

The world of air travel has been transformed, with Irish CEOs leading the way.

But somehow the country’s banks appear if anything to have moved in the opposite direction — away from their customers — over the past few decades.

A poisonous, short-termist sales culture has been allowed to emerge within these organisations, one where greater and greater financial rewards have been diverted up to a relatively small cadre of top CEOs and salespeople.

Ireland is not alone. Our nearest neighbour has suffered in a similar way. Indeed, customers, if anything, have been treated in an even more cavalier fashion — witness HBOS’ treatment of owners of many smaller businesses.

The Centre of Business Research at Cambridge University has recently published a report on how UK banks have been responding to the financial crash and to a series of scandals that have followed in its wake.

Co-authors Ian Jones and Michael Pollitt have delved deep into a number of high-profile banks including Barclays, Lloyds, TSB and Santander. The picture they paint is a fascinating one.

They point out that several interviewees traced the 2007/8 meltdown to the 1986 financial deregulation known as ‘Big Bang.’

As a result, the City of London was transformed, freed up to compete as a global player with a massive infusion of US capital in particular. But with the American money, came American high pitch selling.

Across the Irish Sea, a not dissimilar change in business culture was being engineered by an upsurge in US foreign direct investment, with an early focus on manufacturing. Larger Irish professional firms became ‘Americanised’ almost overnight.

At this point in 1986, UK banks started to hire sales managers from outside to create and sell financial products. This resulted in a wholesale change in the culture culminating in the crash.

Fast forward to the aftermath of the meltdown and we have a sector in ‘beaten docket’ mode, though some CEOs found it hard to feel the shame that so many demanded of them.

Barclays CEO Bob Diamond saw little reason to bow and scrape or rein in his remuneration. His bank after all had avoided the embrace of the State unlike peers RBS and HBOS.

But a further wave of scandals engulfing Barclays, HSBC and others has meant that these banks too have had to embrace transformation.

Over the past 20 years, the pressures of change has largely been born by employees and customers, particularly the elderly and more rural, through branch closures and back office efficiencies.

However, the sense of disgrace caused by scandals around Libor rate setting and the misselling of payment protection insurance has enforced more fundamental changes in internal work cultures.

Barclays commissioned a major external review of its business practices by Sir Anthony Saltz, who carried out over 600 interviews. Salz made 34 major recommendations as part of a reputation rebuilding exercise.

One key focus was compliance. 45,000 hours of training was provided to over 1,500 compliance and financial crime staff. Annual staff turnover in compliance halved to 18% as a consequence.

In 2013, a board reputational committee was established to oversee a programme of cultural change. An internal ‘speak up’ hotline was established.

Meanwhile, TSB was hived off from Llloyds Bank along with 600 branches following pressure from the Competition Authorities.

Lloyds itself has paid over close to £25bn in compensation to customers over the PPI scandal.

A new rewards policy has been put in place at TSB. Emphasis is placed on performance in customer service with key metrics beign developed.

Management are rewarded for ‘sustainable performance.’

At Bank Santander, a key industry ‘disrupter’, the focus was on heavy selling with the aim of netting current accounts . The bank has moved to simplify its product range.

A new programme is focused on employee conduct towards customers, their ability to handle complaints, whether unsuitable products are being sold and whether customers are being enabled to make informed decisions.

Progress then, but the authors of the Cambridge study believe that more needs to be done.

Up to 2008, there was too much focus on growth at the expense of underlying profitability. This has changed in many, but not all areas.

Witness the heavy selling aimed at students. More work is required on the remuneration front where very generous packages are still the norm despite pressure from shareholders.

One idea is that executive contracts should stipulate that bonuses would be returned if long term performance fails to match that in the short run.

There are lessons in all of this for this country’s banks which, however, must operate in a much more limited space, geographically and financially, after the years of reckless lending.

Irish banks are still working through the damage to customers caused in the period up to 2007. Spreads between lending and deposit rates remain exceptionally high. Some of the bad old habits have not disappeared.

Could a new generation of top executives such as Bank of Ireland’s new CEO, Francesca McDonagh, untouched by the legacy of the domestic bubble, initiate the sort of internal revolution demanded by the citizens?

Our banks could draw on the experience of some Continental institutions which have remained closer to their communities.

Progress is being made in tackling the mountain of bad debt, but new disruptive competition is emerging.

The current leadership will have to move quickly to restore the faith of customers, particularly that of a younger generation which may be increasingly tempted to move elsewhere.


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