New report: introducing a time delay on access to credit

Jodi Gardner, Lindsey Appleyard, and Karen Rowlingson have written a new report on the potential effects of introducing a time delay on access to credit, particularly payday lending.

This report was produced for the Archbishop’s Task Group on Responsible Lending and Savings, and can be found HERE.

Response to the Financial Conduct Authority (FCA) Consultation on Payday Lending

Karen Rowlingson, Lindsey Appleyard and Jodi Gardner have written a response to this consultation, which can be found here:

Impact of capping the cost of payday lending in the UK – report for the FCA

Karen Rowlingson, Lindsey Appleyard and Jodi Gardner have written a report for the Financial Conduct Authority on the potential impact of capping the cost of payday lending in the UK.

A copy of the report can be found here:


The Ethical Failures of the Cooperative Bank

Tom Sorell and James Dempsey

In the aftermath of the financial crisis, the Cooperative Bank might have been seen as a potential model for the future of banking. Not only had it apparently emerged from the crisis largely unscathed, but – as the self-styled ‘ethical bank’ – it seemed to understand the public hostility towards a lack of ethics in the sector. A few short years later, the image of the Co-op as exemplary bank has been badly tarnished. A £1.5bn black hole was discovered in its balance sheet, and 70% of the business was subsequently sold to investors led by American hedge funds. The appointment of Paul Flowers – dubbed the ‘Crystal Methodist’ by the media – as the bank’s Chairman, and its involvement in scandals such as PPI misselling, have further taken the shine off the ‘ethical bank’.

What has gone wrong?  First, there is something both imprudent and pretentious about organisational claims to a distinctive ethical status. A bank which proclaims its integrity is likely to look worse if its employees do wrong or if it employs common commercial tax dodges than if it had made no claims for itself in the first place. But second, to claim to be an ethical bank is to claim to be, among other things, a bank, and some perfectly routine banking activity may seem morally questionable.  Offering credit cards or loans to people who will have difficulty repaying is an example.  Selling highly profitable but unpredictably expensive financial products e.g. credit default swaps is another.  Another aspect of being a bank, at least in a highly sophisticated financial services market such as one finds in the UK, is that there is competitive pressure to engage in high-risk activities and to offer huge salaries and bonuses. This means that it is hard to insulate the image of even a would-be ethical bank from the culture of the fat cat and the understandable resentment this draws from the general public after the bail-outs of RBS and Lloyds.

The Co-op has tended to be banker to public sector bodies and charities, and to individuals who support and are sometimes employed in both of these sectors. The values of this clientele have been adopted by the bank in its marketing. On its webpage it proudly states that it is ‘still unique in being the only UK high-street bank to have a customer-led Ethical Policy’. This is fleshed out as follows:

‘Our unique Ethical Policy covers five key areas: Human Rights; International Development; Ecological Impact; Animal Welfare; and Social Enterprise. In line with our customers’ ethical concerns, we restrict finance to certain business sectors or activities, while at the same time committing to provide finance to those organisations making a positive community, social and environmental impact.’

But the Co-op is not alone in the business world in claiming to value human rights and the environment. It has this in common with the Bodyshop, for example. Nor is it the only bank, or even the only UK high-street bank, that has a profile in helping International Development – Barclays has a number of microfinance ventures in Africa and was also a charter member of the Business and Human rights movement. What makes the Co-op distinctive is its combination of UK public sector connections and its connection with the co-operative movement at large.

A co-operative is basically an organisation that produces or distributes something for the benefit of all its members, and that is run according to rules that all members can agree to. Co-operatives, then, have both egalitarian and democratic features.  To that extent co-operatives are ethical. On the other hand, to the extent that co-operatives can be formed for commercial purposes, there is no necessary restriction on what they can do or produce. For example, there is no tension in the idea of a co-operative whiskey or gun-manufacturer, even though ethical investment funds often steer clear of weapons and armaments.  On the other hand, there might be a tension in the idea of a co-operative business that aimed at the replacement of its workforce by robots, or that had dismissal policies that employees universally disagreed with. Co-operativeness tends to empower worker-members who are otherwise insecure or saver-members who otherwise have little buying power individually. It may be an ethical form of organisation, but only with respect to the promotion of some quite narrow ethical concerns.

Ironically, it may be in the cooperative mode of organisation, supposedly at the heart of its ethical impetus, that the seeds of the failure of the Co-op can be found. In his scathing report on the ‘manifestly dysfunctional’ governance of the group, Lord Myners criticises the lack of experience and shared purpose of Directors who are elected through a series of regional and area boards. One unnamed Director summed up the conflicting aims of board members: ‘Some want a dividend, some want low prices, some want to do social good and some want free range chickens’. A focus on ethical issues which are largely incidental to the business can a critical failing in a Director, and perhaps even an ethical failing, since business failure is directly damaging to the welfare of depositors, investors ,and employees

The details of failures at both the group level and at the bank in particular are well documented by Sir Christopher Kelly in his review of what led to the Co-op’s capital shortfall. He identifies nine major factors responsible for this gap:

(i)                  The economic environment;

(ii)                Increasing capital requirements imposed on banks in general following the financial crisis and on the Co-operative Bank in particular as a consequence of specific issues that it needed to address;

(iii)               The merger with the Britannia Building Society in 2009;

(iv)              Failure by the Bank after the merger to plan and manage capital adequately;

(v)                Fundamental weaknesses in the governance and management of risk;

(vi)              Material capability gaps, leading to a serious mismatch between aspirations and ability to deliver;

(vii)             Past mis-selling of payment protection insurance (PPI);

(viii)           A flawed culture;

(ix)              A system of governance which led to serious failures of oversight.

Of these he suggests that all apart from the first, and to some extent the second, were within the Coop Group’s, or the bank’s, control. That is, they all represent failures, and perhaps ethical failures. The episode surrounding Paul Flowers’ tenure as Chairman of the bank is just the most bizarre example of the consequences of basic business failures; the capital shortfall is a more general and far-reaching factor.

The Co-op bank has been caught between three distinct sets of ethical concerns: those encapsulated in the (perceived) values of its customers; those inherent in the democratic and egalitarian system of co-operative organisation; and those that stem from the basic obligations that any business has to its owners, employees, customers, and other stakeholders. An ill thought through implementation of the co-operative mode of organisation, and a naive focus on promoting the values held by customers, has led to a failure to fulfil the most basic requirement of promoting (or at least protecting) the interests of the groups most closely related to, and dependent on, the business.

Do the troubles at the Co-op suggest that there can be no such thing as an ethical bank? We think not. Ethical banks are possible; what might they look like? One way to answer this question is by focusing on typical bank stakeholders who are most vulnerable to financial meltdown. These will typically be small depositors or small businesses holding loans.  These are the groups who are closer to losing everything if they are sold risky financial products, and sometimes the groups whose financial know-how is relatively slight. An ethical bank needs policies of communicating risks to these croups with crystal clarity, and even for making members of these groups ineligible for the riskiest products. These policies could be enforced with internal policies for punishing misselling e.g. payment protection insurance or for raising credit card credit limits.

Another measure of the ethical behaviour of banks is how they deal with people who are excluded from banking services – secure savings accounts, insurance, loans, and financial planning — by unemployment or poverty. The class of the “financially excluded” is bigger in countries without welfare states than in Western and Northern Europe, but even in Western and Northern Europe there is a big and growing clientele for financial services outside the conventional banking sector. Pay-day loan companies demand little evidence of credit-worthiness before transferring funds to credit applicants, but this kind of undemandingness is more than counterbalanced by huge interest rates. In these settings there is a need for financial services firms that allow creditworthiness to depend on more than crude credit scoring, and that extend loans at much lower interest rates based on detailed interviews with clients. What emerges from these interviews is a sense of the loan applicant’s general reliability, and of the way personal assets other than income –a determination to work and to keep promises—can be a better guide to repayment than income from employment. An example of a firm that provides deeply personal banking to the financially excluded is Fair Finance, based in London. This and other banks for the financially excluded are not household names. But their relative lack of profile should be reassuring.  Ethical banks shouldn’t – morally shouldn’t – claim to be ethical.  Some things should be shown and not said. The Co-op Bank got this the wrong way round.

Industry and Parliament Trust Event on European Finance Legislation

Tom Sorell and James Dempsey spoke at an event organised by the Industry and Parliament Trust on 6th March, entitled ‘Turning the Tide? How European Finance Legislation is Making Waves in the UK Economy’

A summary of the event, and our contribution to it, can be found here.

Responses to the Lambert Banking Standards Review

Sir Richard Lambert has been tasked with creating ‘an independent body that will promote high standards of competence and behaviour across the UK banking industry’.

In pursuit of this task he issued a consultation paper, following initial discussions with interested parties, inviting feedback on the conclusions reached to that point, and responses to 19 specific questions.

The different streams of the FinCris project have responded to that consultation paper, and the responses can be found on the Banking Standards Review website:

Andy Mullineux’s response

James Dempsey’s response, with additional comments from Tom Sorell

Karen Rowlingson’s, Lindsey Appleyard’s, and Jodi Gardner’s response

Two new papers on regulatory lessons from Australia

The following papers have been written by Jodi Gardner and Karen Rowlingson as part of the Responsible Lending and Borrowing workstream.

The first, by Jodi, is entitled ‘The Challenges of Regulating High-Cost, Short-Term Credit: A Comparison of UK and Australian Approaches’

The second, by Jodi and Karen, is entitled: ‘Towards a ‘cost of credit’ cap in the UK: Lessons from Australia’.

Download (PDF, 468KB)

Download (PDF, 366KB)

Lloyds Bank Employees: Victims or Villains?

This post has also appeared on James Dempsey’s website

Another day, another record fine for a banking group. This time it is Lloyds Banking group being fined £28m for incentive schemes that led to the mis-selling of individual savings accounts and income protections products between 2010 and 2012. In some cases staff were offered bonuses of up to 35% of their monthly salaries, in others £1000 in cash. On the flip side, employees who failed to meet targets were threatened with demotion – the Financial Conduct Authority (FCA) highlights the case of the individual who sold to himself, his wife and a colleague to avoid this fate. Read more »

New RBS Reports Raise Old Questions

This blog is reposted from James Dempsey’s website.

Last week two new reports appeared on the Royal Bank of Scotland, this time focusing on its activity since the financial crisis. Both, in their own ways, raise new versions of concerns that have been around since the crisis and before – (1) that penalties imposed on banks target the wrong people; and (2) that banks are still failing in one of their primary responsibilities, the good management of risk.

The more serious accusations appear in the Tomlinson Report compiled by the ‘Entrepreneur in Residence at the Department for Business, Innovation and Skills’. Tomlinson says that:

‘The experiences of many businesses across the country suggests that, at least within RBS, there are circumstances in which the banks are unnecessarily engineering a default to move the business out of local management and into their turnaround divisions, generating revenue through fees, increased margins and devalued assets.’

Whether these accusations should be upheld will be determined by the Financial Conduct Authority and the Prudential Regulation Authority, to which Vince Cable has handed the report. If they are, however, and penalties follow as a result, who will those penalties hit?

If they are financial penalties they will, primarily, hit shareholders, or in other words tax payers (who own 81% of the bank). This is a crazy state of affairs. Those who have allegedly done wrong are the employees who directed and engaged in the activity in question, not the public who are reluctant owners of the bank as a result of rescuing it from previous irresponsible activity.

The second report, by Sir Andrew Large, focuses on RBS’s SME lending operation. Some reasons it identifies why RBS failed to meet its lending targets are as follows:

  • ‘RBS’s SME lending objectives were not consistent with its tougher credit standards, and limits on certain types of lending (especially to the Commercial Real Estate sector) introduced to manage portfolio risks
  • ‘Internal restructuring had a negative impact by fragmenting responsibility for SME lending
  • ‘The ongoing SME business has had difficulty in finding the best way to deploy its people and investment budget to originate and win the lending opportunities that are available to it
  • ‘Although risk management policies are in line with good prudential standards, customer-facing staff and Credit Officers are risk averse in their behavior
  • ‘RBS lending process is time consuming and loan applications take longer than at other banks
  • ‘Credit skills of customer-facing staff that were neglected in the run up to the financial crisis have improved, but remain variable
  • ‘Until relatively recently, deposit gathering was prioritised over lending’

One way of summarising these points is that RBS is not managing risk well, since internal structures and procedures are inefficient, and behaviour is overly risk averse. Banks have rightly been criticised for helping precipitate the crisis through poor risk management, by taking on too many high risks. Now, it appears, things have gone the other way.

Banks have an obligation to manage risk well and this involves striking the right balance between recklessness and extreme risk aversion. It appears that this obligation is still not being met, although for different reasons than before.

Responsibility, blame and consequences: Who is feeling the financial crisis?

Tom Sorell looks at the roles of some of the players in the financial crisis on the Politics@Warwick blog here: