Watchdog calls on banks to clean up their act from the top

FSA chief warns free banking may have to end to stop mis-selling

A change in culture from the very top of the banking industry is needed to rebuild a cynical British public's trust in the sector, the chairman of the City's financial watchdog said yesterday.

In a wide-ranging speech, Financial Services Authority chairman Lord Turner called on bank bosses to act as "custodians of institutions of great public interest, as well as custodians of shareholder value".

He warned the end of free current accounts might be needed to drive more competition into the sector and move away from a model where banks sought profit instead from higher-margin products, leading to the mis-selling of payment protection insurance.

Referring to a recent Economist headline labelling industry bosses "Banksters" in the wake of the Libor scandal, Lord Turner said executives needed to put aside the temptation to boost profits through technically legal means "which go against firm values".

He appeared to single out the complex efforts of Goldman Sachs to disguise the scale of Greece's deficit ahead of the nation's entry into the single currency, saying: "In an investment bank, if a fancy new product design will enable a corporate or a country to conceal from the market the scale of its indebtedness … does the top management and the board say 'Congratulations, take a bonus' or does it say, 'That's not what we do'?

He warned: "There is no value in beating about the bush. Unless management and boards themselves shift the tone from the top in such specific ways, and in addition make effective controls against dishonest behaviour the highest priority throughout the organisation, then we are not going to change the external perception of bankers."

Lord Turner refused to comment on whether authorities should have spotted Libor fixing in 2007 and 2008 when banks were submitting lower rates of money-market borrowing costs to calm nerves over their ease of funding.

But he denied the FSA could have spotted earlier manipulation of the rate to boost profits on derivative contracts "except via supervision so intensive as to be prohibitively expensive".

Barclays has been fined £290m over libor-fixing, which has claimed three boardroom scalps including chief executive Bob Diamond.

Lord Turner said the current set-up in high street banking, where the accounts of customers in credit are subsidised by the overdraft charges of others, "was not a sound basis for a long-term trust-based relationship between the industry and its customers".

But he added the industry would only be ever able to move away from the model of free current accounts if regulators, politicians and consumer groups support the case "rather than accuse them of profiteering".

Fresh start: Salz to put house in order

Barclays has drafted in Anthony Salz, a leading corporate lawyer, to conduct a root-and-branch review of the bank in the wake of the Libor scandal that has forced both its chairman and chief executive to quit.

Barclays said the review "will assess the bank's current values, principles and standards of operation", test how well current decision-making processes incorporated the bank's values, and assess whether appropriate processes were in place.

The bank has committed to implementing Mr Salz's recommendations in full.

Mr Salz, who will have a deputy and a team of accountants to assist, said he hoped the review "would significantly assist Barclays in rebuilding trust and reaffirming its position as one of our leading institutions".