Headlines across the financial press were dominated this morning by the news that Lloyds has been slapped with the regulator’s largest ever retail conduct fine of £28m in relation to venal incentive schemes that led to inappropriate customer sales.
The devil in the detail shows just how insidious these incentives – which ranged from carrot and stick tactics such as huge bonuses or threats of demotion if ‘advisers’ hit or failed to hit targets – were over a two-year review period from January 2010 to March 2012.
Some 70 per cent of staff at Lloyds TSB, for example, were found to be in receipt of monthly bonuses despite a “high proportion” of sales being found to be unsuitable by the bank’s own internal reviews. In fact, 229 staff received a full bonus despite every one of their sales failing the bank’s tests; 30 staff received bonuses under such circumstances on multiple occasions.
We’re dealing with huge mis-selling risk here: the review covered close to 1.1m product sales to over 690,000 consumers worth the best part of £2.3bn across Lloyds TSB, Halifax and Bank of Scotland.
This is conduct failure on a mass scale across every part of the Lloyds Banking Group, fueled by an utterly avaricious culture propagated by sales managers that the FCA found were themselves incentivised to ensure their charges hit their sales numbers.
So, a hefty fine is completely justified – but just how punishing is the £28m penalty Lloyds has been slapped with (which was, by the way, reduced by 20 per cent under the regulator’s early settlement offer)?
Well, it represents 1.5 per cent of the £1.69bn pre-tax profit Lloyds reported for the first nine months of the year alone in October. I’m going to place my tongue firmly in my cheek when I say this: ouch.
Are fines even the right mechanism to truly get to the nub of the matter? Sure, they are a necessary element to focus minds, but it would be fruitless to advocate a substantial increase in pecuniary penalties for an institution that is systemically important and, in Lloyds’ case, still part owned by the taxpayer anyway.
What stands out for me in all this is that, as yet, we’ve seen no enforcement against individuals at the bank – and nor are we likely to see any against those at the heart of this scandal.
As the then Financial Services Authority admitted in written evidence to the Parliamentary Committee on Banking Standards earlier this year, under the current discredited approved persons regime while some junior staff at major banks are authorised under the CF30 customer-facing controlled function, most of their managers who do not have ‘significant influence’ are “not currently approved and, therefore, not liable” to face personal enforcement.
Unless the people that are responsible for the frontline staff are held properly to account we can never hope to see the end of this sort of unscrupulous activity.
There have been some positive developments in the past year or so, not least the FSA’s guidance published in January of this year that sought to crack down on incentive structures that involve disproportionate variable remuneration or where targets are directly linked to jobs. There has, however, has been no explicit banning of anything as yet, so this area remains somewhat murky.
Then there is the government’s announcement that it will take on board the banking commission’s recommendations for a senior persons regime for bankers, to replace the authorised persons regime that has failed so comprehensively to ensure high standards.
Even this is somewhat undermined, though, by the fact that the powers that be have resisted calls for a ‘licensing’ regime for all bankers that represent a risk of detriment to their institution’s reputation or, crucially, its customers.
The FCA has said it will introduce an individual standards code that will apply to a wider range of bank staff and that could open the door to individuals being penalised directly. This is welcome, but a licensing regime would surely provide a quicker and easier means to remove people from the industry who fall foul of the standards the industry must demand and customers have now given up on expecting.
Andrew Tyrie, chairman of both the banking commission and the Treasury Select Committee, cited the need for this again when the drugs scandal relating to former Co-operative Bank chairman Paul Flowers, a methodist minister no less, broke last month.
Interestingly, the Financial Services Bill was held up in the Lords two weeks ago when the second house voted in favour of an amendment that would require just such a licensing regime. It will now traverse back to the House of Commons to be debated again. Maybe there is hope yet.
Until we have effective and hard rules banning the most pernicious of practices and a regime that ensures those responsible at all levels are faced with the threat of industry expulsion and personal penalties, we will never fully get to grips with a banking culture that has lost all relation to client interests.
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