Trust and the Banking Sector: RBS and Lloyds Make the Headlines Again
In Financial
Regulation Matters we have covered the story
of the disgraced GRG unit within RBS from the moment that the scandal was
publicised, and recently that case has taken a particularly disappointing turn.
In other news from the Banking sector, Lloyds have been forced to set aside
even more money to cover PPI claims made against them, bring the prospective to
total to more than £19 billion. In this post, we will assess these stories and
examine what they may mean for the continuing lack of trust that the public
have in the Banking sector.
Starting with RBS, the bank have been in the midst of a
number of legal claims regarding the conduct of its infamous GRG unit, which
was set up to ‘help’ Small and Medium Enterprises (SMEs). Last month the bank
managed to fend off
a claim from a Real Estate group regarding the mis-selling of interest rate
swaps and manipulated interest rate benchmarks, and a couple of days ago managed
to fend
off a claim in the High Court from an SME regarding its treatment via the
GRG unit. Yesterday, however, came the news that many affected SMEs were
dreading, in that the FCA are to take no
disciplinary action against RBS for the conduct of its GRG unit. In
explaining the FCA’s decision, CEO Andrew Bailey stated that the regulator lacks
the powers to take action, although this was followed by the statement that
the lack of action does not condone the actions of the GRG unit. Bailey
suggests this based upon the understanding that whilst the FCA does have the power to punish senior
management within banking institutions, those powers only came into force in
2016 and could therefore not
be used retroactively. This decision falls in line with many other legal
conclusions that suggest that whilst the GRG unit was clearly deficient when it
came to standards, there was little in the way of overtly illegal action. This
is the viewpoint put forward from a number of avenues, despite the damning
report that RBS fought to keep from the public, and revelations that include
leaked memos that declare that GRG were advising its staff that ‘sometimes you
have to let customers hang themselves’ and ‘missed
opportunities will mean missed bonuses’.
This has led, understandably, to considerable backlash since
the news broke that the FCA would not be taking action. Nicky Morgan, Chair of
the Treasury Select Committee, immediately stated that ‘it
will be disappointing and bewildering for those who got caught up in GRG’s
actions that the FCA is not able to act. This demonstrates the need for a
change in how lending for SMEs is regulated’. Affected customers have also
been quick to voice their anger at the announcement, with one customer stating
that ‘the
Government have got to get a grip’. So, whilst RBS celebrate the findings
of the High Court and the FCA, the question is what will be the effect of these
continuing scandals that are going without punishment?
The actions of RBS are rather remarkable when one takes a
moment to look at them. Not only are the bank attempting to close the compensation
scheme and cap it at £125 million, despite the investigation into affected
customers not being complete (only 10% of customers who
may have been affected have come forward), but the bank is continuing the
usage of the term ‘legacy’
to distance the bank from its previous actions. Sir Howard Davies, the Chairman
of RBS, stated that ‘we
await the publication of the FCA’s full account and will reflect carefully on
its findings to learn any further lessons from what was a hugely challenging
time for the bank, its customers and the wider economy’. The tragedy is
that the ‘challenging time’ for the bank was supported by the British taxpayer,
and for the victims of GRG and the wider economy, those ‘challenging times’
continue to this day.
The trust that the public have in the banking sector is
incredibly low, and this is because the rate of scandals that are emanating
from the sector is showing no signs of abating. Over at Lloyds Bank, who are having
massive issues with their own version of GRG (albeit via the purchase of
HBoS), it was announced today that the bank have put
aside another £550 million to cover claims for mis-sold PPI. Although the
bank announced this alongside strong financial figures – a pre-tax rise in
profits of 23% to £3.1 billion in six months – the figure of £19.2 billion as a
prospective figure for PPI compensation is difficult to ignore. It is also
worth noting that this figure represents the highest figure for all British
banks and the compensation due to customers who were mis-sold PPI, The bank,
rather predictably, avoided commenting too much on the extra provision, but it
is a damning development for the culture within the bank – although, obviously,
the bank will be quick to write this off as ‘legacy issues’.
In reality, these are not ‘legacy issues’. In fact, they are
representations of a culture that has persevered throughout one of the largest
financial crashes in modern history. Yes the banks are not able to perform in
exactly the same manner, but the sentiment
the banks still display when treating the victims of their transgressive
policies ‘with
contempt’ is truly remarkable. It often goes unsaid that banking does not
have to be like it is, where the actions of the banking companies are almost
adversarial to everybody else but themselves. The trust that the public have in
the sector will have been damaged significantly during the Crisis – this we
know – but the way in which the banks are dealing with the post-Crisis era is
arguably much worse. To transgress is one thing, but to take such an
adversarial approach when it has been proven
that one did wrong is something which can damage the future relationship
between the public and the sector irreversibly. However, there is a
counter-argument to this, and that is that relationship between the banking
sector and the public is absolutely irrelevant. It is perhaps the case that
people would like that relationship to mean something, but from the perspective
of the leading banks there is very little to suggest it is the case. One may
argue that a breakdown in trust on behalf of certain banks, say RBS, would
damage their reputation, but in reality it is riskier to deal with the smaller banks since the Crisis, despite
deposit protection schemes. The Crisis taught us all that the larger the bank,
the safer it is, so why would the banks care about the relationship with the
public? It is worth debating, but it is certainly the case that the ‘regulatory
capital’ argument no longer applies – the banks have been called ‘too-big-to-fail’,
but perhaps it is more the case that they are ‘too-big-to-care’.
Keywords – Banking, RBS, Lloyds, UK, FCA, Business, @finregmatters.
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