Economic Secretary on the future of banking
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Economic Secretary to the Treasury Andrea Leadsom's speech to the BBA's annual conference.
Thank you, Daisy [McAndrew], for your kind introduction.
I was very struck by what the Prime Minister said in his message to you earlier this morning:
Let ambition be the watchword of this conference.
I don’t think anybody goes into banking who isn’t ambitious.
In the 25 years I worked in finance, I was always surrounded by bright, fast-thinking, seriously ambitious people.
The work carried out by those people – some of whom are sitting here today – has made London the largest financial centre in the world.
And it’s made financial services a cornerstone of our economy.
Contributing almost a sixth of total UK economic output, and 12 per cent of total UK tax receipts.
Like me, I’m sure many of you here will remember the so called ‘good old days’ of banking – when “my word is my bond” was a source of pride. Bankers were considered upright and honourable, if (dare I say it) a little bit dull.
I certainly remember as a banker in my mid-twenties being invited to join what felt like the bank of Mary Poppins fame for a long lunch in their oak panelled dining room, with fine wines from their superb cellar. Truly life imitating art.
As someone just starting out in banking, I looked up to those grey hairs, and I was proud to be part of it.
Banking had then, and continues to have now, a vital social purpose.
That purpose is to oil the wheels of the economy…to provide funding for new and growing businesses. It is a huge creator of jobs and wealth. It provides vital tax revenue to the Exchequer that in turn pays for education, health and a sound infrastructure.
Banking is about creating deep and liquid markets for trading and price discovery that supports global business and international trade.
It’s about making lives easier for customers through excellence in service by using IT to develop new and faster payment methods, by enabling access to finance and driving down costs.
In the UK, for hundreds of years banking was our proudest industry; supporting Britain’s engineers, inventors and entrepreneurs to make Britain truly great.
But I think (and I say this from my personal experience in the financial Institutions of Barclays Group) that it all started to go wrong in the nineties when so many famous names (the old broker dealers, banking partnerships and asset managers) were swallowed up to become ever bigger, and ultimately global financial institutions.
The nineties and the noughties became the time when “too big to fail” and “heads I win, tails the taxpayer loses” might have been the watchwords.
And I don’t think anyone would deny that some of the events of the past few years have totally shaken public confidence in the banking sector.
So much so that when I was elected in 2010 I was one of a handful of MPs who were moving into a more popular profession!
But I do want to be clear with you that what drives me in my job, and I know it drives many of you too, is to see UK banking restored to its rightful place as our hugely respected, globally admired, socially valued, core industry.
That’s my ambition.
Today, I want to talk about “good culture” in the banking sector. Because that is what the future of banking will be built on.
What does good culture look like? How can we encourage it? And how can we move forward, as a sector, away from the sometimes disgusting behaviour of the past?
I know that later today you have a panel discussion touching on these topics: “Culture, change, conduct and doing the right thing”.
So without wanting to pre-empt any of that, I want to talk about three ways in which good culture is vital to how British financial services develop:
- first, the “good culture” of putting the customer at the heart of everything we do
- second, the “good culture” created by a sound regulatory system
- third, the “good culture” of success and being the best in the world
This means a lot of work: from government, from regulators, and especially from the industry itself.
Because a good culture within banking won’t just re-emerge by magic.
I have plenty of contacts in finance who are as sad and angry as me about the damage caused to a once honourable business. But frankly, I also know lots of people in banking who tell me that the government and the media should stop complaining and let them get on with it, because there’s nothing wrong with banking.
Restoring a good culture needs careful thought, it depends on industry, government and regulators working together, each carrying out their own clearly defined roles and with a positive heart for the work.
Government must set out the big picture and that’s what we’re doing.
Regulators must finalise the detailed rules, supervise them and enforce them.
And bank leaders must be committed to carrying out good practice within their businesses, supporting and encouraging their employees to do the right thing.
I’m confident that working together we will achieve that change for the better.
So what does “good culture” look like?
My view is that a good culture is one where, as Victor Hugo put it, “you do the right thing without being told”.
One where people don’t spend their time thinking about how to get round the rules.
One where there’s no tension between “what’s good for the firm” and “what’s good for the customer”.
I’ll momentarily go back to Mary Poppins – you can see how I raise my kids!
When that bank’s customers thought that the bank wouldn’t give back Michael’s tuppence – in other words when they didn’t think the customer was being listened to – they panicked and created a run on the bank.
That’s fiction, of course. But it’s actually a wonderful illustration that shows it’s when banks forget they exist to serve their customers, that things go badly wrong.
To restore confidence in the industry, we must focus on the customer.
So what is the Government doing to set the scene? Well it’s an area that the government has paid huge attention to. And progress is being made.
The Current Account Switch Service – recommended by the Independent Commission on Banking – has been in place for a year now – and has resulted in a real improvement for customers who want to change banks and see the benefits that competition can bring.
Yesterday the latest numbers on this service came out and showed a 22 per cent increase in switching levels over the last year compared to the twelve months before, which is great news.
And when the Midata project is completed next spring, customers will find it easier to compare which is the right bank account for them.
And I know that the Financial Conduct Authority’s (FCA) review will look at what more can be done to make the switching service even better for customers who choose to switch accounts.
But much more can be done in the future to ensure that customers have access to the right products – products which reflect their ever changing lifestyles.
So, for example, we are legislating to introduce cheque imaging – if a customer gets a cheque they should be able to pay it in immediately using their smartphone.
This comes on top of real industry innovation in mobile payments, with apps such as Paym and Pingit revolutionising person to person payments. We hope to see even more of this once the Payment Systems Regulator (PSR) is up and running next Spring.
But, as well as driving innovation, the PSR will need to consider some more fundamental, strategic issues in this space. This will include the structure and ownership of payment systems, as well as how challengers and smaller banks can access them.
And the question of the payments infrastructure, and in particular how it relates to account number portability, will also fall to the PSR to consider, alongside the FCA’s current review.
I want to see the PSR making a real difference in this area once it is up and running on 1 April, driving competition and removing barriers to entry, for the benefit of all consumers.
Just this week, we took another big step towards this, by issuing our consultation on which payment systems we will designate to come under the regulator’s new powers.
And we are also taking steps to improve the banking experience for SMEs – in particular, helping them access funding:
- The Appeals Process, which allows any business with a turnover of up to £25 million which is declined for a loan to appeal that decision to its bank, has now led to an additional £42m of lending to SMEs since its launch.
- We are legislating to require credit data sharing, and referrals for rejected loans. This will enhance the ability of challenger banks and alternative finance providers to conduct accurate risk assessments, and make it easier for SMEs to seek a loan from another lender.
- We also have proposals to help to match SMEs who want loans with challenger banks and other finance providers.
- And we are working with industry to examine in detail how the system is serving the wider economy – and where there’s a lack of lending. We have agreed with the major banks that they will publish detailed data that will show lending across 10,000 individual postcodes.
This will make it easier to identify where action is required to help boost access to finance – and, more importantly for you, where there is a business opportunity to meet that demand.
Taken together, these measures will encourage a more level playing field for challengers and smaller players, helping SMEs gain access to a wider pool of potential lenders.
It is also fundamental that SMEs should also be able to rate their bank.
So last autumn, the Chancellor commissioned a major new survey called the Business Banking Insight from the Federation of Small Businesses (FSB) and the British Chambers of Commerce (BCC) to look at the performance of the banking sector, as perceived by British SMEs.
As a result we now have a ‘trip advisor’ style ranking of banks, based on the quality of customer experience and the products that are provided to SMEs.
And this, too, gives opportunities to businesses. I think it’s great that RBS has publicly committed to becoming the number one bank for SMEs in Britain as measured by this survey.
But in order to increase competition in the banking system we also need to lower the barriers that prevent new banks getting started.
I know that the Prudential Regulatory Authority (PRA) and the FCA have carried out a great deal of work in this area, and as a result there are now 25 potential new banks having conversations with the regulators.
This is excellent progress given that in 2010 Metro Bank’s full banking license was the first granted in the UK in over 100 years.
So this makes it an exciting time to be in the banking industry – and a good time to be a customer.
Good for your shareholders – and good for the reputation of the industry.
The second way to restore faith in the banking industry is to have the right regulatory structure in place.
So as well as policies to increase choice and competition for the customer, the government has focused on creating a sound regulatory system.
We’ve replaced the flawed tripartite system with two new, properly focussed regulators – enabling them to concentrate on core tasks.
And importantly, we’ve set both of the new financial services regulators formal competition objectives.
Through the transfer of consumer credit regulation to the FCA on 1 April this year, we’ve fundamentally reformed regulation of the consumer credit market.
We’re addressing the manipulation of the LIBOR benchmark – which includes the introduction of a criminal offence for those guilty of benchmark manipulation.
The government is clear: if you manipulate a benchmark, you can end up in prison. And we are consulting on extending this to seven other benchmarks.
Our new Senior Managers and Certification Regime will strengthen the accountability of senior management and raise standards of individual conduct in banking. The PRA and FCA are currently consulting on the detailed rules of this regime.
And we have made reckless misconduct by senior bankers that leads to bank failure a criminal offence.
Because although all banking activities carry a level of risk, we all know that some risks were taken recklessly and irresponsibly. And when the gamble failed, the costs to the economy, and to wider society, were huge.
That is also why the government has introduced reforms to ensure risk and reward are properly aligned: we have strengthened the remuneration code, which requires at least 40% of bonuses to be deferred over at least three years and at least 50% to be paid in shares or other non-cash instruments.
Firms must also have policies in place so they can reduce or cancel bonus payments where poor performance comes to light, and from next January further reforms mean they will be able to claw back bonuses already paid out
And we’re determined to make sure that the enforcement process itself works as well as it can do – allowing the regulators to effectively pursue wrongdoing while being fair to those concerned.
So we have launched an Enforcement Review, to provide recommendations on the enforcement decision-making processes at both regulators to ensure that they are fair, transparent and effective.
But key, of course, is the absolute truth that good, honest culture is not something that can be enforced by government and regulators. Its what the banking sector does at firm level and industry level that will make the key difference.
That’s why we welcomed the creation of the Banking Standards Review Council, and the work of other industry bodies, such as the BBA, to promote professional standards and culture within the industry.
I would like to thank Sir Richard Lambert for his work in setting up the Council.
And also to congratulate Dame Collette Bowe on her appointment as the Council’s first chairman.
I also applaud the enormous effort of many individuals in senior and less senior roles in banks who have recognised the need for change and are doing their bit to restore the public’s faith in banking.
The new challengers, the investment in the financially vulnerable; bank support for the credit union movement; financial education initiatives in schools; new innovation with business at its heart. These are things to be proud of.
So in conclusion, my key objective as City Minister is to move the terms of the debate forward. Away from “banker-bashing” and the poor behaviour of the past, and towards the exciting and innovative ways in which the financial services sector will be serving the nation, and leading the world.
Or, to put it another way: yes, I want to focus on fair play, but I also badly want to see us scoring goals on the world stage!
I know that it is a great motivator to be part of a successful industry that is consistently breaking new ground.
So it is worth celebrating, as the Prime Minister said, that today London is the biggest centre for Islamic finance outside of the Muslim world. This year we became the first country outside the Islamic world to issue sovereign Sukuk.
Last week I was in India, where I announced the latest step forward in the UK-India Financial Partnership. This is an industry led initiative to explore how the two countries can co-operate on financial services.
I said there that the UK would like to see the rupee develop into the great international currency it has the potential to become. And, that our ambition in the UK is to be India’s first port of call when – not if – this happens.
And just this week we have completed the pricing of the first UK renminbi bond deal, the first country outside China to do so. This will further reinforce our position as the Western hub for RMB business.
I hope that these steps will create huge opportunities for you in the BBA to grow and develop your businesses.
The benefits of having a successful City of London stretch far beyond this square mile.
Those benefits will be felt by people up and down the country. People taking out a loan to start up their first business. A shop which wants to open a new branch. A building company planning a new development.
I know, from my time spent in finance, that creating the right culture is possible. People in this industry are among the best and highest calibre in the world.
And I am convinced that having the right culture in place will help the banking sector do what it does best:
For your shareholders – and also more importantly for people up and down this country.
It’s an ambitious vision. But what are we in this industry if not ambitious?