Banking ethics: a few bad apples or rotten to the core?

 What has been the problem with our financial services sector?  It seems that so many of our present woes can be connected with it – from the housing bubble to the credit crunch, the Eurozone crisis and currency speculation to the dodgy marketing and selling of PPI and mortgages.  The LIBOR fixing scandal seems to be just the latest in this sad litany of disasters which have transformed the public perception of bankers to something akin to – or maybe even worse than – politicians with duck-houses or phone-hacking journalists.

There has been a lot of finger-pointing and blaming going on, but I don’t really see much purpose in trying to apportion blame to anyone. When it comes to human nature, I’m a bit more optimistic. I do not believe that there are really so many bankers who are all so deceitful and manipulative that they would deliberately go out to do wrong. 

What I think is more helpful and more constructive is offering suggestions for the future to do our best to prevent future harm and where necessary to reconcile and restore trust in the ability of financial services to create wealth in a way which is consistent with an ethical framework which we can all agree on.

The Church and Society Council has recently done this in its submission to the Westminster Parliamentary Commission on Banking Standards.  The Council has urged the City to consider its values and the devastating implications of putting profit before ethics, and suggested that taking excessive risk should become a criminal offence.

The way in which our economy is structured means that many people are marginalised by market forces, and this is of concern to the church.

Banks are not simply businesses, but provide an essential economic service fundamental to how we operate as a society. 

It is necessary that they operate on principles which are driven not simply by profit, but take cognisance of the wider effects which their actions have on society, especially the most vulnerable.  

The Council has said that excessive risk-taking should become a criminal offence as many people at the top in banking have reaped rich financial rewards with no threat of prosecution  when their actions do harm to the consumers they are meant to serve. 

In addition, we feel that non- executive directors should also be liable to sanction in the event of their failure of provide proper oversight.

Our response also challenges tax havens, argues for more effective supervision of Chief Executives through improved auditing and the presence of more shareholder and employee representatives on Boards, calls for the end of the present ‘bonus culture,’ and recommends changes to the Financial Services & Markets Act 2000 to permit all victims of mis-selling to obtain proper redress through the courts.

Earlier this year, the Church of Scotland’s Commission on the Purposes of Economic Activity published its final report.  The thirteen member commission comprised people with expertise from the fields of business and economics, church and community, politics and trade unionism.  In their report they argue that it is necessary to:

• Reduce inequality
• End poverty
• Ensure sustainability
• Promote mutuality

On banking bonuses and the nature of work

Stephen Hester, of RBS has just announced that he will waive his bonus in spite of the fact that according to his Chief Executive, Sir Philip Hampton, Hester outperformed the targets set. In this, Hester is following in the footsteps of John Varley and Bob Diamond from Barclays who also waived their bonuses although their bank reported an £11.6 billion profit. It is all very well and good, that high powered executives can afford to forfeit financial incentives. However, the issue is not about a few people acting magnanimously. The issue is about a culture that sees financial rewards as the one and only way to reward job performance.

It is clear that although money is an important motivator it is not the only motivator for people to excel in their job. There is also plenty of research that links increased job mobility of top performers within the banking sector to pay differentials. In other words, in a highly competitive sector, high performers will tend to switch jobs lured by financial incentives. A spiralling salary and bonus situation is then almost inevitable. Is this where we want to go?

It makes sense that our banking sector should hire the best possible people for the job and that they should be rewarded for their performance. However there are many reasons besides putting bread on the table that motivate people to go to work every morning. For example, there are learning opportunities; the contacts with colleagues; the development of personal networks and social capital; the intellectual challenge of negotiating a difficult problem etc. In short, the satisfaction of a job well done that contributes to society. To look merely at financial incentives devalues the nature of the cooperative, human experience of going to work and negates the fact that “man does not live by bread alone”.

Our society could be much improved by recognising that although the outcomes of work are important, the conditions and processes leading to those outcomes are also important. I believe that a more egalitarian workplace, family supportive policies, flexibility in work schedules, job stability and more control over the work performed are non-monetary compensations that can be extremely attractive to high achievers as well as to the thousands of people that work in the banking sector.

Do the poor pay for the rich?

I was unimpressed to see that HBOS have chosen to hammer ordinary customers with a radically increased overdraft fee. Is this once again the poor folk paying for the mistakes of the rich folk? Why is it always the little guy that gets hammered when the powerful screw up? No matter how they spin it, this is the 1000’s of ordinary customers paying through the nose for the excesses of a few who still don’t seem to worry about how what they do affects others.