UK’s ‘toxic’ banking culture has cost sector £36bn as mis-selling persists

“Toxic” and “aggressive” behaviour in British retail banks and building societies that led to scandals ranging from the attempted manipulation of foreign exchange and benchmark interest rates to the mis-selling of retail structured products has cost financial firms £35.8bn in fines and redress and will take a generation to change, according to an independent report by think-tank New City Agenda and Cass Business School.

The Culture of British Retail Banking found that "aggressive sales cultures" dominated the banks for some two decades, with investment and pensions mis-selling costing a combined £1.2bn between 2000 and 2014.

SRP has covered at least nine cases of misconduct from financial services firms involving structured products in 2014 which resulted in disciplinary actions and fines as a result of mis-selling/suitability, breaching adviser rules/commission bans, as well as custody and disclosure failures.

“It has become clear that having an aggressive sales culture, which ripped off customers, has cost banks dearly,” said David Davis, MP. “Banks seem to be trying to change, and some organisational progress has been made. However, it has yet to deliver for high-street customers. A toxic culture which was decades in the making will take a generation to turn around. At this crucial juncture, Britain’s biggest banks cannot afford to let the better treatment of customers become a second order priority.”

Misconduct
Over the past 15 years, noted the report, Britain’s banks have been embroiled in a number of scandals starting with endowment mortgages and precipice bonds through to unfair bank charges, investment and mortgage advice, structured products, ID theft and mis-sold payment protection insurance.

“They do not appear to have learned lessons from earlier scandals,” it said. “Banks have also taken some years to recognise the scale of their misconduct, to deal fairly with complaints and to make appropriate provisions.”

According to the report, the misconduct of investment banking arms has placed significant strain on bank balance sheets, costing the banks and their shareholders more than twice as much as their total losses on all UK mortgage lending. In extreme cases the scale of these provisions has affected the stability of individual banks.

“A watershed moment came with revelations that UK banks had been involved with the manipulation of the Libor rate,” it said. “What was perhaps most striking about these revelations was that misbehaviour happened after the bailouts of 2008 and much of the self-reflection which followed.”

The sense of dismay among members of the public, said the report, was only amplified by continued news of misbehaviour such as mis-selling of card and identity protection, insufficient protection against money laundering, increasing complaints about packaged accounts and mis-selling of structured products.

Need for change
Lord McFall, former chairman of the Treasury Select Committee, said that the need for a culture change has been recognised but it has to be transmitted all the way from the top to the bottom of these huge organisations. “In the past, the interests of customers was often totally disregarded,” he said. “Some were brazenly exploited.”

The various reports on banking which appeared following the financial crisis have delivered a remarkably consistent message: the failure of banks is due to a number of complex interlocking underlying issues such as macro-economic issues, the structure of the marketplace, psychological factors, the structure of banks, failures of governance, poorly designed incentive structures, a lack of punishment and failures of oversight and regulation.

“Simply rooting out objectionable practices such as mis-selling products, the manipulation of industry benchmarks or lax risk management practices is not enough,” said the report. “Banks need to address the root causes of these problems. This will take time and require fundamental transformation in these institutions.”

The report concluded that banks must ensure that culture change remains a top priority and that there is no pressure at branch level on staff to aggressively sell products.

Click to read The Culture of British Retail Banking.

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UK’s ‘toxic’ banking culture has cost sector £36bn as mis-selling persists