Lloyds Banking Group’s submission to the Parliamentary Commission on Banking Standards
The global banking industry’s role in the financial crisis and the subsequent support provided by central banks and governments, together with historic remuneration structures have contributed to the mistrust that people now have in our industry. More recent issues such as mis-selling of PPI policies, SME derivatives, the alleged manipulation of LIBOR, money-laundering accusations and “rogue state” financing have only compounded the problem. Trust has broken down, not only in banks but also in bankers.
A number of these ills were caused by an obsession with financial success and an over-riding fixation on short-term performance, driven by investors ratcheting up required returns, the “war for talent” driving up expected individual returns (i.e. pay and bonuses) and the regulators relying on the market. Customer outcomes and financial soundness arguably took second place. As a consequence, Boards and Executive Management in a significant number of banks, to a greater or lesser degree, failed.
One of our principal challenges is to restore trust - the trust of our customers, shareholders, policymakers and regulators. Trust goes to the heart of what banking is about. Customers need to be able to trust their bank to look after their savings. They need to trust their bank to manage their financial transactions smoothly; trust that their bank will be diligent and not provide levels of credit or mortgage that are more than the customer can re-pay; and trust their bank to provide products that genuinely meet the customer’s needs and which the customer can understand. In commercial banking, sound businesses need to know that their bank will be with them through difficult as well as good times and will not suddenly change terms or withdraw support. At the start of this year, Lloyds Banking Group (“Lloyds”) set out a public target to make at least £12bn of gross lending available to SMEs, since increased to £13bn; in terms of net lending, Lloyds has increased lending by 4% whilst the market has reduced by the same amount.
As an industry, we need to re-earn the trust of policy-makers and regulators too. Good legislation can provide the framework for safe and stable banks. Regulation can punish wrong-doing or negligence. However, regulation should be a back-stop not a substitute for trust. In the absence of that trust, banks do not function effectively, undermining the vital role they play in the economy.
The introduction of ring-fencing has the potential, if carefully executed in the legislation, to help rebuild consumer trust in the banking sector and more clearly separate the different cultures of retail/commercial and investment banking. Investment banking has a different business model and culture as it is done deal by deal; retail and commercial banking is about the processes and procedures that see many thousands of individual transactions conducted daily to the satisfaction of the millions of customers who bank with them. The latter must be much more ordered and regimented to ensure that each of those thousands of transactions is conducted efficiently to rules and levels of risk that customers should be able to take for granted. Lloyds has focused hard on reducing customer complaints and their causes. Complaints have fallen by 42% over the last two years (excluding PPI).
Banks are not faceless institutions. We are collections of people who make decisions and act as the ambassadors in our daily interaction with customers and other stakeholders. The tone and example needs to come from the top - having leaders with the highest integrity and values, who think and act for the long-term and with proper incentives.
We know, having talked with our customers and other stakeholders, that it will only be through an unswerving determination to 'do the right thing' and a fundamental commitment to anchor our business in activities which support the broader economy and contribute to prosperity, that we can address and rebuild that trust.
We have to make things right, especially for legacy issues such as Payment Protection Insurance (PPI), where Lloyds was the first bank to break ranks and provide certainty for customers by offering compensation to those who were mis-sold. That was the right decision to rebuild trust, driven by a desire to embed a more customer-centric culture where we do the right things. Also part of our journey is a focus on a clearer and simpler range of products, our pledge to retain the number of branches and not to close a branch if it is the last one in a community.
We want Lloyds and its individual businesses to be a source of pride for our employees. We can only do that through having the trust of our customers and the wider public. Commitment from all colleagues to personal integrity and professionalism is a key part of making Lloyds a trusted, contributing corporate member of society, and we are taking steps to reinforce this across all of our business.
Throughout the bank, we are taking the necessary steps to ensure that colleagues are well trained, uphold the highest ethical standards in the way they behave and are appropriately incentivised.
Restoring trust to the levels we want and expect will take time and effort - but we have to undertake it. In the absence of trust, banks do not function effectively, undermining the vital role they play in the economy. This is critical as the future of the banks and the economy are inextricably linked; there are no strong economies without healthy banks and healthy banks require sound and strong economies.
Lloyds is different to other UK banks, being focused on UK retail and SME customers. Being a successful and responsible business, and the largest retail and commercial bank in the UK, means that we are able to benefit society and help Britain prosper.