Judith Cork: High time we started a drive for more ethical banking

One of the reasons given was the ongoing injection of compensation money to individuals from the Payment Protection Insurance (PPI) mis-selling scandal (some 16 million policies have been sold since 2005) providing enough cash for decent deposits on many a new motor.

And this isn’t really surprising. Any economy with an injection of nearly £14bn would benefit. So, many people will be driving around in their spanking new vehicles courtesy of the bad practice and poor customer care of the banks. And who knows how much bigger and better their cars might have been if they hadn’t also been preyed upon by the new vultures – the claims management companies.

Thankfully they are also now being investigated. Teresa Perchard, former director of the Citizens’ Advice service has stated that “a failure of ethics drove the mis-selling of a product that, sold properly, had a benefit to consumers”. A key conclusion from their investigation was that firms needed to put customers before profits.

The Parliamentary Commission report on Banking Standards says “major banks and some senior banking executives remain in denial about the true extent of PPI mis-selling. Over a significant period of time they ignored warnings from consumer groups…”

It adds: “One of the most dismal features of the banking industry… was the striking limitation on the sense of personal responsibility and accountability of the leaders … for the widespread failings and abuses over which they presided.… trust in banking can only be restored when it is earned.”

Accountability and trust go to the very heart of the problem. Every year the world’s largest PR firm, Edelman, conducts research for its Trust Barometer. It won’t come as any surprise that the least trusted industries in 2013 are banks and financial services.

The 2013 Trust Barometer identified three key attributes which build trust in the eyes of the public. These were integrity, engagement and products and services. If we focus on the Edelman definition of “integrity”, this consists of having ethical business practices, taking personal responsibility to address an issue or crisis and being transparent. Within the “engagement” attribute, listening to customers’ needs and feedback as well as placing customers ahead of profits are mentioned.

So how do you start to instil ethical behaviours and fair treatment into organisations? If we look at a real example of an organisation’s response to the Parliamentary Commission, then Lloyds Bank is a good place to start. In context, it was responsible for almost one third of PPI compensation claims (£5bn out of the £14bn) so it has a regulatory and business imperative to act and a long way to go to build trust; however its start seems promising.

The board has a new strategy with “responsible business” a prominent mission. They have three female non-executive directors out of nine, one of them chair of the responsible business steering committee.

Their “colleagues” (ie staff) have codes of responsibility to generate the correct behaviours. Their incentives focus on a mix of rewarding low-risk culture and meeting the needs of customers. They state “we are trying to do the right thing based on the right judgments. Being legal is not enough”. And they have independent assessment of their Responsible Behaviour metrics.

But it is in this area of independence that my main concern lies. The company undertaking the responsible business assessment is none other than the Lloyds Bank’s external auditor. It is one of the “big four” accountancy firms. These companies collectively audit 90 per cent of the UK’s largest stock market-listed companies.

Remember, this industry was also heavily criticised during the financial crisis for not doing enough to warn about company balance sheets or scrutinising banks’ books in enough detail.

With the recent watered-down ruling by the Competition Commission allowing accountancy firms to bid for the audit work of the largest companies every 10 years, rather than the previously suggested five, their dominance continues for some time to come.

So, to me, as a Lloyds multiple stakeholder, it would provide greater reassurance about their aim to be “the best bank for customers”, contribute more to “a prosperous Britain” and be positively different if they were to make a more courageous choice. What about a genuinely gutsy decision which gives the independent assessment of responsible business to an organisation outside the established club? But I guess accounting for severing convenient, cosy connections is just too great a step on the responsibility ladder.

*Judith Cork is a business ethics consultant based in Yorkshire. See www.judithcork.co.uk