My Lords, I start by warmly congratulating the noble Lord, Lord Carrington of Fulham, on his excellent and insightful maiden speech. He set a formidably high hurdle for those of us who follow him. I also congratulate the most reverend Primate the Archbishop of Canterbury on securing this debate. I congratulate him and his fellow commission members on the reports that they have produced and the use to which they have put them. I know that the commission no longer exists, but listening to its members in the House in the debates on the banking reform Bill, is surely conclusive proof that there is life after death.
I know that it is conventional to praise the work of our committees—sometimes before going on to qualify that praise—but I will make it plain from the start that I have an unreserved and unqualified admiration for the work of the commission and the reports that it has produced. I am struck by the force of its analytical inquiry. I am struck by the force of its criticisms and by the essential simplicity of its recommendations. I am struck, too, by the clarity and simplicity of the language in which all this was expressed.
The commission’s reports deal with all aspects of the banking crisis and many of its recommendations have been adopted by the Government. The focus and debate has, quite rightly, been on legislation to produce better regulation. Although banking culture formed a prominent part of the commission’s report, it played, perhaps, a less prominent part in our debate. It is the issue of banking culture on which I wish to focus my remarks.
The commission was clear that there was, and indeed is, a problem with the culture in banking. It is worth quoting paragraph 754 from volume 2, which states:
“Poor standards in banking are not the consequence of absent or deficient company value statements. Nor are they the result of the inadequate deployment of the latest management jargon to promulgate concepts of shared values. They are, at least in part, a reflection of the flagrant disregard for the numerous sensible codes that already existed. Corporate statements of values can play a useful role in communicating reformist intent and supplementing our more fundamental measures to address problems of standards and culture. But they should not be confused with solutions to those problems”.
In other words, fine talk will not solve real problems—and the problems are very real.
It is a sad reflection that there is no need to rehearse the consequences of the banks’ corrupt culture in any great detail; it is all too appallingly familiar. Nevertheless, we should not forget the scale of the problem with the ethics and behaviours of the banks. There was the mis-selling to SMEs of products that were completely inappropriate; there were the LIBOR and the EURIBOR scandals; there were the HSBC money-laundering scandals; and there is now the possibility of another huge scandal if the allegations about RBS’s treatment of small businesses prove true. All these were bad enough, but much worse was the PPI mis-selling scandal, because it was the clearest example of a deliberate exploitation by the banks of their customers.
John Lanchester wrote in the London Review of Books recently:
“PPI was about banks breaking trust by exploiting their customers, not accidentally, but as a matter of deliberate and sustained policy. They sold policies which they knew did not serve the ends they were supposed to serve and in doing so treated their customers purely as an extractive resource”.
There is a common thread running through this criminal, or near-criminal behaviour. It is a kind of contempt that the banks have had for their own customers. It is clear that the banks have not behaved in the interests of their customers—nor, for that matter, in the interests of the rest of us. The banks are almost unique in doing this, and they are certainly unique in getting away with it. Many huge and complex commercial concerns exist, but they do not systematically loot their customers.
My own long experience as an adviser to the senior management of very large, complex, commercial companies suggests a reason for this. One factor common to all the multinationals I have worked with was a fundamental belief in competition—a word that has so far not played much of a role in our debate. Competition in the service of customers was the key. That belief was not just a form of words, or just the shared view of senior management. It was the belief that defined the company at every level and in everything it did. It formed a strong cultural bond, where the obvious question to ask about anything was: is this really in the interests of our customers? No one in our banks asked this question about the introduction of PPI.
What makes the belief in serving the interests of customers a culture, and not just jargon, is competition. In all normal enterprises, large and small, what keeps companies focused on their customers is competition. If you do not serve the interests of your customers, your competitors certainly will—or at least they will if you operate in a competitive marketplace.
I have heard it argued that our large banks really did want to compete with each other. If that was ever true, it is certainly not true now. They do not compete and they probably will not because they do not need to do it to make money, and they make more money for themselves by not competing. Why do they not need to compete? It is because they effectively form a cartel. The EU Commissioner for Competition said yesterday:
“What is shocking about the LIBOR and EURIBOR scandals is not only the manipulation of the benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks which are supposed to be competing with each other”.
“If you take the opportunity to see the conversations between these cartel traders, you will be appalled”.
A cartel means no competition, and no competition means no need to serve the customer, who does not have many real choices anyway.
It is now a bit easier to switch banks, but where do you go? Which bank is better than the other, which is different, and which has senior management that will put your interests firmly before its own? As long as there is a banking cartel there will be no competition, and as long as there is no competition there will be no reliable driver of sustained cultural change. As long as banks are too big to fail, as long as they are too big to manage, and as long as there are too few of them to be competitive, the chances of real and sustained cultural change are very low.
Of course we will see, as we are beginning to see, banks trying to say plausible things about customer focus. We will see new codes of conduct, new mission statements and reassuring advertising. But the sad fact is that without real competition, the banks have no real and sustained incentive to change, and the consumer has no real choice and no real chance. There is only one way to fix this, and that is to break up the banks. They are too big to fail, so let us make them smaller. They are too big to manage, so to make them easier to manage, let us make them smaller. There are not enough banks to really compete, so let us make more by breaking them up.
I realise that we have had to give priority to fixing the obvious regulatory failures, and we are well on the way do doing this. Now we should turn our attention to failures in culture and in competition. Unless we do this, I fear that in 10 years’ time our successors will be looking at yet another series of banking scandals, and at yet another PCBS report on our failures in both culture and competition.