A report in the Guardian this week suggested that misconduct has cost the UK’s banks and building societies £53bn in fines, compensation and legal fees in the last 15 years.
The article cites research published by think-tank New City Agenda, which claims that payment protection insurance (PPI) mis-selling alone has cost banks £37.3bn – around four times the cost of the 2012 London Olympics.
This dwarves the second-highest mis-selling scandal, involving interest rate hedging products, where provisions of £4.8bn were made by banks between 2012 and 2015.
What is the impact of banking misconduct on firms, shareholders and customers?
The New City Agenda findings report that if it wasn’t for the misconduct costs, the major retail banks would be ‘robustly profitable’.
Misconduct is therefore a costly mistake for banks to make. Not only does it impact their profitability as a result of financial penalties – it also has wider implications.
Banks that face misconduct issues suffer reputational damage and the broader financial ramifications of this. Their financial performance is not just affected directly by FCA fines and redress to customers, but can be severely impacted by poor brand image.
Firms with a poor reputation for corporate ethics will suffer in the marketplace as a result of negative press and poor consumer perceptions – as we outline in our blog on Why compliance is essential to your brand strategy. Lower profits, leading to reduced pay and bonuses for employees, and potentially to questions around firms’ very existence, are some of the tangible consequences of banking misconduct.
Banks that don’t perform well also cannot issue dividends to shareholders.
And of course – central to all of this; banks have a duty to deliver good customer service and to treat all their customers fairly (an important focus for the FCA, as this blog explains). Any form of misconduct goes against their basic regulatory expectations.
The New City Agenda report calls on shareholders to hold banks to account in terms of good conduct. Initiatives to raise professional standards and to make positive changes to corporate culture should be championed by shareholders, the report suggests.
Compliance is an issue for investment and corporate, as well as retail, banking
The report focuses on the retail market; it therefore doesn’t include scandals that have hit the investment banking industry, for example the rigging of Libor or foreign exchange markets. Investment and corporate banking firms, like their retail counterparts, have just as much need to deal with potential misconduct, and for the same reasons.
Reputational damage, shareholder action and the resulting impact on profits – not to mention the FCA fines themselves – should be enough impetus for all banks to revisit their current approaches to governance.
Driving out misconduct through a culture of compliance
Shareholder action and customers ‘voting with their feet’ may provide the motivation for change – but ultimately, banks themselves have the biggest role to play in influencing the sector’s culture. It’s down to the banks to take responsibility for their own conduct.
We have touched in the past on the need for financial services firms to take a more proactive approach to compliance. It’s something the FCA is very keen on, with many of their recent speeches, papers and reports sharing the underlying theme of compliance as a cultural given, rather than a bolt-on activity carried out by one department (often seemingly at odds with the aims of the wider business).
Building this compliant ethos throughout the firm is key to good governance and strong corporate ethics. Any firms that want to avoid being in the regulator’s sights in future need to make sure that they embed a compliance culture within their business.
Compliance teams need to work in tandem with Marketing, Sales and Operations. This will ensure that regulatory issues are addressed at an early stage, whether firms are looking at financial promotions, business development presentations or corporate processes and procedures.
It needs to be made easy to be compliant. Automated workflow systems that help with the production and approval of financial promotions; clear brand guidelines and easily-accessed corporate information that enable firms to communicate clearly and accurately with customers; product development processes that build in fair treatment at the start.
A useful feature of many compliance systems is their ability to provide detailed reporting. This management information is a valuable means of monitoring compliance activity. It can identify systemic faults which firms can then ensure they rectify via employee/provider education and training and improved processes.
All of these will help to make compliance a central part of a firm’s operations. Doing this is an essential first step for firms that want to avoid wrong-doing in future. Keeping on the right side of the regulator shouldn’t be difficult if treating customers fairly is at the heart of the firm, and if compliance is made ‘business as usual’.