When the banking crisis broke in 2008 it soon became clear that one of the many things that had gone wrong was the so-called “bonus culture”. Defenders of the banks, if they could be found, were nonetheless quick to point out that such unhealthy practices were confined to the more exotic end of the business. Though they didn’t quite put it in these terms, the implication was that professional investment bankers were only defrauding each other, or, in the older vernacular associated with the criminal fraternity, “they only hurt their own”. One such example would be RBS’s violation of US sanctions on Iran, for which it rightly received a fine of $100m from the US authorities.
We have known for a while that banking malpractice has been endemic – and the record £28m fine levied on Lloyds banking group by the new Financial Conduct Authority, and its damning indictment of the institution, is confirmation of two important things. The first is that the bonus culture infected almost every part of the bank’s business, right down to those dealing with the bank’s high-street customers, many of whom were being systematically fleeced. In the words of the FCA: “A high proportion of sales were found – by the firms themselves – to be unsuitable or potentially unsuitable.” Or, in terms we might all understand, bank staff flogged rubbish to get their bonuses.
Indeed the bonus culture approached the sort of manic level that one might expect in a highly pressured derivatives dealing room, rather than the supposedly sedate world of payment protection insurance for loans and mortgages. In the worst example that the FCA saw, an adviser sold protection products to himself, his wife and a colleague in order to hit his target and prevent himself from being demoted. Advisers could be automatically demoted and suffer a pay cut, depending on their sales performance. No account was taken of any other factors, least of all the suitability of the financial products for customers.
In the world of food safety, say, or cars, such wilful and dangerous misrepresentation has traditionally attracted severe punishment – from consumers who simply walk away. But as is well documented, the problem with British banks was that lack of competition meant that there was little point in a consumer moving their account; they were all at it.
The second thing this case demonstrates is more hopeful. It shows that the Financial Conduct Authority – like the American authorities – has serious intent. Fellow regulators in the Bank of England and Treasury need to look afresh at how to stimulate competition and diversity in the banking industry, especially in the light of the Co-op Bank debacle.
Just for a change it would be heartening to read about a bank that was making record profits through the simple expedient of serving its customers – personal, business and in the City – with integrity. No regulator can create a rule book that covers everything. The FCA is right to concentrate on the simple business of punishing wrongdoing wherever it finds it. A £28m fine ought to concentrate the minds of Lloyds managers; but how many of them, and at what level of the bank, will see their bonuses cancelled next as a result of all this?