Andreas Whittam Smith: Banks need a change of culture

Do we have any banks that have not been accused of wrongdoing? This time it is Lloyds Banking Group. It has just been referred to the enforcement division of the Financial Services Authority (FSA) for "serious failings" in the way it has been paying commission to its sales staff. This means the bank's staff was incentivised to sell financial products to private customers without regard for whether they truly required them or understood them or could afford them. "Enforcement" means that Lloyds will shortly be heavily fined for its shortcomings.

The FSA's new managing director, Martin Wheatley, said this week that it intended to change the culture of banks so that they no longer view customers simply as sales targets. Mr Wheatley's reference to "culture" is significant. For traditional regulation on its own, without cultural change, cannot secure fair dealing.

When you become merely a sales target, you find yourself in a cold world where human contact is kept to a minimum. Does anybody ever meet their bank manager, or even know who he or she is, or would any longer trust him or her even if contact were made? You draw your cash out from a machine. If you want anything more complicated, you rarely deal with the same person twice and you may easily find yourself trying to conduct your business through a call centre. No matter, at every turn you will be asked whether you have considered buying this or that service, or an insurance or savings plan. Remember you are a sales target. There are no relationships, only transactions.

Take the case of the mis-selling of personal protection insurance (PPI). This is likely to cost the banks the enormous sum of £10bn in compensating customers. As for Lloyds Bank, an independent arbitrator upheld some 98 per cent of the complaints it received. Perhaps technically this kind of behaviour isn't criminal, but that is what it feels like to me.

Mr Wheatley's opinion is that "incentive schemes on PPI were rotten to the core and made a bad problem worse". The FSA also gives the example of one bank (unnamed), which allowed sales staff to earn a bonus of 100 per cent of their basic salary for the sale of loans and PPI with this rider – the bonus would only be payable to those who had sold PPI to at least half their customers. At another bank, the basic salaries of sales staff could move up or down by more than £10,000 a year depending on how much of the bank's product line they sold.

Mr Wheatley described what has happened. He said that "banks for me were all about making sure my money was safe and my best interests were looked after. The type of place where you would go in, have a pleasant chat with the clerk and go about your daily business. Some time ago, financial institutions changed their view of consumers from people to serve, to people to sell to".

Not every service or product we purchase has to be based on a relationship with the seller. All of us happily practise what is called "transactional shopping". A transactional buyer being somebody looking for a series of "bests" or "lowests", such things as price, warranty, service, quantity or perceived quality. Consumer reports are published primarily for the transactional shopper. But when it comes to handling our personal financial affairs, we feel desperately in need of help and advice.

This is because our financial decisions have two special features. In the first place these arrangements are incredibly important. For a faulty decision about the mortgage arrangements made can blight the enjoyment of one's home. Inappropriate pension plans can spoil one's old age. The insurance policy that doesn't pay out as expected after a burglary or fire can trigger a financial crisis. And the second feature is implied by these examples. You may not be able to establish whether you have bought the right financial product until many years after the purchase. You cannot take it home, try it out and swiftly return it and get your money back if it doesn't work as promised. Instead you live in hope.

This is why customers of financial services want a relationship of trust between them and the financial institution with which they are dealing. Nothing would do more to bring this about than sustained, unchanging personal contact at the point of sale. And that in turn would require a complete restructuring of the way the banks do business with ordinary people. However, the FSA cannot order such a radical reorganisation. Instead the regulator is likely to introduce rules that would require banks to restructure incentive schemes so that they are as much targeted at getting the best deal for the customer as the best deal for the person or firm selling it. Even that would be a small revolution. But it wouldn't be the only one. Barclays has just announced it is sharply cutting back its advisory business that specialised in helping customers to reduce their tax bills. The clean-up is beginning.