Bernard Ginns: Customers would benefit from running their own bank

WHILE the brightest and best minds in politics and finance are applying themselves to the difficult question of reforming a financial system dominated by banks that are too big to fail, who is tackling the problem of banks that are too big to succeed?

By this, I mean large high street banks that struggle to perform the basic functions of customer service, leaving consumers feeling frustrated and helpless.

I have some personal experience with this. For many years, I banked with Barclays, after opening my first account as a fresh-faced teenager. The bank supported me throughout adolescence, university and my entry into the world of work.

By and large, it was a positive experience, in spite of all the student overdraft charges. I liked the bank and what it stood for and I felt some connection with its history.

But a few years ago, frustration with the bank and its centralised customer service operations started to grow. Simple actions seemed to be very difficult to carry out. For example, how many times should I have to write to the bank and visit a branch in person to persuade them to send my correspondence to the correct address? Once should be enough, surely.

In the end, apathy lost out to action and I moved banks, to a smaller operator that manages to provide a much better service.

If large financial institutions struggle to carry out simple tasks, how can we feel confident that they are capable of managing complex operations like proprietary trading?

More competition in the high street would force banks to improve their customer service operations and a greater number of operators should make the financial system more stable, as it would spread risk.

Staying with this theme, I reported a fortnight ago how Yorkshire Building Society would consider taking over Northern Rock, if the Government wanted to remutualise the nationalised lender.

Iain Cornish, the chief executive of Yorkshire, told me that he “absolutely supports” efforts by a cross-party group of MPs to persuade ministers to return Northern Rock to its building society roots.

He said that Britain’s second biggest building society would be “more than happy to talk to the Government to see how we could assist” if ministers considered the remutualisation option, one of three being looked at by UK Financial Investments, which manages the taxpayers’ stake in banks.

The other two options are an initial public offering or sale to another bank. The Government is keen to get the best possible return on its asset, which in the past has been valued at £1.5bn.

Chris Hulme, chairman of the UK Shareholders Association, said: “It would be a nicety that the mutuals are given a shout at acquiring it but obviously the Government has to achieve best value for the taxpayer.”

That may be difficult in the current climate, according to a recent newspaper report which said Northern Rock is likely to announce in the next few weeks a loss of more than £200m for 2010, which would hamper hopes of a quick sale.

One well-placed industry expert told me: “They have had heavy changeover of management, a high cost base and are making very little margin on the business. The benefits of an IPO or sale are quite small now.”

He added: “There are political benefits of remutualisation, which a lot of MPs would support, given all these nasty banks around.”

According to a legal expert, remutualisation of Northern Rock could take place either through an existing player, in which the bank’s existing customers become members, or through the creation of a new building society or industrial and provident society, the likes of which have not been established for 30 years.

Stephen Williams, a partner at Deloitte, said a remutualised Northern Rock could include “some kind of senior debt on the balance sheet, which paid a return to the Government over a period of time, like an investment return or dividend return”.

This kind of arrangement could help the likes of Yorkshire Building Society, which does not have hundreds of millions of pounds in excess capital, pay for Northern Rock.

John Kirkbright, chairman of EFMA Banking Advisory Councils, a think tank for the European financial services industry, warned that remutualisation would be far from easy or straightforward.

The Yorkshireman added: “Mutuals are not having an easy time in terms of legislative impact – and the cost of regulation and paying for part of the bank bail-out has hit them hard – but the concept of a bank owned by customers, understanding their needs and there to support them in times of difficulty is an 1850s concept that would certainly resonate with today’s customers all over Europe.”

It’s not hard to see why.