It's time to be bold with the banks
The 2008 financial crisis tested our faith in the stability of Britain's banks and the reckless lending decisions made during the financial boom with Royal Bank of Scotland and HBOS (merged into Lloyds) attracting the most opprobrium. So, it is remarkable to find that four years on, the banks have learnt little of the lessons of the past few years.
The Parliamentary Banking Commission, drawn from both the Commons and Lords and chaired by Andrew Tyrie MP, will have plenty to deal with. The primary focus of the Commission is the Libor scandal that has already claimed the heads of the two top executives at Barclays, Bob Diamond and Jerry del Missier.
The person temporarily relieved by the fuss must have been Stephen Hester, the chief executive of Royal Bank of Scotland, as it shifted the focus from RBS's system meltdown, that left millions of people without access to their bank accounts, to something that looks even more sinister.
If this were not enough, Britain's most trusted bank and Europe's largest, HSBC has had its own share of troubles. An excoriating report by the Senate sub-committee on investigations in the United States found that its American branches had been engaged in widespread money laundering. Among the allegations, for which the bank has apologised, is that it engaged in covering up money from drug cartels as well as handling funds from al-Qaeda and other terrorist groups.
‘Bankers have lost their ethical moorings’
HSBC, that operates in Israel as well as the Arab world, is expected to have to pay a $1 billion fine to the US Department of Justice.
At times it seems that none of our banks are to be trusted. No sooner has one scandal, such as the Payment Protection Scandal (PPI), been and gone, then another comes along.
The bill for PPI mis-selling is rising and has now reached £8 billion. Among the reasons that banks are so enthusiastic about selling extra products, such as PPI and debit cards with extra services to consumers, is to offset the costs associated with free current account banking.
Lord (Adair) Turner, the current chairman of the Financial Services Authority (FSA), and one of the leading candidates to replace Sir Mervyn King as governor of the Bank of England, is urging an end to free banking and genuine competition among the banks for customers based on service provision and low pricing.
It is not just ordinary households that suffer from the efforts to load customers up with products that they do not need. The big four high street banks: Barclays, HSBC, RBS and Lloyds, together with seven other lenders currently are under investigation for allegedly wrongly selling an estimated 28,000 loans based on complex interest rates swaps to small and medium-sized businesses up and down the land.
The loans were intended to protect the SMEs from loss, but when rates moved in the wrong direction many small firms lost out and some went to the wall.
The FSA is now investigating and fines are likely to be paid as well as compensation. There must be some suspicion - that with so much ethically questionable behaviour going on - that the banks, in their enthusiasm to make profits and earn bonuses, regard the prospect of fines for such errant behaviour such as Libor fixing and making dodgy loans to small businesses as simply a cost of doing business.
This suggests, as Professor John Kay observes in his July report on short-termism in the City, that the incentives are all wrong. Kay believes that the bonus system is out of control and unnecessary. He argues that many other professions, from public servants to surgeons, engineers and academics, operate effectively without a bonus structure, so why is the City different? If bonuses are to be paid, he believes that they should be in shares only and be received when people leave the company, so that they do not become a short-term objective.
Much of the blame for the short-termism and ethical lapses at the banks stems from the top. The Barclays board, stuffed full of the good and the great, behaved like nodding dogs when faced with Bob Diamond's pay demands including the settlement of a £5.7 million tax bill from the United States.
So grateful was the bank that Diamond had kept the bank out of the hands of the taxpayer in its darkest hour in 2008 (when fiddling of Libor rates was at its height) that it acceded to all the banks demands and ignored warnings from the FSA about practices - such as parking toxic assets offshore and off balance sheets - that it ought to have raised the ethical antennae.
Barclays is belatedly seeking to clean-up its act and has recruited City lawyer Anthony Saltz, who first came to prominence for his role as a legal advice to Guinness in its controversial £2.7 billion bid for Distillers (now Diageo), in 1986.
Saltz is to look at the bank's values and practices and determine whether staff are trained properly.
There is a view among senior policymakers, such as Adam Posen, an external member of the Bank of England's Monetary Policy Committee, that the reputation and effectiveness of British banks, as real supporters of enterprise and growth, won't happen until the present model of an industry dominated by four or five mega players is changed.
Some of this has started to happen with the proposed sale of 600 or so Lloyds Banking Group branches to the Co-operative Bank. But Israel's supporters might find that a little uncomfortable given the Co-op's boycott of West Bank goods.
Sir Richard Branson's Virgin money, with its emphasis on service; Santander (UK) that is reaching out to small business customers, and American finances Metro bank are all seeking to break the mould.
But something much bolder is needed, such as a break up of Royal Bank of Scotland and a dismantling of Lloyds Banking Group beyond the current planned branch sell-off.
Bankers used to be among the most trusted members of society. But the past decade has seen them lose their ethical moorings. The challenge is to clean up practices and create a competitive marketplace where households and businesses can enjoy real choice and competition.
Alex Brummer is City Editor of the Daily Mail and author of Britain for Sale