February 2014

Getting away with it?  Don’t Bank on it

Getting Away With It? Don’t Bank On It

On 17 January, Phillip Stephens wrote a lead opinion piece in the Financial Times called “Nothing can dent the divine right of Bankers”.  He wrote,

“The bankers have got away with it.  They have seen off the regulators and angry citizens alike to stroll triumphant from the ruins of the great crash.  Some thought the shock of 2008 might change things.  We were fools….. Like monarchs of old, they have accepted some constraints, but these can be worn away over time.  Their power and riches remain untouched.” 

The central tenet of the piece was reinforced this week by a report by Kinetic Partners in their Global Regulatory Outlook.  The report contained two findings that underline Mr Stephens’ point –

  • 62% of respondents think that financial services regulation will have little impact on the reputation of the financial services industry.  Indeed, 85% said that regulators had only a partial or no understanding at all of how the financial crisis was allowed to happen, and,
  • Only 38% of bankers and asset managers believe investments in corporate tax policy have a significant impact on reputation. On this, Kinetic’s Chief Executive, Julian Korek said, “Despite high profile controversies over large businesses’ tax arrangements, most still don’t see the link between tax and reputation. As governments continue to face years of stretched public balance sheets and public pressure to ensure businesses pay their fair share, that link will only strengthen.”


So was that it?  Back to the old ways of bonuses, aggressive tax avoidance and light-touch regulation?  Plus ça change?

Well it may not be apparent in bonuses and remuneration but there have been costs and reputational damage that the industry will have to live with. 

Regulatory constraints have been costly, both in terms of capital raising and operating costs – HSBC alone has employed 2,800 more compliance staff over the last three years and in sum these factors are likely to suppress returns on assets for many years. 

The process of governance reform is not over, either.  This week, Sir Richard Lambert, who has spent the past five months looking into banking ethics, will present his report.  It is expected to recommend a new committee to look into complaints with the ability to levy fines.  The committee will consist of a range of stakeholders including customers, investors and regulators.

As to reputation damage, just ask any marketing director at a financial services company how much time he spends trying to nudge his customer Trust-O-Meter into a positive reading.  That does not just mean customers lack a warm and fuzzy feeling for financial products, it means lower structural growth in top line for the long term.  Many financial institutions are also running very large reputation deficits with other stakeholders too, from employees to politicians.

Ultimately, who will cares if the Good Times are coming? 

Well, here the Kinetic report is revealing in that over half or respondents do not believe enough has been done to prevent another crash.  If this is true, ask yourselves if stakeholders will be quite so forgiving or accommodating next time around.  Unless, of course, you have been smart and rebuilt the trust and reputation in the meantime.