Deborah Hargreaves: This crisis requires a radical solution - an ethical bank

[Legal Beagles]

Deborah Hargreaves: A reformed banking industry would treat customers fairly, pay bosses less and shun complicated financing

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[Celestine]

Re: Deborah Hargreaves: This crisis requires a radical solution - an ethical bank

Deborah Hargreaves barely touches on the tip of the iceberg of poor customer treatment by banks: :tinysmile_cry_t:

This crisis requires a radical solution - an ethical bank

A reformed banking industry would treat customers fairly, pay bosses less and shun complicated financing


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• 
• • Deborah Hargreaves
  • The Guardian,
  • Thursday September 25 2008
  • Article history

One of the longer-term outcomes of the current financial crisis will be yet another blow to consumer confidence in the banking industry and its ability to manage our money and savings safely. And yet this is a development that we, as a society, can ill afford since the security of our retirement and financial wellbeing is tied up in an industry that has broken faith with us.
Consumers are even worried about their bank deposits. Andy Hornby, chief executive of HBOS, admitted in a memo to staff that one of the reasons for merging with Lloyds TSB was that depositors were taking fright at the bank's share price falls and had started to withdraw their money. Before the Northern Rock debacle last September, Britain had not experienced a run on a bank since 1866. But consumers have now become so nervous that some started pulling their money out of Britain's biggest mortgage lender because of short-term volatility in its stock price.
While it may be a rational decision for one person to withdraw their savings from a weak bank, if everyone does it that bank is doomed. A run on a bank also exposes the myth at the heart of the financial system - our money is not there tucked up in an underground vault. Banks are not able to return everyone's money at once and if we do not maintain faith in them, the financial system starts to crumble.
The trouble is, banks and most financial services companies are among the least liked and respected sectors of the economy. The government wants us all to take more responsibility for our own savings and retirement funding, which is a problem if we do not trust the companies providing those facilities.
We are right to be wary. The financial services sector has done little to earn our respect. Successive failures, such as the mis-selling of endowment mortgages, personal pensions and payment protection insurance, as well as the Equitable Life debacle, have eroded goodwill among the public. Even those who leave their money in a deposit account often find that the bank has withdrawn an attractive starter rate of interest once it has their savings.
When trust is rapidly evaporating, it is difficult to know where to turn. One of the less well-publicised developments of last week's seismic events on world markets was US consumers' withdrawal of $197bn of savings from money market funds. These are sold as ultra-safe savings vehicles, where returns are low but investors are reassured that their money is not going to disappear. However, for the first time in years, one of these funds was forced to return less to its investors than they had put in. Some of these funds had been investing in Lehman Brothers' commercial paper, the value of which was reduced to zero when the bank went bust.
So retail investors who bought supposedly safe products have lost out from Lehman's fall. At the same time, the bankruptcy court has earmarked a $2.5bn bonus pool for bankers in parts of the business just taken over by Barclays. It is no wonder that savers are cynical.
The magnitude of bankers' remuneration is another legitimate reason for the public to feel short-changed. We have watched managements justify the multimillion-pound bonuses and pay packages for leading bankers only to discover that many of these people are responsible for fouling up the financial system. It is galling in the extreme to see those bankers who were paid so much for the stewardship both of our money and the financial innovation we were told had made the system safer, now come running for public bail-outs when the system implodes.
While the Bank of England is prepared to make £100bn available for banks that need funds - not to speak of the $700bn earmarked in the US for buying up toxic mortgage assets, and the $500bn pumped into money markets in recent weeks - those retail investors and savers who lose out are mostly left to fend for themselves.
Equitable Life pensioners have been lobbying for years for compensation. Other pensioner groups who lost their savings when their companies collapsed have recently secured some government funding, but they fought for so many years to achieve it that many of them died penniless.
Policymakers' patience with a freewheeling banking industry is fast running out. The industry must surely see an opportunity for a high street ethical bank or savings company. A model could be the Co-operative Bank. It would be a bank that promised to treat its customers fairly - and meant it. It would need to steer away from complicated, unstable financial products. Even more radical, the bank could promise to pay its top executives only a set ratio over average earnings.
Banks argue that competition means they have to pay well to attract the top talent. The current crisis shows the weakness of that argument. Anyway, since HBOS and Lloyds are merging, in contravention of all existing competition laws, that will reduce demand for bankers on the high street. The industry has got to rebuild faith among its customers for the benefit of everyone. It should not be too much to ask.
· Deborah Hargreaves is business editor of the Guardian