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Banking: All eyes on conduct


Published: 24 Aug 2022

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The banking world is moving into a recession-proofing mode at a time that rising interest rates are driving up bank’s income but the UK’s consumers and businesses face 18 per cent inflation forecasts.
Imagine back two decades. It’s 2002. Defence spending is soaring amid rising geopolitical tensions, technology stocks are getting pummelled and strikes are halting London’s tube network. The only constant in life is change…isn’t it? 

Now imagine this 2002 scenario. It’s a Saturday afternoon. You're queuing to buy your favourite band’s new CD in your local HMV store. Your debit card is declined unexpectedly. You queue at local bank branch to investigate but the clock’s ticking. You want to grab a cab home before the taxi queue gets too long and collecting your Saturday takeaway in-person will also mean joining another queue! 

A lot has changed in the past twenty years in the world of commerce, food, taxis and most of all banking and thankfully one way is a lot less queueing. Much of the difference in banking today vs in 2002 is experiential with smartphones and software now core to the proposition. But below the surface the change is even more pronounced.  

In 2002, bankers could not put a foot wrong and yet the seeds of the Great Financial Crisis were being sown by dire conduct by individual bankers as well as by banks themselves as institutions that would not be allowed now.  

Today, however, the importance of good banking conduct is back in the spotlight as we increasingly fret over a potential recession or - as JP Morgan’s CEO put it recently - “something worse”. 

Dear CEO 

The banking world is now stealthily moving into recession-proofing mode as interest rates are rising which can help them drive up income but also suggests a period where paying back debt will become tougher and more expensive. 

The UK’s financial regulator the Financial Conduct Authority, is clearly concerned about the matter.  It recently wrote to bank bosses in a 'Dear CEO' letter where it expressed that lenders must support borrowers as the cost of living crisis escalates. 

“As consumers across the country are affected by the rising cost of living it is critical that lenders meet the standards we expect to support their borrowers, including those in financial difficulty,” said Sheldon Mills, executive director of consumers and competition at the FCA, and author of the letter. 

The FCA is expecting to see higher demand for credit in the coming year while rising interest rates, and lower disposable income, may make borrowing less affordable, or even unavailable, for some.  In addition, lenders will also see a wider group of consumers in financial difficulty, who will find it harder to pay their debts.  

“Some of these consumers will be in vulnerable circumstances or may be experiencing financial difficulty for the first time. Firms need to remain alert to the changing situation of their customers and target their efforts in response,” the letter said. 

Mills goes on to say consumers that are least able to bear the rises will likely be hardest hit.  

The regulator clearly delivering the fresh guidance as many banks will be increasing staff numbers in order to help with anticipated rises in mortgage and loan delinquencies. 

Rich Wagner, founder and CEO of Cashplus Bank, says the FCA is aware that in the past older, larger banks have not always acted in ways to their customers that could be considered fair. 

“Ultimately what the regulator is trying to encourage is good outcomes and fair treatment for customers. This is something the whole industry should support but clearly hasn’t always been delivered by the legacy banking system,” he said.  

Culture wars 

How best to do this? During the 2007/8 financial crisis era banks were fewer in number with around 10 ‘high street’ names. Today there are dozens and dozens of new banking challengers thanks to the boom in fintech start-ups over the past decade.  

Are there practical steps banks can take to move on the advice from the regulators? 

“Of course, there are regulatory tools that can be applied in the conduct area but my view is that these are as much issues of values and culture as they are of compliance,” Wagner said.  

Wagner says the potential risk of a return to poor behaviour from banks can examined when looking at the last few years’ of Covid as a recent test case.  

“Clearly a lot has changed since the financial crisis, much of that due to regulation, but also thanks to the fintech revolution and the creation of some competition in the market,” he said 

“This is a real positive change but there is still a long way to go due to the scale and systemic nature of the UK’s legacy banks and we certainly continue to see certain segments of the market being poorly served, which is where we and other digital challengers can make a real difference,” he said. 

One example of this is the treatment of SME customers, who were in the early days of the pandemic most hit by lockdowns, only to be supported to the tune of c.£87bn by government backed lending schemes. 

“Many high street banks withdrew from offering new business current accounts during the pandemic, just when people needed them most. This is where challengers who really understand the customers that high street banks aren’t interested in can step in and deliver the better customer outcomes that the regulators want,” Wagner said. 

Now, though, the effects of lending schemes are wearing off with cash largely spent by firms facing an oncoming potential recession. 

In terms of SME collections, the market has been significantly distorted by the Bounce Back Loan Scheme and other Covid-related programmes, Wagner says. 

“The programme was well-intentioned but clearly there are now significant issues with the levels of defaults and fraud being reported and, from a conduct point of view, there were clearly some practices that were not delivering the best customer outcomes, such as providers appearing to sign up customers with the promise of a Bounce Back Loan and then not delivering on that promise,” he said. 

Lessons from 2008 

While technology has revolutionised banking in terms how we interact with our bank and money, the lower barriers to entry and more competitive field has also ushered in a different cultural landscape to banking that has spread out beyond the fintech ‘avant garde’ and into the biggest institutions. 

The Great Financial Crisis is the real causal reason for this, prompting the public to ask more from not only the user experience of banking but also how they are treated as customers. 

One of the most prominent of this new group is Starling Bank, set up in 2014 by an ex-banker Anne Boden, who said she had become “ashamed to be a banker” in a recent interview in the Financial Times during this period of fixation on banker bonuses while the whole system appeared to be melting away. 

Starling, which has consistently come out on top in customer satisfaction surveys as well a being one of the most switched to banks, recently announced its first full year of profitability. It has three million customers and now employs nearly 2000 people. 

Declan Ferguson, chief financial of Starling Bank, says the Great Financial Crisis offered up an important lesson for the place of banks within society. 

“One of the interesting lessons of the GFC was that it exposed how a lot of the thinking that had been going on in the banking and finance world was of no relevance or use to customers, particularly at a time of crisis,” he said.   

If the recent the ‘Dear CEO’ letters to banks do nothing else, Ferguson says, they remind us - indirectly - of the disconnect between banks and their customers during this period and the need to bring the focus back on customer outcomes.  

“Back then it was bank failures that spread economic havoc. This time it’s the reverse. We face economic turmoil and it’s up to the banks to respond by putting themselves in the shoes of their customers,” Ferguson said.  

“At Starling, we’ve always started with customer needs and worked backwards from there. That’s how our processes are built and that’s our mindset. If you start thinking in terms of ‘staying onside’ with the regulators and your public image, rather than doing the right thing, you’ve already failed the customer,” he added. 

There is no doubt of the growing peril for both consumers and business. We are see rising arrears in unsecured loans and credit cards with the likes of Equifax expecting this to translate later this year or early next year to mortgage payments.  

The origins of the 2007-8 banking crisis, according to a government report from 2009, “were many and varied, including low real interest rates, a search for yield, apparent excess liquidity and a misplaced faith in financial innovation.” 

Fast forward 13 years and good conduct in the provision of banking service is now recognised as essential for people and the society’s wellbeing. Whether this holds true over a worsening economic outlook is the financial industry’s biggest test in a generation.