tag:theconversation.com,2011:/fr/topics/uk-banking-13502/articlesUK banking – The Conversation2023-10-30T13:33:05Ztag:theconversation.com,2011:article/2151962023-10-30T13:33:05Z2023-10-30T13:33:05ZWhat Revolut’s attempt to secure a UK banking licence could mean for its current customers and for the ‘unbanked’<figure><img src="https://images.theconversation.com/files/556090/original/file-20231026-15-8jym8f.jpeg?ixlib=rb-1.1.0&rect=10%2C3%2C1200%2C792&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Revolut CEO Nik Storonsky: all he wanted for Christmas (2022) was a UK banking licence.</span> <span class="attribution"><a class="source" href="https://www.revolut.com/news/">Revolut</a></span></figcaption></figure><p>Last year, the CEO of financial technology (fintech) company Revolut added a UK banking license to his 2022 Christmas wish list, <a href="https://sifted.eu/articles/revolut-storonsky-fundraise-interview">telling startup news outlet Sifted</a>: “I would love to have it as a Christmas present. A present for me personally and for the business.” </p>
<p>But it’s nearly Christmas 2023 and Revolut still hasn’t secured the right to take deposits from the UK customers – the main benefit to the company of getting a UK license. </p>
<p>Revolut has been offering e-money services such as currency exchange and transfers (which do not require a UK banking licence) in the UK since 2015. It generated £196 million in revenue from this <a href="https://www.revolut.com/financial-statements/">in 2021</a>, or nearly one-third of its business – the rest mostly comes from banking activities in 18 EU countries.</p>
<p>Revolut, which says it has <a href="https://www.revolut.com/en-IE/news/revolut_surpasses_30_million_retail_customers_worldwide/">more than 30 million retail customers worldwide</a>, now wants to join other “<a href="https://www.which.co.uk/money/banking/bank-accounts/challenger-and-mobile-banks-aiYuO7u4JjWJ">challenger banks</a>” (those attempting to break the historical dominance of the “big four” UK banks: Barclays, Lloyds, HSBC, NatWest) in becoming a fully licensed bank in the UK. </p>
<p>The main benefit of this would be that it could take deposits <a href="https://www.altfi.com/article/6274_revolut-reportedly-preparing-uk-banking-licence-application">and handle more loan business</a> instead of “outsourcing” these activities to a number of UK-licensed banks. It could also boost financial inclusion by providing people in the UK with more choice and access to products that help manage money – a key concern amid the current cost of living crisis.</p>
<p>Whether deposits are handled directly by Revolut or through a third-party provider is unlikely to make much difference to customers. But for Revolut, outsourcing means additional costs so this could provide the company with cheaper access to finance. So, in theory, Revolut could pass any savings on to its customers.</p>
<p>Getting a UK banking license involves an extensive application process but <a href="https://www.ft.com/content/6d2eef34-d414-49c7-8557-c43a3d9ab803">typically takes about a year</a>. Once a bank gets one, it has to adhere to more stringent reporting and monitoring requirements. </p>
<p>During the nearly two years since Revolut first applied in January 2021, it has experienced IT system issues that have delayed its reporting of annual accounts. Requesting an extension is not an unusual process, but <a href="https://www.uktech.news/fintech/revolut-auditor-revenue-bdo-20230302#:%7E:text=The%20report%20stated%20the%20company,of%20the%20company's%20reported%20revenue.">concerns were also raised by Revolut’s auditor BDO</a> about its 2021 revenue reporting. </p>
<p>In March 2023, a Revolut spokesperson <a href="https://www.reuters.com/business/finance/revoluts-2022-revenues-grew-by-33-despite-crypto-winter-2023-03-01/#:%7E:text=Finance-,Revolut%20auditor%20flags%20concern%20about%20%24576%20mln,in%20long%2Ddelayed%202021%20accounts&text=LONDON%2C%20March%201%20(Reuters),its%20long%2Ddelayed%202021%20accounts.">told Reuters</a> the concerns were “remedied” in 2021. The company’s chief financial officer Mikko Salovaara said: “There is not any doubt over the completeness of the balance sheet, which, in turn, logically means that total revenue is also correct.”</p>
<p>More recently, Revolut has <a href="https://www.reuters.com/business/finance/revolut-strikes-share-deal-with-softbank-remove-barrier-uk-licence-ft-2023-10-03/">simplified its ownership structure</a> – its use of different classes of shares was more common in EU countries – which could help unblock the UK banking license application process for the company.</p>
<p>Whether, after all of this, customers would actually benefit from lower operating costs will depend on various factors, including what the competition is charging and the need for Revolut to maintain its profitability. </p>
<p>Another possible (perceived) benefit for customers could be greater financial security. Deposits of up to £85,000 held with licensed banks are secured through the Financial Services Compensation Scheme (<a href="https://www.fscs.org.uk/">FSCS</a>). However, the outsourcing model already offers the same protection to Revolut users if its third-party provider operates with its own UK banking license anyway.</p>
<h2>Enhancing UK financial inclusion</h2>
<p>More generally, fintech companies offer easier and often cheaper <a href="https://www.bis.org/cpmi/publ/d191.htm">access to financial products</a> than traditional banks, which means they boost financial inclusion according to <a href="https://onlinelibrary.wiley.com/doi/full/10.1002/jid.3524">research-based definitions</a>.</p>
<p>World Bank <a href="https://www.worldbank.org/en/publication/globalfindex">research on financial inclusion</a> suggests the UK scores almost perfectly in this area: 99.76% of respondents to World Bank surveys have personal current accounts and 95.46% with a debit card (although only 88.91% say they use their card). </p>
<p><strong>How people bank in the UK:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bar chart showing results of World Bank survey of UK banking customers." src="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552996/original/file-20231010-21-kp68ks.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.worldbank.org/en/publication/globalfindex">Author provided using data from the World Bank Findex Database, 2021</a></span>
</figcaption>
</figure>
<p>But the limited sample size for the UK (the World Bank’s survey relies on 128,000 adults in 123 countries) makes it difficult to truly identify the small number of “unbanked” people in the UK and their struggles. The Financial Conduct Authority’s (FCA) more comprehensive <a href="https://www.fca.org.uk/publication/financial-lives/financial-lives-survey-2022-key-findings.pdf">Financial Lives Survey</a> puts the number of unbanked people in the UK at 1.1 million in 2022, down from 1.7 million in 2014 but largely unchanged since 2017. </p>
<p>The UK Treasury’s <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1125329/Financial_Inclusion_Report__002_.pdf">Financial Inclusion Report 2021-22</a> argues that the more basic bank accounts now offered by all banks have improved financial inclusion, but it also stresses the importance of fintechs in increasing choice and launching innovative products like mobile budgeting tools. </p>
<p>On the other hand, fintech’s reliance on mobile and internet banking arguably widens an existing digital divide. According to the World Bank, <a href="https://www.worldbank.org/en/publication/globalfindex">92% of UK respondents</a> had access to the internet and used mobile phones in 2021, leaving some without access to fintech products. </p>
<p>For those that can access them, fintech solutions could help reduce costs and provide tools to manage people’s stretched budgets. This could help mitigate the current <a href="https://theconversation.com/uk/topics/cost-of-living-crisis-115238">cost of living crisis</a> while also enhancing financial inclusion. Studies show better financial inclusion can <a href="https://www.tandfonline.com/doi/full/10.1080/1351847X.2020.1792960">reduce income inequality</a> under certain conditions. </p>
<figure class="align-center ">
<img alt="Woman sitting in a window using a laptop." src="https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/556095/original/file-20231026-21-hlq509.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Tech companies can provide easier access to financial products.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-pondering-female-person-beautiful-curly-747373468">GaudiLab/Shutterstock</a></span>
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</figure>
<h2>Becoming a challenger bank</h2>
<p>Revolut has a convincing track record of obtaining banking licences in its short history. After its 2015 UK launch, Revolut obtained its first banking licence in Lithuania in 2018. It has operated as a bank in 18 EU countries since 2021. That same year, Revolut applied to become a deposit-taking institution in Australia. This is a good sign that its UK banking licence should be achievable. </p>
<p>However, the benefits for customers are less clear. Most customers already use e-money accounts together with traditional bank accounts. Looking at <a href="https://www.thebanker.com/What-does-Metro-Bank-s-troubles-mean-for-UK-challenger-banks-1698136247">Metro Bank’s recent problems</a> – investors were <a href="https://otp.tools.investis.com/clients/uk/metro_bank_plc/rns/regulatory-story.aspx?cid=1352&newsid=1720003">concerned</a> that it could not meet regulatory requirements on its capital levels, although it has since <a href="https://news.sky.com/story/metro-bank-seeks-bids-within-weeks-for-3bn-mortgage-book-12984988">secured additional financing</a> and continues to serve customers as normal – it is not evident that one more challenger bank will benefit UK customers. </p>
<p>On the other hand, a more comprehensive range of different types of financial service providers <a href="https://www.tandfonline.com/doi/full/10.1080/02692171.2022.2090522">tends to stabilise the financial system</a>. In this sense, diversity could enhance financial stability.</p><img src="https://counter.theconversation.com/content/215196/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span><a href="mailto:gerhard.kling@abdn.ac.uk">gerhard.kling@abdn.ac.uk</a> receives funding from the ESRC-NSFC (Newton Fund), FP7, FP6, and the Maava Foundation.</span></em></p><p class="fine-print"><em><span>Aravinda Meera Guntupalli receives funding from ESRC, GCRF, World Cancer Research Fund, Canadian government and World Bank. </span></em></p>More diversity in the banking sector can help with stability, but Revolut’s two-year wait for a UK banking licence indicates regulatory caution.Gerhard Kling, Chair in Finance, University of AberdeenAravinda Meera Guntupalli, Senior Lecturer in Global Health, University of AberdeenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2139662023-09-20T14:06:19Z2023-09-20T14:06:19ZCity watchdog finds no evidence for recent political ‘debanking’ – but private banks have been picky for centuries<figure><img src="https://images.theconversation.com/files/549303/original/file-20230920-25-h5u8vx.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4724%2C3154&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ex-politician Nigel Farage accused his bank of refusing his business because of his political views.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-november-1-2019-brexit-1547668835">Frank 2012/Shutterstock</a></span></figcaption></figure><p>After a row over the closure of his bank account earlier this year, former politician Nigel Farage has hit out at the UK financial regulator for saying it has found <a href="https://www.fca.org.uk/news/press-releases/fca-sets-out-initial-findings-bank-account-access-and-closures#:%7E:text=The%20FCA%20has%20published%20the,of%20a%20customer's%20political%20views.">no recent evidence</a> of customers being “de-banked” over their personal views.</p>
<p>Farage believes private bank Coutts <a href="https://news.sky.com/story/nigel-farages-bank-accounts-whats-it-all-about-and-whats-the-coutts-threshold-12915155">closed his account</a> because his political views didn’t align with the company’s values. Coutts and its parent company NatWest Group denied his accusations, saying <a href="https://news.sky.com/story/nigel-farage-doesnt-deny-he-fell-below-wealth-cap-at-coutts-bank-used-by-royals-12914753">he didn’t have enough funds</a> to be a customer of the private bank. Farage was offered an account with NatWest’s high street arm <a href="https://news.sky.com/story/nigel-farages-bank-accounts-whats-it-all-about-and-whats-the-coutts-threshold-12915155">but reportedly turned it down</a> as unsuitable.</p>
<p>UK chancellor Jeremy Hunt asked banking regulator the Financial Conduct Authority (FCA) to <a href="https://www.fca.org.uk/news/news-stories/we-request-data-banks-account-closures">gather data</a> from all UK banks about the reasons for any account closures, suspensions and services denied between July 2022 and June 2023. Farage’s account was closed during this period.</p>
<p>Admitting the data was gathered very quickly, FCA chief executive Nikhil Rathi, said: “While no bank, building society or payment firm reported to us that they had closed accounts primarily due to someone’s political views, further work is needed for us to be sure.”</p>
<p>Indeed, banks being choosy about which customers they accept is nothing new. Farage’s furore has simply highlighted private bank behaviour that has persisted without much comment over centuries.</p>
<h2>The origins of private banks</h2>
<p>When Coutts was set up <a href="https://www.coutts.com/about/history.html">in London in 1692</a>, banks generally acted as an intermediary to encourage trade and the free flow of goods and services – but only for the rich. Banks facilitated the greater flow of capital among this exclusive group by lending them money, discounting their bills of exchange (like an IOU note) and providing them with deposit accounts.</p>
<p>In the 18th and 19th centuries, <a href="https://www.worldcat.org/title/country-banking-in-the-industrial-revolution/oclc/249850">banks proliferated outside London</a>, throughout England’s provinces. <a href="https://global.oup.com/academic/product/private-banking-in-europe-9780198735755?cc=gb&lang=en&#">London banks</a> were typically larger and often funded international as well as national trade. Otherwise, there were few differences between London banks such as Coutts and these new country banks. They were both generally single units (no branches) and founded by a similar social group – the gentry – who initially offered financial services to their peers. </p>
<figure class="align-center ">
<img alt="Window with Coutts sign and three crowns." src="https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/549308/original/file-20230920-23-jymd2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Coutts was founded in 1692 and has counted the British royal family among its customers since the late 18th century.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-october-15th-2022-main-2214749407">Alex Yeung/Shutterstock</a></span>
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</figure>
<p>Things started to change in the early 19th century with the introduction of joint stock banking. Joint stock banks tended to have much larger ownership structures comprising a local community of shareholders. Some even <a href="https://www.tandfonline.com/doi/abs/10.1080/00076791.2017.1323883">opened branches</a> and offered their services regionally, rather than just to a small number of local customers. But still, these bankers only expanded their financial services to the <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799600000095">mercantile classes</a> – business owners, who had lacked access to banking previously.</p>
<p>Even then, customers of joint stock banks were carefully restricted by the commercial communities that owned them and the managers that ran them. They used self-regulation to protect their industries <a href="https://doi.org/10.1111/j.1468-0289.2004.00287.x">from “bad” traders</a> – people who ran up debts, made poor business decisions or engaged in unethical business behaviour that didn’t align with bank owners’ values, aims and goals. </p>
<p>In the 1850s, for example, Sheffield steelmaker Naylor Vickers & Co. ran up high levels of debt with the Sheffield Union Bank. The bank was only saved from failure by <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799600000095">a Bank of England intervention</a>. Such behaviour, when it occurred, was usually not worth litigating because the courts were busy and so commercial lawsuits were often <a href="https://doi.org/10.1080/01440365.2017.1289671">discouraged by leading judges</a>. This meant these matters were usually dealt with by “debanking” or refusing service to offending business owners.</p>
<p>Joint stock banks were more inclusive than the private banks, but still didn’t serve the working classes. They applied a strict process of scrutinisation for all depositors, loan applicants and shareholders. Bank staff gathered information <a href="https://www.cambridge.org/core/journals/enterprise-and-society/article/abs/constructing-corporate-identity-before-the-corporation-fashioning-the-face-of-the-first-english-joint-stock-banking-companies-through-portraiture/DE8AB45BFEB81F97E3BB93C8C24A1FA1">from the local community</a> through their economic, social, religious and political networks. </p>
<p>This was an important process because these banks didn’t have limited liability – shareholders were responsible for all of their banks’ debts. </p>
<h2>Building high street banking behemoths</h2>
<p>Another shift occurred in the late 19th and early 20th centuries. As joint stock banks grew they became limited liability companies to protect shareholders by ensuring that they were no longer liable for all of their bank’s debts, only for an amount corresponding to the shares they held. </p>
<p>These banks also became national as opposed to regional. It was then that they transformed into the high street behemoths with large branch networks that we know today. In fact, <a href="https://www.natwestgroup.com/who-we-are/about-natwest-group/our-history.html">the origins of NatWest</a>, the high street banking arm of Coutts, can be traced back to joint stock banks. </p>
<p>Alongside this growth, bank managers could no longer use local information to assess customers. Head offices had to <a href="https://www.tandfonline.com/doi/abs/10.1080/00076799900000201">undertake more standard checks</a> on those applying for accounts or credit instead, losing some lending flexibility along the way. </p>
<p>As British banks <a href="https://www.taxjustice.net/wp-content/uploads/2015/06/Linda-Arch-Competition-and-the-London-Clearing-Banks-1946-1979-for-Should-Nation-States-Compete.pdf">became more competitive</a> in the latter half of the 20th century, they wanted more deposits so they could offer more loans. So high street banks began to <a href="https://doi.org/10.1080/00076791.2020.1791823">target the previously “unbanked”</a> – largely working-class people paid cash in hand. But private banks didn’t change their business models or services at this time; to this day they remain concerned with serving the wealthiest people.</p>
<h2>What about today’s ‘unbanked’?</h2>
<p>British banks have long excluded customers based on their membership of a certain social class or group, making Farage’s experience rather conventional when it comes to private banks. But there are <a href="https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/1642/164205.htm#:%7E:text=The%20FCA%20has%20published%20research,not%20have%20a%20bank%20account.">over a million people</a> in the UK without a bank account – private or high street. It remains to be seen if this lack of access can be solved by new rules, such as those <a href="https://www.gov.uk/government/news/government-clamps-down-on-unfair-bank-account-closures">recently announced by the government</a>.</p>
<p>Like many other businesses, banks have long been using <a href="https://www.sciencedirect.com/science/article/abs/pii/0305048377901037">market segmentation</a> to design the kinds of products, services and advertising that will <a href="https://www.investopedia.com/terms/m/market-segment.asp#toc-how-are-market-segments-used:%7E:text=value%20business%20customers.-,How%20Are%20Market%20Segments%20Used%3F,-Commonly%20used%20in">attract customers</a> they want to serve. As a result, British banking, and in particular private banking, will probably remain exclusive rather than inclusive.</p><img src="https://counter.theconversation.com/content/213966/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research shows banks – especially private banks – have always been concerned about their customers’ social status and respectability.Lucy Newton, Professor in Business History, Henley Business School, University of ReadingFrancesco De Pascalis, Senior Lecturer in Financial Law, Brunel University LondonVictoria Barnes, Reader of Commercial Law, Queen's University BelfastLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2096582023-07-13T13:03:56Z2023-07-13T13:03:56ZWhat is a ‘politically exposed person’ and why do the likes of Jeremy Hunt and Nigel Farage claim the status prevents them getting bank accounts?<p>Reports <a href="https://www.bbc.co.uk/news/business-66097039">vary</a> as to why the private bank Coutts decided to close the account of former UKIP leader Nigel Farage. He claims he was excluded for his political views, the bank says the problem was a lack of funds. But either way, his case does highlight <a href="https://hansard.parliament.uk/lords/2014-10-14/debates/14101474000519/MoneyLaunderingUKParliamentarians#contribution-14101474000036">a wider and longstanding problem</a> faced by so-called “politically exposed persons” or “PEPs”. Just a few days after the Farage story broke, the chancellor of the exchequer himself, Jeremy Hunt, revealed that he had been <a href="https://www.theguardian.com/business/2023/jul/09/jeremy-hunt-reveals-he-was-refused-monzo-account">denied an account by online bank Monzo</a>. </p>
<p>Hunt said of the incident, which happened before he became chancellor, that he was concerned that the rules around getting a bank account when you are a PEP could prevent people from wanting to take up public office. </p>
<p>Whether that is true or not, it is very much the case that PEPs face difficulties finding banks that are willing to take them on because of the way in which they apply certain banking rules. </p>
<p>When taking on new customers, banks in the UK are required to comply with <a href="https://www.legislation.gov.uk/uksi/2017/692/contents">anti-money laundering regulations</a> that are supposed to deter criminals and help the police to investigate crime. The rules are designed to prevent the banking system from <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015L0849">being used by criminals</a>. They require that banks, building societies and certain other regulated groups undertake due diligence on their customers by verifying their identities and addresses. </p>
<p>Financial service providers usually satisfy this requirement by requesting <a href="https://www.gov.uk/guidance/money-laundering-regulations-your-responsibilities">photo ID and utility bills</a> from new customers. Banks must also monitor customers’ <a href="https://www.legislation.gov.uk/uksi/2017/692/regulation/28">dealings during the lifetime of their accounts</a>, seek proof that the source of large deposits into accounts is legitimate and consistent with a customer’s business activities and <a href="https://nationalcrimeagency.gov.uk/what-we-do/crime-threats/money-laundering-and-illicit-finance/suspicious-activity-reports">report any suspicious transactions</a> to law enforcement authorities.</p>
<p>The theory is that if the proceeds of crime can be linked to specific bank accounts and the ownership of those bank accounts has been properly established, law enforcement authorities can simply “follow the money” to see who is responsible for those crimes.</p>
<h2>What is a PEP?</h2>
<p>Where PEPs are potential customers, a beefed-up version of the due diligence requirements apply. A PEP is anyone who is “entrusted with prominent public functions” either in the UK or in any other country. The question of who is viewed as being “entrusted with a prominent public function” is somewhat opaque, but it <a href="https://www.legislation.gov.uk/uksi/2017/692/regulation/35">includes</a> all MPs and members of the House of Lords, senior judges, and the governing bodies of political parties. </p>
<p>The AML regulations recommend that banks consider <a href="https://www.legislation.gov.uk/uksi/2017/692/part/3/chapter/2">“seeking additional independent, reliable sources to verify”</a> that PEP customers are who they say they are, and require that PEPs’ transactions are subject to additional monitoring and oversight.</p>
<p>PEPs are viewed as <a href="https://www.fca.org.uk/firms/money-laundering-terrorist-financing/high-risk-customers-politically-exposed-persons">“high-risk” clients</a> because <a href="https://www.unodc.org/documents/treaties/UNCAC/Publications/Convention/08-50026_E.pdf">international lawmakers</a> and <a href="https://www.transparency.org.uk/sites/default/files/pdf/publications/AML_report09.pdf">transparency groups</a> highlight that they may be more susceptible to bribery and other forms of corruption than other customers.</p>
<p>However, on top of the PEPs themselves, their families and their “close known associates” are also made subject to strict anti-money laundering laws too. That’s because their accounts can be used to receive and hold the proceeds of corruption. It is no coincidence that PEP-specific anti-money-laundering rules first emerged in the 2000s at a time when a number of <a href="https://www.hsgac.senate.gov/wp-content/uploads/imo/media/doc/FOREIGNCORRUPTIONREPORTFINAL710.pdf">high-profile international corruption scandals</a> involving senior politicians and their families were unfolding. One legendary case of the time saw the wife of the recently deceased Nigerian dictator Sani Abacha caught trying to leave the country with <a href="https://www.theguardian.com/world/2012/oct/05/nigeria-sani-abacha-jewellery-police">38 suitcases stuffed with cash</a> apparently looted from their state coffers.</p>
<h2>Are banks shutting down the accounts of PEPs?</h2>
<p>In recent years, the Financial Conduct Authority has imposed <a href="https://www.fca.org.uk/news/press-releases/fca-fines-santander-uk-repeated-anti-money-laundering-failures">massive fines</a> on banks in the UK for failing to properly comply with money laundering rules. In 2015, Barclays had to pay <a href="https://www.fca.org.uk/publication/final-notices/barclays-bank-nov-2015.pdf">£72 million</a> in one such case involving PEPs.</p>
<p>Faced with such potential penalties, banks have apparently sought to minimise their own risk of incurring these fines by <a href="https://www.fca.org.uk/publication/research/drivers-impacts-of-derisking.pdf">minimising the number of PEP customers they accept</a>. This is despite the fact that the <a href="https://www.fca.org.uk/publication/finalised-guidance/fg17-06.pdf">FCA has expressly warned</a> that banks should not end their relationships with customers just because they are PEPs.</p>
<p>This enthusiastic application of money-laundering rules by banks and building societies may explain why politicians are claiming that they and their family members risk becoming <a href="https://www.ft.com/content/bed60941-bd7c-4f26-a482-05d84c7650e7">“unbanked”</a>’. And since estimates put the number of customers affected by the PEP-specific rules at <a href="https://hansard.parliament.uk/lords/2014-10-14/debates/14101474000519/MoneyLaunderingUKParliamentarians#contribution-14101474000038">over 150,000 people</a> in the UK, this is not an insignificant problem. What’s more, the rules can continue to apply to PEPs even after they leave office, so the number of people implicated will only continue to grow. </p>
<h2>Changing the guidance</h2>
<p>In response to the grievances raised by UK politicians, Andrew Griffith, the economic secretary to the Treasury has <a href="https://twitter.com/griffitha/status/1676547441942831106?ref_src=twsrc%255Egoogle%257Ctwcamp%255Eserp%257Ctwgr%255Etweet">written to the FCA</a> asking it to fast-track a proposed review of its <a href="https://www.fca.org.uk/publications/finalised-guidance/fg17-6-treatment-politically-exposed-persons-peps-money-laundering">guidance to banks on dealing with PEP customers</a>.</p>
<p>Given the ever-growing number of PEPs and the varying risk profiles presented by them, depending on the types of public function they perform, this is an excellent opportunity for the FCA to remind banks that they are required to take a risk-based approach in applying the money laundering rules. Banks should ensure that they direct their oversight resources towards riskier PEP customers and take a lighter-touch approach to PEPs who, by the nature of their activities, have little or no exposure to corruption risk.</p><img src="https://counter.theconversation.com/content/209658/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Áine Clancy does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Banks in the UK have to conduct extra checks on people more at risk of blackmail – and an easier option is sometimes just to say no to giving them and account.Áine Clancy, Lecturer in Law, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2055112023-06-27T16:00:54Z2023-06-27T16:00:54ZWelsh mining towns had alternative currencies 200 years ago – here’s what the crypto world could learn from them<figure><img src="https://images.theconversation.com/files/532005/original/file-20230614-21-yyoovi.jpg?ixlib=rb-1.1.0&rect=0%2C28%2C2400%2C1156&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A halfpenny token issued by the Parys Mining Company of Anglesey in 1788. The hooded druid design was used for many years and was the first of hundreds of token designs.</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Conder_Token_1788_Anglesey_Halfpenny_DH275_composite.jpg">BrandonBigheart/Wikimedia</a></span></figcaption></figure><p><em>You can also read this article <a href="https://theconversation.com/dyma-beth-allair-byd-crypto-ei-ddysgu-or-arian-cyfredol-oedd-yn-cael-ei-dalu-i-weithwyr-yng-nghymru-canrifoedd-yn-ol-205424">in Welsh</a>.</em></p>
<p>The global cryptocurrency market has seen a number of recent setbacks: from the collapse of the <a href="https://www.ft.com/content/c10bc6f7-abbe-45dc-9367-042186c3336f">Terra/Luna system in May 2022</a> to the failure of <a href="https://www.ft.com/content/913ff750-d1f4-486a-9801-e05be20041c1">FTX</a>, one of the largest crypto exchanges in the world. </p>
<p>Because of these factors, and other concerns over cryptocurrencies’ <a href="https://ccaf.io/cbnsi/cbeci/ghg">carbon emissions</a>, these assets <a href="https://www.bloomberg.com/news/articles/2022-09-30/does-crypto-owe-anyone-an-apology-after-2-trillion-of-losses">lost US$2 trillion in value</a> (£1.5 trillion) in 2022.</p>
<p>But while cryptocurrencies get a lot of attention today, in some ways they are not a revolutionary concept. Hundreds of years ago, workers in Wales were often paid with alternative currencies instead of money.</p>
<p>These currencies were physical tokens that represented and were linked to the value of real money. Many cryptocurrencies work in a similar way, acting as digital tokens that <a href="https://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets-HIGHLIGHTS.pdf">represent a ledger of financial assets</a> (this is known as “tokenisation”).</p>
<p>Digital currencies are also not reliant on any central authority, such as a <a href="https://www.bloomberg.com/opinion/articles/2021-03-15/cryptocurrencies-are-rising-so-are-the-stakes-for-governments">government or bank</a>, to uphold or maintain their network of exchange. Again, this is similar to how physical tokens were used by Welsh mining companies. </p>
<h2>Currency crisis</h2>
<p>Towards the end of the 18th century the coinage of Britain was in a deplorable state due to the severe <a href="https://coinsandhistoryfoundation.org/2021/07/13/eighteenth-century-britain-coinage-in-crisis/#:%7E:text=The%20production%20of%20silver%20coins,of%20coins%20made%20from%20it.">shortages</a> of silver and copper coins. During the Industrial Revolution people migrated from the countryside into mining and manufacturing centres. But living in towns required money, and the ability to pay wages was impossible for businesses without small change. </p>
<p>With an influx of new workers using money, new shops were opened to meet demand, creating more jobs that required payment in coins. Although the production of counterfeit coins was illegal and <a href="https://www.jstor.org/stable/4091719">punishable by death</a>, it was not illegal to produce tokens with other designs which could be used instead of coins. </p>
<p>The first great era of token production during the <a href="https://education.nationalgeographic.org/resource/industrial-revolution-and-technology/">first Industrial Revolution</a> began in 1787 with the issue of the <a href="https://www.britishmuseum.org/collection/term/BIOG214134">Parys Mining Company</a> token. This company mined at Parys Mountain on the Welsh island of Anglesey. It briefly produced more copper than any other mine in the world during the Industrial Revolution. </p>
<figure class="align-center ">
<img alt="A quarried landscape of brown and orange earth." src="https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/531672/original/file-20230613-15-vt2pzd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">What Parys mountain on Anglesey looks like today.</span>
<span class="attribution"><a class="source" href="https://pixabay.com/photos/anglesey-parys-mountain-wales-3816220/">rhianjane/Pixabay</a></span>
</figcaption>
</figure>
<p>It also used the high-quality ore from its mine to produce tokens which could be exchanged for official coin at full value at any one of its shops or offices. This made the Parys Mining Company the first company in the world to issue tokens. These were described as the “<a href="http://provincialtokencoinage.weebly.com">premier tokens</a>” of the 18th century by that era’s coin experts.</p>
<p>Soon, practically every town in Britain was producing its own tokens. This was driven in part by a shortage of government coinage and improvements in coin manufacturing by <a href="https://globalcapitalism.history.ox.ac.uk/files/case28-matthewboultonscoinspdf">Matthew Boulton’s Soho Mint</a> in Birmingham, who also turned his hand to tokens. </p>
<p>By the turn of the 19th century, the total supply and fast circulation of tokens, foreign coins and other substitutes probably <a href="http://projects.exeter.ac.uk/RDavies/arian/welsh.html">exceeded</a> those of the official coin of the country.</p>
<p>The process of tokenisation was subsequently seen in other countries, in particular the United States. Mining and logging camps in the 19th century US were typically owned and operated by a single company, often <a href="https://www.jstor.org/stable/1992612">in remote</a> locations with poor access to cash. </p>
<p>These companies would often pay their workers in “scrip”, or tokens. The workers, given the limited places they could spend scrips, had little choice but to purchase goods at company-owned stores. By placing large mark ups on goods, the <a href="https://rethinkq.adp.com/artifact-coal-company-scrip-miners/">company</a> could increase their profits and enforce employee loyalty. </p>
<figure class="align-left ">
<img alt="A close up of a silver coin on a green background." src="https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=576&fit=crop&dpr=1 600w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=576&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=576&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=724&fit=crop&dpr=1 754w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=724&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/531992/original/file-20230614-19842-dbn8gn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=724&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A Parys penny produced by the Parys Mining Company.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Parys_Penny.jpg">Obscurasky/Wikimedia</a></span>
</figcaption>
</figure>
<p>While the production of tokens by the Parys Mining Company were spurred on by the first Industrial Revolution, the adoption and popularity of Bitcoin and other cryptocurrencies has been hastened by the <a href="https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/">fourth Industrial Revolution</a>.</p>
<p>Although they are more than 200 years apart, the history of these tokens have important lessons for today’s cryptocurrencies. First, for cryptocurrencies to succeed there needs to be various ways for individuals to accumulate the crypto/tokens, plus a demand and use for the crypto that means it holds its value, and trusted environments where exchange for goods and services can take place.</p>
<p>And second, for cryptocurrencies to be successful and sustainable in the long term they must uphold their original purpose of having an ecosystem that remains independent of a single company or government. Efforts to lock cryptocurrencies to a single organisation do not look positive, for example Facebook’s failed attempt to <a href="https://www.coindesk.com/layer2/2022/01/28/reflecting-on-facebooks-hilarious-well-deserved-crypto-failure/">launch a cryptocurrency</a>, announced in 2019. </p>
<p>The tokens of Welsh mining companies inherently failed when the closures of the mine or shops led to the removal of one or more of the three components of the ecosystem. And then people left with the tokens lost their money, a lesson for us today.</p><img src="https://counter.theconversation.com/content/205511/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A Welsh mining company was the first to issue tokens to workers as an alternative form of payment.Edward Thomas Jones, Senior Lecturer in Economics / Director of the Institute of European Finance, Bangor UniversityLaurence Jones, Lecturer in Finance, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1993412023-03-02T16:55:44Z2023-03-02T16:55:44ZDeciding what to wear to work isn’t getting any easier for women, even as business dress codes relax<figure><img src="https://images.theconversation.com/files/510902/original/file-20230217-306-4ggfl4.jpg?ixlib=rb-1.1.0&rect=42%2C35%2C4619%2C3624&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Dressing for success?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-woman-mens-clothing-getting-undressed-92426995">Everett Collection/Shutterstock</a></span></figcaption></figure><p>HSBC has <a href="https://www.bbc.co.uk/news/business-64484761">recently introduced</a> what it calls a “more casual” uniform for its branch staff, including jumpsuits and jeans, “menopause-friendly” clothing, as well as “ethnic wear”. The uniforms aim to make staff immediately visible to customers and also signal a clear corporate message of a friendly, approachable high street bank.</p>
<p>Last year, Virgin Airlines announced that <a href="https://www.theguardian.com/business/2022/sep/28/virgin-atlantic-staff-can-choose-which-uniform-to-wear-no-matter-their-gender">staff could wear any version</a> they wish of its Vivienne Westwood-designed staff uniforms, giving space for personal expression of gender identity.</p>
<p>Such changes hint at the difficulties involved in working out what to wear at work, especially for women working in offices or in customer – and client-facing roles. Without a uniform – be that employer-designed or a female version of the traditional work suit – women have often had to forge their own identity at work. </p>
<p>This is because, like it or not, work clothes are important. They reflect the identity of both employee and employer, as well as status. Clothes communicate key information and influence how others perceive the wearer. </p>
<p>In a corporate environment, clothing also reflects the identity of the organisation. Many businesses still see what employees wear as an important indicator of their brand and it also affects perceptions of employees on an individual basis. This is the case with uniforms, as well as when women wear their own clothes to work.</p>
<p>Our research on <a href="https://www.tandfonline.com/doi/full/10.1080/00076791.2020.1791823">workwear for women in banking in the 1970s</a> shows how Barclays Bank used uniforms as a branding tool, but also indicates the role gender has played in women’s work clothes over the years. This work was possible thanks to access provided by Barclays Group archives.</p>
<p>We looked at the introduction of a new role – the personal banker – by Barclays in the 1970s. This was an entry-level position, based primarily on the shop floor, engaging with customers and being more approachable and available than traditional clerks or bank managers. In the early days, the position was mostly held by women and there was a corresponding uniform (see image) of a blue two-piece skirt suit with a white blouse.</p>
<p>Female personal bankers, on the whole, seemed to enjoy wearing this uniform. Our research shows they saw it as an equivalent to the male business suit, that gave them a sense of legitimacy and status that they did not have in the traditionally male banking world. </p>
<p>It’s telling then that the small number of male workers that were personal bankers at Barclays in the 1970s did not have uniforms. Those in charge at the time preferred “to confine the wearing of uniforms to the ladies”, according to a document sent between two senior staff members on September 3 1979 that we found in the archive. </p>
<p>To this day, dark-coloured, “sensible” work suits convey the <a href="https://www.jstor.org/stable/j.ctt1j7x96s">classic image of a banker</a> in sober, serious, professional attire. This “uniform” is a clear signal of authority and status in the workplace.</p>
<p>Suits have also been adopted by women, of course. But they still tend to have more choices to make than men, even if they wear a suit to work: trousers or skirt, length of skirt, fabric colour, boots or shoes, heel height, neckline, accessories – the list goes on. And the options they choose can affect how they are seen by bosses, colleagues, clients and customers.</p>
<p>Indeed, documents from Barclay’s archives showed that managers felt women were able to provide the personal, caring and relationship-based approach in branches that it was seeking at the time. And the uniforms were an attempt to support the bank’s thinking around this kind of branding. One internal marketing report from 1979 said: </p>
<blockquote>
<p>We believe that uniforms create an attitude of mind on behalf of those that wear them … and an improved perception of the bank on behalf of our customers. They strongly reinforce the idea that we are doing something different to what we have done in the past. </p>
</blockquote>
<h2>Post-lockdown workwear</h2>
<p>Various <a href="https://pubmed.ncbi.nlm.nih.gov/29048254/">research</a> has found that perceptions of women in the workplace <a href="https://link.springer.com/article/10.1007/s11199-015-0450-8#:%7E:text=Overall%20participants%20rated%20the%20senior,not%20present%20for%20the%20receptionist.">are still influenced</a> by the way they dress, often in a way that perceptions of men are not. This research has found that clothing deemed to be “unsuitable” by colleagues or customers can result in women being viewed as less competent or of lower status than men in the same working environment. </p>
<p>One of the <a href="https://pubmed.ncbi.nlm.nih.gov/29048254/">studies</a> above concludes:</p>
<blockquote>
<p>Clothing is enough of a cue for people to make significant character judgements. An important implication of our results is that not following clothing rules can have a negative impact on how people perceive women. </p>
</blockquote>
<p>Of course, what many people wear to work has become progressively more relaxed since the 1970s. Pre-COVID, many firms had “dress-down” Fridays or “business casual” dress codes. But the adoption of relaxed clothing really ramped up when many people were working at home during the COVID lockdowns. </p>
<p>This has continued since, with <a href="https://www.ft.com/content/4c504e38-ab40-11ea-abfc-5d8dc4dd86f9">suit sales falling</a> in recent years – even Goldman Sachs <a href="https://www.theguardian.com/business/2019/mar/06/goldman-sachs-relaxes-dress-code-for-more-casual-environment">relaxed its dress code</a> for some staff. But recent reports suggest that UK women working remotely during the global pandemic were still being asked by companies <a href="https://news.sky.com/story/coronavirus-women-told-to-dress-sexier-when-working-from-home-survey-finds-12034520">to look more attractive</a> to win new business.</p>
<p>So, while more relaxed clothing and even gender-neutral uniforms are being introduced in offices, banks or on planes, it seems that women still have some way to go in terms of perceptions of their work being based on their appearance. A continued shift in attitudes, not just corporate clothing, is still needed.</p><img src="https://counter.theconversation.com/content/199341/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Women have had to forge their own identity at work but still face issues based on their appearance.Lucy Newton, Professor in Business History, Henley Business School, University of ReadingVictoria Barnes, Reader in Commercial Law, Brunel University LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1994742023-02-23T06:15:25Z2023-02-23T06:15:25ZClass and the City of London: my decade of research shows why elitism is endemic and top firms don’t really care<p>During the COVID pandemic, as most wages <a href="https://commonslibrary.parliament.uk/what-happened-to-wages-in-the-coronavirus-pandemic/#:%7E:text=Since%20November%202020%2C%20wages%20have,November%202020%20and%20December%202021.">stagnated</a>, workers in the City of London were enjoying <a href="https://www.theguardian.com/business/2022/jun/11/what-cost-of-living-crisis-bumper-executive-bonuses-make-a-comeback">bumper pay packets</a>. Average partner salaries in one corporate law firm <a href="https://www.thetimes.co.uk/article/lawyers-lead-the-way-as-million-pound-salaries-rain-down-on-the-city-rdmxjfs67">exceeded £2 million</a> for the first time. Investment bankers received their <a href="https://www.theguardian.com/business/2022/feb/16/weve-had-a-run-on-champagne-biggest-uk-banker-bonuses-since-financial-crash">highest bonus payouts</a> since 2008.</p>
<p>City bosses have long justified these exceptional rewards by claiming that they are available to anyone with sufficient intellect and willingness to work hard – regardless of their gender, ethnicity or social class. In the <a href="https://www.goldmansachs.com/our_firm/investor_relations/financial_reports/annual_reports/2003/pdf/GS03AR_businessprncples.pdf">words of Goldman Sachs</a>, one of the City’s most iconic players:</p>
<blockquote>
<p>Advancement depends on merit … For us to be successful, our people must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be.</p>
</blockquote>
<p>But studies tell a different story about the City of London’s culture and demographics. In October 1986, the “<a href="https://en.wikipedia.org/wiki/Big_Bang_(financial_markets)">Big Bang</a>” – the name given to the sudden deregulation of financial markets to enhance London’s status as a global financial centre – was also supposed to signal the creation of a new, <a href="https://www.bbc.co.uk/news/business-37751599">more egalitarian</a> City. Yet four decades on, <a href="https://www.thebridgegroup.org.uk/news/partner-law">research</a> <a href="https://static1.squarespace.com/static/5c18e090b40b9d6b43b093d8/t/5f6c69ea4d0d1b29037581f3/1600940523386/BG_SEB_Partner_Law_Sep2020_SUMMARY_FINAL.pdf">shows</a> that more than half of all partners at the leading law firms are white, male and privately educated, while more than 90% of bosses at eight top financial service firms are from society’s most privileged backgrounds – a demographic that comprises just over 30% of the entire UK population.</p>
<p>I began <a href="https://www.researchgate.net/publication/293014505_Understanding_social_exclusion_in_elite_professional_service_firms_field_level_dynamics_and_the_%27professional_project">researching</a> this <a href="https://bristoluniversitypress.co.uk/highly-discriminating">issue</a> more than ten years ago, after briefly working in business development for a City law firm. Despite being appointed in almost equal numbers to men, women were significantly under-represented at the firm’s senior levels, comprising fewer than 20% of its partners. There was also a striking lack of ethnic diversity among all staff, and it was especially rare to see any black lawyers.</p>
<p>Soon after I joined, I was offered a session with a style consultant who, my manager explained, would help me appear “more professional”. The consultant’s primary advice was to wear more make up and put on skirt-suits.</p>
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<img alt="" src="https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288776/original/file-20190820-170910-8bv1s7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption"></span>
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<p><strong><em>This article is part of Conversation Insights</em></strong>
<br><em>The Insights team generates <a href="https://theconversation.com/uk/topics/insights-series-71218">long-form journalism</a> derived from interdisciplinary research. The team is working with academics from different backgrounds who have been engaged in projects aimed at tackling societal and scientific challenges.</em></p>
<hr>
<p>In any industry where people are regularly spotlighted as a firm’s most important resource, hiring staff for any other reason than their ability might appear to make little sense. In the City, however, white middle-class men have always been particularly valued for other qualities.</p>
<p>Consider this exchange I had with asset manager Toby* in 2019. I started by asking on what basis his clients selected their financial advisers, to which he replied: “They have expectations of meeting people with expertise, really.”</p>
<p>But when I asked how they assess this expertise, Toby said it was “a difficult question”:</p>
<blockquote>
<p>I think they’re choosing us basically on whether they like the sound of us or the look of us. Most of our sales force is [made up of] white, middle-class males … Let’s try a thought experiment. If we turned up with, I don’t know, a black woman and a white bloke, but a bit spivvy with an Essex accent … Yeah, I don’t know. I really don’t know. God, that sounds really bad.</p>
</blockquote>
<p>Many City executives have told me that a certain type of “social ease”, often cultivated at private schools, allows colleagues to get away with bullshit and bluff. Or as one senior executive at a FTSE 100 firm put it:</p>
<blockquote>
<p>We all know that people with the right accent and mannerisms … sound much more believable. Equally, I want to say that we can see through that – but the truth is, we can’t.</p>
</blockquote>
<h2>‘We give the jobs to other posh people’</h2>
<p>Many of my interviews were conducted in the late 2010s, a time when “diversity and inclusion” was a buzz phrase among elite City firms. I was keen to find out how serious these firms – spanning finance, legal services, management consulting, accounting and auditing – were about changing the social makeup of their staff, particularly those earning the biggest bucks.</p>
<p>Prestigious City firms, some with billion-pound revenue streams, have long tried to position themselves as “<a href="https://www.ft.com/content/376f3374-cf1e-4923-8c24-e4dbafe70b6d">money meritocracies</a>”, where success and promotion is based purely on an employee’s performance and the profits they generate.</p>
<p>Privately, however, City insiders I spoke to repeatedly blamed deviations from this rule on outright favouritism. One hedge fund manager, Michael, confided: “It’s easy to explain. Basically, we give the top jobs to other posh people who are our mates.”</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/509253/original/file-20230209-16-4q8zqk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Four white men in suits walking away from the camera" src="https://images.theconversation.com/files/509253/original/file-20230209-16-4q8zqk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/509253/original/file-20230209-16-4q8zqk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/509253/original/file-20230209-16-4q8zqk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/509253/original/file-20230209-16-4q8zqk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/509253/original/file-20230209-16-4q8zqk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/509253/original/file-20230209-16-4q8zqk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/509253/original/file-20230209-16-4q8zqk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Businessmen in the City of London financial district.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-20-april-2019-business-1822728791">I.R. Stone/Shutterstock</a></span>
</figcaption>
</figure>
<p>Investment manager James said that frequently, recruitment and promotion “becomes a subjective call”, at which point decision-makers typically revert to type. I asked him what “type” that might be:</p>
<blockquote>
<p>Myself … I’m already doing that role and I know what I’m doing. Therefore, I’m more likely to go towards the sort of people who are like I am, which is why you end up with the stereotypical male – mid-40s, white. It’s why the profession’s full of them.</p>
</blockquote>
<p>To date, efforts to diversify according to gender and ethnicity appear to have had very limited results. In 2014, <a href="https://www.suttontrust.com/our-research/pathways-banking-education-background-finance/">The Sutton Trust</a> found that within <a href="https://www.theglobalcity.uk/financial-professional-services">financial services</a>, more than 60% of bosses educated in the UK had attended private schools, as opposed to just 7% of the population at large. And despite many interventions designed to improve representation of women at senior levels, a <a href="https://www.fnlondon.com/articles/under-10-of-top-city-dealmakers-are-women-its-still-very-testosterone-fuelled-20200810">2020 study</a> of the City’s top “deal-makers” in investment banks found that less than one in ten were women.</p>
<p>I believe that City firms’ efforts to become more diverse and inclusive, and to deliver more equal representation at the top, have not worked <em>because they were never meant to</em>. Instead, they are a form of “reputation laundering”, offering only the illusion of change in order to protect their privileges and rewards. This conclusion is based on my interviews with more than 400 City leaders and workers – among them diversity experts and human resource managers charged with trying to change the culture of this rarefied world.</p>
<h2>The phoney ‘war for talent’</h2>
<p>Class-based recruitment strategies are perceived to offer City firms certain benefits – in particular, sustaining the impression of status and prestige to competitors, clients, potential colleagues and even policymakers. This in turn helps justify the high fees they charge, and the exceptional profits they generate.</p>
<p>Defining employee “talent” in narrow terms creates an artificial impression of scarcity in available skills. At entry level, City firms battle to attract graduates from the UK’s most elite universities. This “war for talent” is largely phoney – in reality, the skills the firms need are available from a much wider cohort of graduates – but it has helped convince both City firms and clients of these employees’ exceptional worth.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/509254/original/file-20230209-26-2cg6g6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Three Black men in suits chatting outside an office building" src="https://images.theconversation.com/files/509254/original/file-20230209-26-2cg6g6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/509254/original/file-20230209-26-2cg6g6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/509254/original/file-20230209-26-2cg6g6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/509254/original/file-20230209-26-2cg6g6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/509254/original/file-20230209-26-2cg6g6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=510&fit=crop&dpr=1 754w, https://images.theconversation.com/files/509254/original/file-20230209-26-2cg6g6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=510&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/509254/original/file-20230209-26-2cg6g6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=510&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Non-white employees are typically much less likely to reach client-facing executive roles.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-20-april-2019-business-1819187273">I.R. Stone/Shutterstock</a></span>
</figcaption>
</figure>
<p>This narrative was invoked in the wake of the 2008 financial crisis when, despite being closely implicated in this catastrophic collapse, <a href="https://www.ft.com/content/d4f02d66-1d84-11e0-a163-00144feab49a">top bankers argued</a> against punitive regulation on the basis that it would drive “scarce” UK financial talent <a href="https://www.newstatesman.com/politics/2011/06/banks-threats-tax-government">to other countries</a>. More recently, it was used to justify the <a href="https://www.theguardian.com/business/2022/oct/14/bankers-bonuses-double-since-2008-crash-tuc-study-finds">very large bonuses</a> paid out to UK bankers in 2022 amid the growing cost of living crisis.</p>
<p>One law firm partner explained why his firm preferred to appoint “polished” candidates from elite universities, in preference to the very best who might be educated elsewhere:</p>
<blockquote>
<p>From a business perspective, you can’t afford to have people in meetings who will not look good to the clients, [even if] some might be very, very bright.</p>
</blockquote>
<p>In part, this can be explained by City managers adopting a risk-averse strategy to recruitment. In the context of a considerable oversupply of job applications, a “good” degree from an “elite” university acts as an easy signal of probable competency. As asset manager Reena explained:</p>
<blockquote>
<p>If we hire somebody from a completely different background and they don’t work out, the person who hires them is going to look like a fool. [Whereas] if we continue to hire the exact same type of person – the Oxbridge-educated white male, for argument’s sake – and that person doesn’t work out, which often happens, nobody will blame the hiring manager for making that decision.</p>
</blockquote>
<p>Leigh, a former <a href="https://www.investopedia.com/terms/t/trader.asp#:%7E:text=A%20trader%20is%20an%20individual,the%20person%20holds%20the%20asset.">City trader</a>, describes himself as a working-class “<a href="https://en.wikipedia.org/wiki/Barrow_boy">barrow boy</a>”. He said that following the Big Bang in 1986, the City’s banks all started saying they had to recruit “only the best” university students:</p>
<blockquote>
<p>They came from Oxford or Durham or wherever – anywhere that looked good and if they could bullshit their way in … Some of them were good, but not all. They’d come in as graduates and have to learn on the job, but they had no common sense.</p>
</blockquote>
<p>This is not to say that the City has no diversity at all. But demographics differ between job roles, and class differences are most tolerated in more technical or “quantitative” roles such as trading, where performance can be more objectively measured and perceived success does not depend on personal relationships with clients. However, even these roles remain dominated by men, while diversity is considerably more likely in less prestigious and often lower-paid <a href="https://www.investopedia.com/terms/m/middleoffice.asp#:%7E:text=What%20Is%20the%20Middle%20Office,technology%20(IT)%20as%20well.">middle</a>- and <a href="https://www.investopedia.com/terms/b/backoffice.asp#:%7E:text=What%20Is%20Back%20Office%3F,%2C%20accounting%2C%20and%20IT%20services.">back-office</a> jobs.</p>
<h2>The City’s way of ‘doing diversity’</h2>
<p>In the early 2010s, when diversity and inclusion agendas were still quite new, Liam, a black corporate lawyer, sounded somewhat cynical when I spoke to him about the sincerity of these strategies:</p>
<blockquote>
<p>Their dream scenario is to try and find a nice, uncontroversial way to try and ‘do diversity’ without having to change much of anything else.</p>
</blockquote>
<p>Several years after that, Gus, a partner at one of the “big four” accountancy firms, reflected on why they had adopted these diversity agendas:</p>
<blockquote>
<p>Why does anything like this become popular? I guess we were quite influenced by what other firms were doing around the same time – and that’s probably still true today … It was just the buzz in the City at the time.</p>
</blockquote>
<p>While some firms have made efforts to become more diverse in their higher-profile, client-facing and revenue-generating jobs, when it comes to social class the focus has largely been on access rather than career progression. Thousands of young people, generally aged between 16 and 21 and from working-class backgrounds, have taken part in these <a href="https://www.researchgate.net/publication/350590737_Organisational_Social_Mobility_Programmes_as_Mechanisms_of_Power_and_Control">social mobility programmes</a> – often conducted with charities such as the Social Mobility Foundation, UpReach, the Sutton Trust and the City Brokerage.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/londons-skyscrapers-tell-a-rich-story-about-the-citys-worship-of-finance-69743">London's skyscrapers tell a rich story about the City's worship of finance</a>
</strong>
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<p>This seems positive and in one sense it is. I have interviewed several hundred of these students as they aim to secure a career in investment banking or with other financial and professional service firms. Many described these opportunities as “life changing”, telling me uplifting stories of their experiences as they first engaged with the City – sometimes while still at school.</p>
<p>Aspirant banker Max explained how everything about the City seemed to him “oversized” – from the office buildings to the furniture that fills them:</p>
<blockquote>
<p>I mean, you’re in this massive building with these massive tables and chairs, and really awesome decor and art, and there’s people who are really well spoken and really professional in their suits.</p>
</blockquote>
<p>Rahul sounded similarly awestruck as he described how growing up, he had seen the City from a distance but never expected to find himself there:</p>
<blockquote>
<p>My father was a greengrocer. We used to go to the market and [on the way] we’d be able to see the City … I used to literally stand and stare over and imagine what it would be like to be there. To fast-forward a couple of years and be able to be at the [bank’s] office was quite amazing.</p>
</blockquote>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/509260/original/file-20230209-16-lwm7wz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Skyscrapers in the City of London" src="https://images.theconversation.com/files/509260/original/file-20230209-16-lwm7wz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/509260/original/file-20230209-16-lwm7wz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/509260/original/file-20230209-16-lwm7wz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/509260/original/file-20230209-16-lwm7wz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/509260/original/file-20230209-16-lwm7wz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/509260/original/file-20230209-16-lwm7wz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/509260/original/file-20230209-16-lwm7wz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The City of London skyline: ‘I used to stand and stare …’</span>
<span class="attribution"><a class="source" href="https://pixabay.com/photos/skyline-london-financial-district-4587051/">Waid1995/Pixabay</a></span>
</figcaption>
</figure>
<p>Participants of these schemes were frequently told that, given the City’s “meritocratic culture”, they should have high expectations of getting in. As Emily put it: “They say all the time: it doesn’t matter who you are, you can do anything as long as you work hard enough.”</p>
<p>Sam described having learnt that: “Anybody could become the CEO of a major bank. It’s just all about sacrifice … To do well, to rise up the ranks, it’s definitely the people that are the hardest working.”</p>
<p>Yet the reality for these working-class interns could soon feel very different. On entering mainstream graduate recruitment programmes, some told me they quickly discovered that “merit is a myth”. When we spoke in 2019, bank intern Mishal, a black woman in her early twenties from a working-class background, described her experience in visceral terms:</p>
<blockquote>
<p>What those people have been telling you [about diversity] is just the corporate crap that everybody vomits from their mouths … If you’d interviewed me [before] I probably would have said all those things. But now that I’ve actually been in a bank and seen it – I kept saying to my friends over the summer: “I have been sold dreams.”</p>
</blockquote>
<p>Mishal’s disillusionment was striking. “[They’ve] told me one thing and then I’ve come in and it’s a complete opposite other thing,” she complained. “Your motivation has to be so strong, because everything they tell you turns out not to be true.”</p>
<p>Some of the interns I met felt very self-conscious of their “different” appearance and demeanour, compared with the image that is so carefully cultivated by these City firms. Kasia described one of her encounters during an internship at an investment bank:</p>
<blockquote>
<p>My team had sent me to a meeting with about 40 white, middle-aged men. There was not a single female in the room … No one was below 35, 40 years old … I was just trembling with fear – like, I’m not valuable in this room.</p>
</blockquote>
<p>Many interns said they felt strong pressure to assimilate while navigating sometimes hostile and frightening cultures. Kasia described making efforts to change her look and accent, adding:</p>
<blockquote>
<p>I don’t want to be viewed as a social experiment who’s come, like, from the street … I want to be judged based on my abilities.</p>
</blockquote>
<p>Young people like Kasia and Mishal are far from victims and would not wish to be seen as such – although neither went on to be offered a graduate job. However, it is clear that for some young interns, assimilation into the City of London is impossible – especially where class intersects with ethnicity.</p>
<p>Nor are these problems restricted to entry-level recruitment, as evidenced by lower retention rates and slower career progression for those who are employed. A <a href="https://static1.squarespace.com/static/5c18e090b40b9d6b43b093d8/t/5fbc317e96e56f63b563d0f2/1606168962064/Socio-economic_report-Final.pdf">2020 study</a> of eight major financial services firms found that employees from less privileged backgrounds took 25% longer to progress, despite no evidence of poorer performance. Describing how your educational background can cast a shadow over a whole career, asset manager Euan told me, only half-jokingly: “It’s like if you went to an ex-poly – in the City that comes with a lifetime of shame!”</p>
<p>Tanya, a black woman working for a City finance firm, graduated from a leading <a href="https://russellgroup.ac.uk/about/">Russell Group university</a> but still described the barriers – some blatant, others more subtle – that she felt had delayed her career progression within the firm:</p>
<blockquote>
<p>It’s difficult to exactly know the impact because a lot of it’s quite subtle. But I’m always, always focusing on creating the right impression, the right amount of assertiveness … It’s exhausting and there’s less energy to focus on work. But you never want to come across as the “angry black woman”, so even when there is more blatant discrimination, it’s too dangerous to complain.</p>
</blockquote>
<h2>The myth of merit</h2>
<p>Many people are taken in by the City’s “myth of merit” – not least some of its top bosses, who prefer to believe their own positions are based on exceptional talent and hard work, rather than any inherited privilege. Attempts I have made to question this narrative, both during informal conversations and formal interviews, have sometimes met with robust responses. As corporate lawyer Kris said when we spoke a few years ago:</p>
<blockquote>
<p>I came from a relatively humble background myself and I got into the system … I think they would be quite offended if you said the major City firms were unmeritocratic. I would be offended.</p>
</blockquote>
<p>And indeed, some working-class figures have acquired legendary status. In his <a href="https://www.theguardian.com/books/2010/jan/30/city-london-david-kynaston">biography of the City of London</a>, historian David Kynaston profiles several, including John Hutchinson – a “brash whiz-kid” who took on a key role trading gilts at <a href="https://www.nytimes.com/1986/09/28/business/merrill-lynch-s-london-blitz.html">Merrill Lynch</a>. Playing up the successes of such figures has helped to support the City’s meritocratic narratives.</p>
<p>The emphasis on merit also helps cement the impression that these firms are engaged in highly complex work that only the very smartest people can do. In her <a href="https://www.dukeupress.edu/liquidated">superlative work</a> exploring the City’s US equivalent, Wall Street, anthropologist Karen Ho shows how this exaggerated narrative helped situate investment bankers as the epitome of control and technical competency, offering them a “naturalised” right to their place near the top of the social order – both in terms of earnings and status.</p>
<figure>
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<figcaption><span class="caption">The Big Bang in 1986 changed the culture of the City – but its elitist image has endured despite calls for change.</span></figcaption>
</figure>
<p>Similarly, in London since the <a href="https://www.bbc.co.uk/news/business-37751599">Big Bang</a>, a discourse of “smartness” (of intellect) has become central to the image of investment bankers and other City professionals. This means financial rewards which far outstrip most other sectors’ pay levels can be justified on the basis that they are fairly allocated to “only the brightest and best”.</p>
<p>Many City workers <em>are</em> exceptionally qualified and also very bright. By the 2010s, new entrants to investment banks in the UK were typically among the top 1% of performers in A-levels or equivalent. Corporate lawyer, Rob, explained that while in the old days “it didn’t really matter if you were a bit dim”, the <a href="https://www.independent.co.uk/news/business/analysis-and-features/the-day-big-bang-blasted-the-old-boys-into-oblivion-422005.html">arrival of the American banks</a> in the wake of the Big Bang led to a more “intensive, more competitive style of work … more of a meritocracy”.</p>
<p>However, the City’s highly remunerated jobs are still overwhelmingly done by white men who have benefited from a private school education – the children of the affluent middle and upper classes. Furthermore, if any unfair recruitment practices or treatment of employees come to light, City firms typically employ the shield of “<a href="https://www.nytimes.com/2019/11/20/style/diversity-consultants.html">unconscious bias</a>” to explain away any discrepancies in staff makeup or treatment.</p>
<p>This response can suggest a sort of “no-fault discrimination” where since everybody is to blame, nobody is. Some academics <a href="https://scholar.harvard.edu/iris_bohnet/what-works">argue</a> that putting a heavy focus on unconscious bias reflects a misguided, highly individualised response to what is actually a systemic, structural problem.</p>
<p>But in the City of London, my research shows that discrimination is also, in part, a conscious choice that offers systematic advantages for more privileged groups – while supporting an image of “desirable elitism”. And where this is the case, City firms prefer us to look away.</p>
<figure>
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<figcaption><span class="caption">Ian Clarke came through HSBC’s management training scheme in 2008, but resigned from his job in global sales in 2021 after writing a report about the bank’s lack of diversity.</span></figcaption>
</figure>
<p>Investment banks are characterised by opacity and secrecy – sometimes justified by their need to to maintain a “competitive advantage”. But the related use of <a href="https://en.wikipedia.org/wiki/Non-disclosure_agreement">non-disclosure agreements</a> for employment contracts has meant that many discrimination cases involving City firms have never seen the light of day.</p>
<p>Where this was not the case, legal actions and tribunals have periodically shed light on instances of <a href="https://www.cnbc.com/2022/03/17/london-insurance-firm-fined-1-million-over-bullying-sexual-harassment.html">bullying and sexual harassment</a> (leading to a more than £1 million fine) and <a href="https://www.ft.com/content/310caee4-d2d9-4f88-9a2b-f6d790b9eb1b">gender discrimination</a> (£2 million payout). There is strong evidence that the City’s historic “laddish” culture <a href="https://www.thetimes.co.uk/article/has-the-city-booted-out-lad-culture-tfc9mqptl">continues to exist</a> in <a href="https://www.standard.co.uk/business/lloyd-s-of-london-culture-drinking-sexism-b988746.html">pockets</a>, and that in some cases this leads to <a href="https://twitter.com/Telegraph/status/1505838573467144193">hostility</a> towards individuals who exist outside established white, male, middle-class norms.</p>
<h2>Why this matters</h2>
<p>Over the past 40 years, inequalities of income and wealth have become more pronounced in the UK. The <a href="https://ifs.org.uk/publications/characteristics-and-incomes-top-1">share of national income</a> taken by the top 1% increased from almost 6% in 1977 to around 14% in 2019. The City’s remuneration practices are implicated here, with the Institute of Fiscal Studies <a href="https://www.theguardian.com/business/2022/may/04/city-london-bonus-boom-risk-driving-up-inequality-institute-fiscal-studies">reporting</a> in 2022 that the City’s pay and bonus packages exacerbate inequality.</p>
<p>The UK’s <a href="https://www.theguardian.com/commentisfree/2023/jan/30/england-old-boys-club-zahawi-wealthy-network">cosy relationship between finance and politics</a> enhances the City’s influence. Bosses and politicians alike claim this is justified because of the City’s <a href="https://www.economicsobservatory.com/how-important-is-the-city-to-the-uk-economy#:%7E:text=Economists%20use%20the%20expression%20because,City%20(Hutton%2C%202022).">major contribution</a> to the UK economy in terms of jobs, tax revenues and trade.</p>
<p>Yet an alternative argument is that the UK’s oversized financial sector impoverishes the UK, resulting from what author Nicholas Shaxson calls the “<a href="https://www.theguardian.com/news/2018/oct/05/the-finance-curse-how-the-outsized-power-of-the-city-of-london-makes-britain-poorer">finance curse</a>”. He cites <a href="https://www.independent.co.uk/news/business/news/finance-curse-uk-economy-sector-city-of-london-loss-financial-services-a8571036.html">research</a> estimating that an oversized City of London inflicted costs of £4.5 trillion on the UK economy between 1995 and 2015. This is explained in part by lost economic output since the 2008 financial crisis, and in part from “<a href="https://eprints.whiterose.ac.uk/143275/1/Baker%20The-UKs-Finance-Curse-Costs-and-Processes%20final.pdf">misallocation costs</a>” as big finance has generated activities that distort the rest of the UK economy – diverting skills, investments and resources from more productive uses.</p>
<p>Shaxson also points to £700 billion of “excess profits” and “excess remuneration” enjoyed by big finance which might otherwise have contributed to the UK economy. He suggests the salaries, bonuses and profits paid out by the City significantly exceed what is necessary to incentivise the supply of financial products and services in an efficient, competitive market.</p>
<p>At the heart of these eye-watering figures are policies first implemented during the 1980s, which privileged the need to maximise shareholder returns over reinvesting profits. This <a href="https://neweconomics.org/uploads/files/NEF_SHAREHOLDER-CAPITALISM_E_latest.pdf">short-term agenda</a> has been associated with rising salaries at the top, growing inequality in UK society, and even increased levels of environmental destruction.</p>
<p>At the same time, financial institutions have been afforded ever-more influence over UK economic policy. Wealthy City donors have <a href="https://www.independent.co.uk/news/uk/politics/tory-funding-donors-money-general-election-lib-dems-labour-a9362571.html">helped fund political parties</a> to ensure policies are prioritised that protect their interests. City leaders have not only shaped laws and regulations in their favour, but also influenced society and culture. This includes promoting a form of “winner takes all” individualism in which the notion of the common good has slowly dissipated.</p>
<p>In the UK, the <a href="https://policy.bristoluniversitypress.co.uk/why-we-cant-afford-the-rich">poorest 10%</a> pay a higher proportion of their income in tax than the richest 10%, while <a href="https://www.nytimes.com/2021/10/11/opinion/pandora-papers-britain-london.html">corporate tax avoidance strategies</a> have additionally limited the redistribution of wealth. In 2015, the Bank of England’s then chief economist, Andy Haldane, <a href="https://twitter.com/BBCNewsnight/status/625081308063121408">warned</a> that under our system, businesses are now “almost eating themselves”. He called on policymakers to consider new models of corporate governance that “share the spoils more equally between a wider set of stakeholders in a firm”, including employees and customers.</p>
<h2>Will the City ever change?</h2>
<p>In 2021, the <a href="https://en.wikipedia.org/wiki/City_of_London_Corporation">City of London Corporation</a> (the City’s formal governing body) set up an <a href="https://www.cityoflondon.gov.uk/supporting-businesses/business-support-and-advice/socio-economic-diversity-taskforce">independent taskforce</a> with a vision of encouraging “equity of progression”, where high performance is valued over “fit” and “polish”. I was a member of this two-year initiative, which culminated in the publication of a <a href="https://www.cityoflondon.gov.uk/assets/Business/breaking-the-class-barrier-december-2022.pdf">five-point pathway</a> to achieve a more socio-economically diverse City of London.</p>
<p>The impact of this taskforce is debatable, but to be fair to its many committed participants, delivering more inclusive and diverse organisations is a “wicked problem” that is difficult, if not impossible, to solve. Not least because not everybody agrees on the nature of the problem – nor even that the problem exists.</p>
<p>Efforts at change have generally been pinned on the “business case” – that once hiring managers are convinced discrimination is irrational, they will feel compelled to act. Yet this is unlikely to work because the incentives are not there. Class-based inequalities embedded within systems and structures offer elite City firms certain benefits, while diversification carries perceived risks.</p>
<p>The business case sometimes suggests diversification will make the City a better or even safer place, by allowing for cognitive difference while preventing “<a href="https://www.cityam.com/businesses-without-diversity-are-plagued-by-groupthink/">groupthink</a>”. But new entrants are generally subjected to strong socialisation processes that train them to present and even think much the same, as management consultant, Diletta, explained to me:</p>
<blockquote>
<p>As much as [firms] talk about diversity, especially now with all this stuff on social class – it’s almost impossible to exist outside the norms … That’s what training is all about. We’re extremely effective at making sure everybody is packaged up and churned out looking and sounding exactly the same. That’s our product. It’s what we sell.</p>
</blockquote>
<p>It seems that in the City, people can be different as long as they are the same. A genuine desire among many City people to deliver fairer outcomes is no match for institutional inertia. When it comes to social class, firms have historically tended to adopt a “deficit” model where young people from working-class backgrounds are assumed to lack the necessary forms of “polish” to get on, and efforts centre on how these deficits can be addressed.</p>
<p>But the challenges they face are not limited to “polish”. Growing up poor in a rich society contributes to long-lasting and sometimes career-limiting feelings of stigma and shame. Abdul explained his feelings as he struggled to access a graduate position in an investment bank:</p>
<blockquote>
<p>I was surrounded by people who were, I suppose you could say, better than me … I didn’t belong.</p>
</blockquote>
<p>An emphasis on social mobility is an attractive agenda for both City leaders and politicians who can present change as a “win-win” – for talented people and the organisations they join. But in practice, this is a zero-sum game: when opportunities are not expanding in absolute terms, for some people to move up others must move down. Current conversations allow City and other elites to avoid such uncomfortable truths.</p>
<p>Instead they focus on more palatable, less threatening questions of culture and behaviour, over the fundamental changes that are needed if the UK’s resources and rewards are to be more fairly distributed. The City of London must recognise its own role in perpetuating – and increasing – economic injustice if ever this status quo is to change.</p>
<p><em>* All interviewees’ names have been changed to protect their anonymity.</em></p>
<hr>
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<img alt="" src="https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=112&fit=crop&dpr=1 600w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=112&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=112&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=140&fit=crop&dpr=1 754w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=140&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/313478/original/file-20200204-41481-1n8vco4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=140&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p class="fine-print"><em><span>Research mentioned in this article received funding from government and charitable bodies. However, to protect confidentiality I do not mention which organisations. There is no conflict of interest and individuals took part on the basis of informed consent. I was a working group member for the Corporation of London Taskforce on Socioeconomic Diversity, which is mentioned in this article. I am the author of the recently published book Highly Discriminating: Why The City Isn't Fair and Diversity Doesn't Work. </span></em></p>My research suggests City firms’ efforts to deliver more equal representation at the top have not worked because they were never meant to.Louise Ashley, Senior Lecturer, Queen Mary University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1965662022-12-21T15:58:34Z2022-12-21T15:58:34ZBanking reforms could make the UK a sustainable finance hub, but also threaten financial stability<figure><img src="https://images.theconversation.com/files/502380/original/file-20221221-12-6ss9zi.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5470%2C3635&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Relaxing some banking rules could affect the stability of the UK's financial sector, largely based in the City of London.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-nov-1-2012-tower-2162519901">Dmitry Naumov / Shutterstock</a></span></figcaption></figure><p>The UK government wants to rewrite the rules designed to keep the country’s banks and financial institutions stable – again. The so-called <a href="https://www.gov.uk/government/collections/financial-services-the-edinburgh-reforms">Edinburgh reforms</a> announced recently by UK chancellor Jeremy Hunt will “unlock investment and turbocharge growth in towns and cities across the UK”, he says. </p>
<p>The government is certainly heading in the right direction in some areas, including new measures on sustainable finance. Hunt has promised <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1074650/green-finance-strategy-cfe.pdf">a 2023 update</a> to its <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/820284/190716_BEIS_Green_Finance_Strategy_Accessible_Final.pdf">original green finance strategy</a>, published in 2019. This includes regulating the environmental social and governance (ESG) ratings providers from which financial firms get data for green investment and lending decisions.</p>
<p>It will be a challenge to standardise this sector since there were <a href="https://www.sustainability.com/globalassets/sustainability.com/thinking/pdfs/sustainability-ratetheraters2020-report.pdf">more than 600 ESG ratings and rankings in 2018</a> and the industry has only continued to grow since. But government plans to work with regulators to <a href="https://www.fca.org.uk/news/news-stories/code-conduct-esg-data-and-ratings-providers">safeguard transparency and good market conduct</a> in this area could help the City of London to become a global centre for sustainable finance. </p>
<p>On the other hand, some of the regulations that Hunt wants to reverse were only recently introduced in response to the 2008 global financial crisis. Relaxing them could jeopardise the UK’s financial stability. What has changed in less than 15 years to warrant a relaxation of these rules? The short answer is nothing. In fact, history seems to be repeating itself. </p>
<p>The <a href="https://www.britannica.com/event/Great-Depression">Great Depression</a> of the 1930s – the longest and deepest global economic crisis of the 20th century – was triggered by a catastrophic failure of financial markets and banks. <a href="https://www.federalreservehistory.org/essays/glass-steagall-act">Banking legislation</a> introduced afterwards aimed to separate investment banking from commercial banking to protect customer deposits and ensure financial stability. </p>
<p>This was all forgotten during the wave of banking deregulation in the 1980s and 1990s. Reversing these post-depression separation rules basically prepared the ground for the 2008 global financial crisis. After that downturn, <a href="https://www.bankofengland.co.uk/prudential-regulation/key-initiatives/ring-fencing">ring-fencing was reintroduced in both the UK</a> and <a href="https://www.federalreserve.gov/supervisionreg/volcker-rule.htm">the US (via the Volcker rule)</a>.</p>
<figure class="align-center ">
<img alt="Britain's Foreign Secretary Jeremy Hunt attends in an European Union Foreign Affairs Council meeting." src="https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502383/original/file-20221221-16-ox2r83.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">UK chancellor, Jeremy Hunt.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/brussels-belgium-15th-july-2019-britains-1451368922">Alexandros Michailidis / Shutterstock</a></span>
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<p>This is why it was surprising when UK chancellor, Jeremy Hunt, announced the <a href="https://www.gov.uk/government/collections/financial-services-the-edinburgh-reforms">Edinburgh reforms</a> in December 2022. These changes will relax three important protections that were <a href="https://www.bis.org/publ/arpdf/ar2009e1.pdf">created after the global financial crisis</a> to address some very specific contributing factors to that crash. </p>
<h2>1. The ring-fencing of bank capital</h2>
<p>When retail banks ring-fence a certain amount of capital it protects them from shocks originating elsewhere in their business, such as a risky investment or overseas activities. From a bank’s point of view, it increases the <a href="https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Bankers-Without-Borders-Implications-of-Ring-Fencing-for-European-Cross-Border-Banks-24335">level of shareholder capital it must hold rather than invest</a>, which makes the bank less profitable. A <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1060994/CCS0821108226-006_RFPT_Web_Accessible.pdf">recent independent UK review</a> recommended tweaking ring-fencing regulation slightly to change its scope to focus on large, complex banks. However, it reinforces its fundamental role in protecting the money people deposit with banks in basic savings and current accounts.</p>
<p>Increasing the level of shareholder capital banks must hold was a <a href="https://www.bis.org/bcbs/basel3/b3_bank_sup_reforms.pdf">major post-GFC regulatory change</a> because the levels had not properly cushioned banks’ losses during the crisis. This is partly why billions of pounds of <a href="https://commonslibrary.parliament.uk/research-briefings/sn05748/#:%7E:text=From%20September%202007%20to%20December%202009%2C%20the%20then,of%20which%20has%20been%20recouped%20over%20the%20years.">taxpayers’ money was spent bailing out</a> failed banks in the UK after the 2008 crash.</p>
<h2>2. Senior management accountability</h2>
<p>Excessive risk taking by some bank executives was another factor in the fall of the banking sector in 2008. Flawed compensation schemes that encouraged short-term thinking encouraged many managers to take high stakes bets with no liability. After the crisis <a href="https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2014/cp1514">regulators introduced measures</a> to discourage such excessive risk taking. This included bonus caps – <a href="https://theconversation.com/bankers-bonus-cap-why-scrapping-it-could-hurt-the-uk-economy-190811">since removed by the previous chancellor</a> – and clawbacks of previous bonuses for any serious wrongdoing in the run-up to the financial crisis. </p>
<p>The current chancellor is taking this a step further with a review of a key regulation introduced to increase <a href="https://www.fca.org.uk/firms/senior-managers-certification-regime">senior bank managers’ accountability</a>. UK regulators <a href="https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/report/evaluation-of-smcr-2020.pdf?la=en&hash=151E78315E5C50E70A6B8B08AE3D5E93563D0168">recently reported that this rule</a> – the senior managers and certification regime – is curbing risk appetite quite effectively, with 94% of managers seeing a positive impact on behaviour and culture in banks as a result.</p>
<h2>3. Securitisation</h2>
<p>Restrictions on the sale of a group of loans or mortgages as a bundled financial product – or securitisation – will also be reconsidered under Hunt’s plan. A <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1040038/Securitisation_Regulation_Review.pdf">government review</a> last year recommended relaxing such criteria, but there is also <a href="https://www.sciencedirect.com/science/article/abs/pii/S1057521918301339">abundant evidence</a> that securitisation destabilised banks during the 2008 crisis. </p>
<p>The use of these products contributed to deteriorating lending standards at many banks because the bundled nature of these products essentially made them opaque. Once a <a href="https://www.federalreserve.gov/boarddocs/speeches/2005/20050505/">financial innovation that was heavily praised by leading policy makers,</a> securitisation was actually a major cause of the global financial crisis.</p>
<h2>Varying support</h2>
<p>Regulators have <a href="https://www.telegraph.co.uk/business/2022/12/18/bank-england-hits-back-rishi-sunaks-plan-liberate-city-london/">voiced concerns</a> about damage to financial stability due to any relaxation of rules – <a href="https://www.ft.com/content/98882508-7de9-476e-becd-5c9697870770">both current</a> and <a href="https://www.ft.com/content/33f73a5a-9c11-4f59-a7f9-ddd1e56cffbd">former Bank of England staff</a>. Senior European Central Bank figures have also <a href="https://www.ecb.europa.eu/press/blog/date/2022/html/ecb.blog221104%7E34240c3770.en.html">criticised similar efforts</a> to dilute <a href="https://www.ft.com/content/c872d5b9-984e-493c-942d-2dcdc9c8e4b7">EU banking regulations</a>.</p>
<p>Perhaps unsurprisingly, some <a href="https://www.ft.com/content/6cbd63e6-3413-4d4c-9285-6e46dfd7b612">city figures</a> are largely in favour of these changes. City minister Andrew Griffith has said he is <a href="https://www.ft.com/content/7fd1b000-774a-45a2-bf89-611fde48f7ba">“assured” that banks are safe</a>, for example. </p>
<p>But no one predicted the 2008 global financial crisis either. Also, banking sector risk can accumulate over time. Relaxing the rules is unlikely to lead to an immediate crash, but risk could build up in the financial system over the next 5 to 10 years following any changes.</p>
<p>The global financial crisis has cost Britain up to <a href="https://www.economist.com/free-exchange/2010/03/31/big-numbers">£7.4 trillion in lost output</a> alone. It has also had significant negative long-term effects on <a href="https://www.imf.org/en/Publications/WEO/Issues/2018/09/24/world-economic-outlook-october-2018#Chapter%202">global economic growth and income inequality</a>, among many other issues.</p>
<p>Boosting economic growth by making the City internationally competitive may be successful in the short term. But rolling back these key regulatory measures all at once could jeopardise the UK’s long-term financial stability.</p><img src="https://counter.theconversation.com/content/196566/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New green finance measures aside, UK chancellor Jeremy Hunt’s Edinburgh reforms look like history repeating itself.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1908112022-09-20T09:06:49Z2022-09-20T09:06:49ZBankers bonus cap: why scrapping it could hurt the UK economy<figure><img src="https://images.theconversation.com/files/485106/original/file-20220916-7044-ss59az.jpg?ixlib=rb-1.1.0&rect=63%2C31%2C5221%2C3621&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/financial-district-canary-wharf-london-during-755623915">Shutterstock/Sven Hansche</a></span></figcaption></figure><p>At a time of rising prices and an ever increasing cost of living, there are at last signs of a financial boost for an industry toiling away at the economic coal face. British bankers, it seems, could be about to receive a hefty pay rise, with the new UK chancellor reportedly <a href="https://www.msn.com/en-gb/news/world/cap-on-bankers-bonuses-of-twice-their-salary-could-be-scrapped-under-new-plans/ar-AA11SXl6">planning to scrap</a> the limit on how much they receive in bonuses.</p>
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<p>At the moment, that limit stands at 100% of a banker’s salary, but can be doubled to 200%, subject to shareholder approval. So a banker earning, say, £100,000 a year can only receive an annual bonus of £100,000, or £200,000 in special circumstances. </p>
<p>The cap was introduced as part of efforts to improve regulation of the banking sector in the wake of the <a href="https://www.britannica.com/event/financial-crisis-of-2007-2008">financial crisis</a> of 2008. That crisis sparked the <a href="https://www.bbc.co.uk/news/business-41229513">first British bank run</a> for 150 years and led to the UK government spending <a href="https://commonslibrary.parliament.uk/research-briefings/sn05748/#:%7E:text=From%20September%202007%20to%20December%202009%2C%20the%20then,of%20which%20has%20been%20recouped%20over%20the%20years.">billions of pounds</a> of taxpayers’ money bailing out failed banks.</p>
<p>In many countries, <a href="https://www.theguardian.com/business/2008/oct/15/unemploymentdata-recession">unemployment spiked</a> and <a href="https://www.cambridge.org/core/journals/international-organization/article/abs/uncertainty-risk-and-the-financial-crisis-of-2008/21562A52134CC4271FB24E5D63CE9DBB">household wealth evaporated</a>. The crisis had long-term negative effects on global economic growth, <a href="https://blogs.imf.org/2018/10/03/lasting-effects-the-global-economic-recovery-10-years-after-the-crisis/">income inequality</a> and, some have argued, <a href="https://blogs.imf.org/2018/05/10/trust-and-the-future-of-multilateralism/">political stability</a>. </p>
<p>As a result, authorities introduced extensive reforms to banking and financial regulation, seeking to avoid a repeat of this economic catastrophe. One key problem to solve was the banking industry’s desire to maximise short-term profit, where risk-taking was rewarded with extremely generous pay packages. The bonus cap was <a href="https://www.theguardian.com/business/2014/nov/20/eu-lawyer-bonus-cap-george-osborne">introduced by the European Union</a> in 2014 – when the UK was a member – to curb such pay mechanisms triggering reckless and risky behaviour. </p>
<p>At the time, the bonus cap <a href="https://www.theguardian.com/business/2013/mar/05/george-osborne-fights-bonus-cap">was criticised</a> by the then Conservative UK chancellor George Osborne as having a “perverse effect”. Eight years on, the new prime minister Liz Truss and her chancellor Kwasi Kwarteng, appear to see scrapping the cap as a key part of their “pro-growth” post-Brexit agenda. </p>
<p>They will argue that such a move will lure the best talent to the UK’s financial industry, helping London in particular to become the attractive and competitive hub it once was. US banks in particular, reportedly find it challenging to <a href="https://www.ft.com/content/e5dac84e-dabf-4408-8d65-1db0ecc315c3">employ staff in London</a> because of the cap.</p>
<p>Kwarteng will probably say that highly paid finance professionals help to boost the national economy, with more tax paid on bigger bonuses. British banks such as Barclays and HSBC would also benefit in their international operations as the cap applies to their staff working abroad.</p>
<p>There is too, an argument to be made that the bonus cap reduces the flexibility of banks to manage costs at times of economic difficulty. This is because bonus caps inevitably increase the fixed component of employees’ salaries, which unlike bonuses, cannot be reduced when profits are down. </p>
<p>The new UK government then, have an apparently strong case to make. Removing the cap could have short-term benefits, and the idea has been <a href="https://www.ft.com/content/d3fc81d8-0f29-4069-9f51-9eb9605c24f0">widely welcomed</a> by many prominent voices in banking.</p>
<h2>Optimistic optics?</h2>
<p>But research into banking bonuses suggests caution, with evidence of a <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/corg.12454#corg12454-bib-0082">direct relationship</a> between “variable executive remuneration” (performance dependent bonuses) and risk taking. In the US for example, it has been found that bank CEOs with pay incentives linked to risk took on <a href="https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/executive-compensation-and-business-policy-choices-at-us-commercial-banks/AE40559214A82BF61517BDFD1F7A9C83">higher levels of risk</a> in the run up to the financial crisis. And financial firms where pay levels rewarded a short-term approach <a href="https://reader.elsevier.com/reader/sd/pii/S0304405X18300655?token=FAD8D15A5E71EE68D91D698C15E0122DBAF917DC436CAE5965A0412445613B42675D3235EDC5C692ACC501E298BEBCEA&originRegion=eu-west-1&originCreation=20220915212358">were more exposed</a> to subprime credit risk and performed poorly during the crisis.</p>
<p>Politically speaking, it could be seen as a highly insensitive move for a new government, as the effect of energy and food prices prove devastating for vast numbers of households. Is it really a wise move to increasing bankers’ <a href="https://www.tuc.org.uk/news/city-bonuses-are-rising-six-times-faster-wages">already high incomes</a> when real wages of others are decreasing during a cost-of-living crisis? </p>
<p>Those who support ditching the cap should also consider whether or not it would really boost the UK’s financial sector, which may have more fundamental problems. After Brexit, around 43% of the largest UK financial institutions announced plans to move some of their business and staff <a href="https://www.ey.com/en_uk/news/2021/03/ey-financial-services-brexit-tracker--uk-financial-services-firms-continue-to-incrementally-move-assets-and-relocate-jobs-to-the-eu-but-changes-since-the-brexit-deal-are-small">to the EU</a>, where bonuses are also capped. </p>
<p>And what about the long-term consequences of deregulation? Banks are not like other business. The public depends on them, and economies cannot function without them. When they fail, they drag down the whole economy down with them, with catastrophic outcomes. </p>
<p>Heavier bank regulation, including the bonus cap, was a response to the financial crisis and the need to avoid a repeat of its shattering consequences. It was introduced to help maintain financial stability. </p>
<p>In the current economic climate, the new government should be cautious and carefully consider the motives of those regulators. Taking big risks for potential short-term financial gain is to be avoided – whether you’re a bank or a national government.</p><img src="https://counter.theconversation.com/content/190811/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research suggests that big bonuses encourage big risks.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1861462022-07-06T15:57:14Z2022-07-06T15:57:14ZTinkering with the mortgage market won’t solve the UK housing affordability crisis<figure><img src="https://images.theconversation.com/files/472793/original/file-20220706-18-j1l7nu.jpg?ixlib=rb-1.1.0&rect=56%2C18%2C6272%2C4074&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Potential government measures to help more people get on the housing ladder are unlikely to help first-time buyers.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/side-view-young-couple-looking-window-146162657">sirtravelalot/Shutterstock</a></span></figcaption></figure><p>UK borrowers may see the return of larger, longer-term loans as the government plans a comprehensive review of the mortgage market with the aim of <a href="https://www.reuters.com/markets/europe/uk-launch-review-mortgage-market-pm-boris-johnson-says-2022-06-09/">boosting access to finance</a> for first-time buyers. Rather than addressing the real problems with UK housing affordability though, this approach seems to be aimed at helping dig the government out of a housing policy hole.</p>
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<p>Last May, Michael Gove, the secretary of state for Levelling Up, Housing and Communities, <a href="https://www.building.co.uk/news/government-not-bound-by-300000-home-manifesto-target-says-gove/5117470.article">announced</a> that the government’s housebuilding target “risks making someone’s perfect arithmetic the enemy of the common good”. This statement has been widely interpreted as signalling the end of a Conservative Party manifesto commitment to deliver 300,000 new homes annually in England by the mid 2020s. It also follows the <a href="https://www.ft.com/content/a19272a3-4af0-438e-9b8b-bace6fbf1548">abandonment of planning reforms</a> in May that were unpopular in Tory heartlands and were a significant factor in the party’s loss of the <a href="https://www.bbc.co.uk/news/uk-politics-57535928">Chesham and Amersham by-election</a> last year.</p>
<p>By increasing housebuilding rates, the government wanted to tackle the decline in housing affordability that has been driving down <a href="https://www.theguardian.com/business/ng-interactive/2021/mar/31/uk-housing-crisis-how-did-owning-a-home-become-unaffordable">UK home ownership</a> rates. Whether the government was right to place so much emphasis on planning reform is questionable, particularly considering the housebuilding industry <a href="https://institute.global/policy/planning-fail">consistently fails</a> to build enough houses to match the units of planning permission awarded. Research also shows it takes an awful lot of <a href="https://www.tandfonline.com/doi/abs/10.1080/02673030500291082?journalCode=chos20">additional housebuilding</a> over a sustained period to make material differences to affordability. </p>
<p>Abandoning the housebuilding target leaves the government without any meaningful response to the affordability crisis, however. This has led to the government’s new emphasis on the mortgage market: if people can borrow more, then more people will be able to afford to buy houses.</p>
<p>History shows this isn’t always the case, though. Government policy since the financial crisis has been to limit borrowing (or lending). <a href="https://www.mortgagefinancegazette.com/features/how-the-mortgage-market-might-look-in-2013-09-01-2012/">Since 2013</a>, lenders have been required to assess mortgage applicants’ ability to make their payments and to withstand higher interest rates. The Bank of England recently told lenders they could <a href="https://www.bankofengland.co.uk/news/2022/june/financial-policy-committee-confirms-withdrawal-of-mortgage-market-affordability-test">drop this requirement</a> from August 1 2020. </p>
<p>But mortgage lenders will remain limited in the number of high loan-to-income mortgages they can keep on their books. After all, these measures were introduced to avoid the booms in <a href="https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/1992/house-prices-arrears-and-possessions.pdf">mortgage arrears</a> and repossessions seen in the early 1990s and during the 2008 global financial crisis, as well as the systemic failures that forced the government to <a href="https://commonslibrary.parliament.uk/research-briefings/sn05748/">rescue multiple banks</a> back in 2008. And while raising the amount that can be borrowed will help some people buy houses, at least some of this extra finance will also contribute to higher house prices as demand for new homes rises. This will benefit existing owners, not first-time buyers. </p>
<h2>History repeating</h2>
<p>All of this has happened before. When mortgage finance was deregulated in the 1980s, access to home ownership increased, but the sudden expansion of mortgage finance also fuelled a <a href="https://www.jrf.org.uk/sites/default/files/jrf/migrated/files/housing-markets-volatility-full.pdf">house price boom</a>. This unravelled when interest rates were raised in response to rising inflation, giving rise to largescale mortgage arrears and repossessions. With a striking lack of institutional memory, mortgage lending criteria relaxed again in the run up to the financial crisis, resulting in the growth of the sub-prime sector that contributed to the subsequent market crash in 2007.</p>
<p>Proponents of increasing people’s access to mortgage finance hope long-term fixed rate mortgages will shield borrowers from these risks. The development of mortgage guarantees might also help extend coverage within groups such as the self-employed who have found it more difficult to secure mortgage finance over the past 15 years. But even if ways can be found to expand lending while managing risk better than in the past, this graph showing the decline in mortgaged home ownership rates illustrates the limits of mortgage credit as a means of expanding lending:</p>
<h2>UK mortgaged home ownership rates</h2>
<figure class="align-center ">
<img alt="Line graph showing declining UK home ownership levels between 2002 and 2021" src="https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">UK mortgage ownership by age group (2002 – 2021)</span>
<span class="attribution"><a class="source" href="https://www.gov.uk/government/statistics/family-resources-survey-financial-year-2020-to-2021">Family Resources Survey, Department for Work and Pensions</a></span>
</figcaption>
</figure>
<p>Mortgaged ownership was dropping before the financial crisis – at a time when lenders were falling over one another to provide mortgage finance. As the graph shows, between 2002-03 and 2007-08, the proportion of households who owned their houses with a mortgage fell from 41% to 35%. Among households aged 25-34 years old, the fall was more dramatic, with mortgaged ownership falling by 10 percentage points to 49% during this period. As house prices rose, many hopeful homeowners struggled to take out a 95%-plus loan-to-value mortgage because they couldn’t afford the repayments – there comes a point when you cannot borrow your way out of an affordability crisis.</p>
<p>And this remains the case today. The <a href="https://www.ukhousingreview.org.uk/ukhr22/compendium.html">UK Housing Review</a> affordability index suggests that buying a house was more affordable in 2020 than it was in 2007 – on the eve of the financial crisis when borrowing criteria was extremely relaxed – but remains less affordable than in 1994, when house prices had bottomed out following the 1980s boom.</p>
<p>The UK is not alone. Mortgaged home ownership <a href="http://eprints.gla.ac.uk/269894/1/269894.pdf">has fallen</a> among prime-age households in almost every EU country. Since the financial crisis, ultra-low interest rates have protected the value of assets such as houses. Other responses to the pandemic – including the UK’s <a href="https://www.bbc.com/news/business-58738741">stamp duty holiday</a> – have supported this trend.</p>
<p>Ironically, the rise in consumer price inflation creates the possibility of allowing real house prices to adjust downwards while protecting existing homeowners from negative equity. But this will only restore affordability if real incomes rise to enable people to buy. As <a href="https://www.bigissue.com/news/employment/national-strike-summer-of-discontent-cost-of-living-crisis/">striking workers</a> across country right now will most likely affirm, there is little indication of that happening at the moment.</p><img src="https://counter.theconversation.com/content/186146/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Stephens receives funding from ESRC, and is lead editor of the UK Housing Review (published by the Chartered Institute of Housing).</span></em></p>Government moves to encourage longer and larger home loans won’t address housing affordability in the UKMark Stephens, Mactaggart Chair in Land, Property & Urban Studies at the University of Glasgow, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1596512021-04-23T14:59:48Z2021-04-23T14:59:48ZBitcoin: UK banks are getting tough on crypto, but money-laundering rules are the real problem<p>NatWest, the UK retail bank, <a href="https://www.theguardian.com/technology/2021/apr/21/natwest-will-refuse-to-serve-business-customers-who-accept-cryptocurrencies">has announced</a> it will not engage with business customers who accept payment in bitcoin or other <a href="https://www.investopedia.com/terms/c/cryptocurrency.asp">cryptocurrencies</a>. It follows recent announcements from HSBC that it <a href="https://www.thetimes.co.uk/article/bitcoin-holders-barred-from-depositing-profits-in-uk-banks-pgswbfrdz">won’t allow transfers</a> from digital wallets and <a href="https://www.finews.asia/finance/34290-hsbc-adds-coinbase-to-crypto-ban-list-bitcoin">won’t enable customers</a> to buy shares in companies associated with cryptocurrencies, such as <a href="https://theconversation.com/coinbase-is-listing-for-us-100-billion-on-nasdaq-but-you-might-be-better-buying-bitcoin-instead-158843">Coinbase</a> or MicroStrategy. </p>
<p>The feeling from both banks is that cryptocurrencies are high risk and therefore justify a cautious approach, though they note that their <a href="https://www.theguardian.com/technology/2021/apr/21/natwest-will-refuse-to-serve-business-customers-who-accept-cryptocurrencies">stance could change</a> if and when regulation evolves.</p>
<p>Interestingly, this is not a view shared by institutions across the Atlantic. Both <a href="https://www.coindesk.com/morgan-stanley-approves-bitcoin-exposure-for-handful-of-mutual-funds">Morgan Stanley</a> and <a href="https://www.forbes.com/sites/korihale/2021/04/05/goldman-sachs-cryptocurrency-endorsement-boosts-wealth-management/">Goldman Sachs</a> are now offering their wealth management clients the opportunity to invest in bitcoin. Indeed, the initial uptake has been strong, with Morgan Stanley alone drawing in nearly <a href="https://www.coindesk.com/morgan-stanley-bitcoin-fund-draws-29-4m-in-2-weeks-filings-show">US$30 million (£22 million)</a> of investment in two weeks.</p>
<h2>Why the caution?</h2>
<p>The cautious approach of NatWest and HSBC stems from the <a href="https://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf">2012 recommendations</a> of the <a href="https://www.fatf-gafi.org/">Financial Action Task Force</a>, a G7 initiative geared towards defeating money laundering. These recommendations mandate each member state to implement measures requiring their banks to scrutinise customers’ transactions for the purposes of money laundering and terrorist financing.</p>
<p>Under recommendation one, the anti-money laundering framework is to be applied on the basis of perceived risk. In other words, if a transaction or business activity is perceived to be more risky than usual, it needs closer scrutiny by the bank to ensure compliance with the framework. </p>
<p>This increases the strain on bank resources to verify that a transaction or business activity is safe to continue, but they also face large fines for non-compliance where there are deficiencies in their implementation of the framework or if things go wrong. </p>
<p>NatWest and HSBC are no strangers to being under the spotlight for compliance issues. HSBC was <a href="https://www.bbc.co.uk/news/business-20673466">fined US$1.9 billion</a> by US authorities in 2012, while <a href="https://www.ft.com/content/df2aea12-265e-4a71-aead-bef65eb78ec7">NatWest faces charges</a> over significant compliance breaches in the UK. While these charges relate to traditional money-laundering compliance breaches, perhaps it goes some way to explaining the caution of the two banks.</p>
<p>Banks view digital currencies <a href="https://www.fca.org.uk/consumers/cryptoassets">as risky</a> because they have the potential to be used for money laundering, they are targets for fraud and scams, and their value can be extremely unstable in the short-term. Indeed, the UK’s Financial Conduct Authority <a href="https://www.fca.org.uk/news/news-stories/fca-warns-consumers-risks-investments-advertising-high-returns-based-cryptoassets">has warned that</a> those investing and dealing with cryptocurrency are at risk of losing all their funds. Rather than face the enhanced burden of investigating businesses and individuals dealing with these assets, it is easier for banks to avoid the risk and not engage with them. </p>
<p>This situation is not unique to cryptocurrencies. For instance, it has long been a byproduct of the anti-money laundering requirements that <a href="https://www.thirdsector.co.uk/charities-de-risked-mainstream-banks-says-cfg-report/finance/article/1460805">banks have refused</a> to offer financial services to charities operating in high-risk jurisdictions. The banking sector accepts this reality, particularly given that charities tend to be relatively low-value customers. </p>
<h2>The wrong approach?</h2>
<p>On the face of it, banks are perfectly entitled not top offer financial services to businesses transacting in digital currencies. As well as anti-money laundering, banks are bound by anti-fraud measures and consumer protection. Fradulent crypto transactions are both difficult to spot and impossible to reverse, so the risks of engaging are high, at least until the market establishes itself and the business case to engage is stronger. </p>
<p>Of course, this is not to say that they have necessarily made the right call. The fact that the leading US banks have taken a different approach suggests that they think the potential rewards are worthy of the compliance burden. In defence of cryptocurrencies, they are both <a href="https://www.sciencemag.org/news/2016/03/why-criminals-cant-hide-behind-bitcoin">more traceable</a> than cash, and <a href="https://www.swift.com/sites/default/files/files/swift_bae_report_Follow-The%20Money.pdf">used less</a> for money laundering. </p>
<p>And while it is true that there is a risk of significant losses with cryptocurrency investments, there is also clear potential for big gains. Banks are profit-making businesses: the returns from crypto investments <a href="https://www.coindesk.com/price/bitcoin">in recent months</a> – notwithstanding the big sell-off in the past couple of days – plus the <a href="https://digitalik.net/btc/">very bullish forecasts</a>, ought to prompt them to at least speculate in the area, regulatory burden aside. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bitcoin locked up in jail" src="https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=375&fit=crop&dpr=1 600w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=375&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=375&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=471&fit=crop&dpr=1 754w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=471&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/396799/original/file-20210423-21-q4uwua.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=471&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">De-risked.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bitcoin-bansbtc-illegal-blockchain-technology-cryptocurrency-759593668">Phanurak Rubpol</a></span>
</figcaption>
</figure>
<p>We could simplistically blame the UK banks for either being too cautious or not doing enough to help these businesses, but it overlooks the bigger design flaw in the anti-money laundering framework. Compliance measures are a significant drain on a bank’s resources where a transaction or business is considered high-risk. Banks and their workers also face criminal sanctions, including large fines, where they fail to properly implement the rules, which is particularly troublesome when it is almost impossible for a bank to identify what a suspicious crypto transaction looks like.</p>
<p>Without a guaranteed high return for the bank, it is easier to de-risk and not engage with these businesses. This represents a missed opportunity for banks, and a potentially unnecessary stifling of legitimate business growth for companies wishing to deal with cryptocurrencies. </p>
<p>Banks are portrayed as the public villain, but the bigger problem is at a much higher level. It is a political and legal issue which requires the attention and intervention of lawmakers to address the fact it is much easier for banks to de-risk than to comply with the rules and help these businesses grow.</p><img src="https://counter.theconversation.com/content/159651/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Shillito does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>NatWest and HSBC are restricting customers in their crypto-dealings.Matthew Shillito, Lecturer in Law, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1548672021-02-08T15:24:13Z2021-02-08T15:24:13ZNegative interest rates may not boost UK economy – here’s what the Bank of England should try first<figure><img src="https://images.theconversation.com/files/383044/original/file-20210208-21-6zmy3t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Life below zero. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/turned-cube-changed-direction-arrow-symbolizing-1807562068">Dmitriy Demidovich</a></span></figcaption></figure><p>The Bank of England <a href="https://www.theguardian.com/business/2021/feb/04/bank-england-negative-interest-rate-uk-possibility-but-far-from-certainty">has given banks</a> and building societies in the UK six months to prepare for the possible introduction of negative interest rates for the first time in its 327-year history. </p>
<p>Savers may be starting to get anxious. Negative interest rates sound like a tax on bank deposits, since they imply that instead of paying interest on deposits, banks may start charging interest instead – thereby eroding people’s savings. </p>
<p>As we shall see, it is not quite as bad as that. So how do these rates work, and should we be expecting them?</p>
<h2>What the BoE meant</h2>
<p>When the BoE announced the possibility of negative rates on February 4, from the current rate of 0.1%, it <a href="https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-summary-and-minutes/2021/february-2021.pdf">stressed that</a> “it did not wish to send any signal that it intended to set a negative bank rate at some point in the future”. Instead, it was asking the UK banks to make the necessary preparations in case these rates are required. Having consulted with the banks, six months is considered to be the necessary timeframe.</p>
<p>Negative rates are supposed to incentivise banks to lend their excess reserves to households and firms to boost economic activity, instead of parking them at the central bank. However, the BoE’s current expectation for the UK economy, taking on board <a href="https://www.bbc.co.uk/news/uk-55973847">COVID vaccination progress</a> and the <a href="https://ec.europa.eu/info/relations-united-kingdom/eu-uk-trade-and-cooperation-agreement_en">trade agreement</a> with the EU, is that economic activity will recover rapidly towards pre-COVID levels during 2021. It only expects to make use of negative interest rates if the outlook worsens: for example, if <a href="https://www.theguardian.com/world/2021/feb/08/oxford-covid-vaccine-10-effective-south-african-variant-study">vaccine-resistant variants</a> of the virus trigger a rise in infections and force another lockdown. </p>
<p>But in case negative rates become necessary, why are the banks and building societies not prepared already? To understand this, it’s necessary to jump back to the global financial crisis of 2007-09. This pushed many western economies into a deep recession with a risk of deflation taking hold. This threatened another great depression, so central banks had to act decisively. </p>
<p>They first slashed interest rates to near zero but this was not enough to stimulate the economy. Having decided negative rates were too risky at that stage, central banks introduced quantitative easing, in which they carried out large-scale purchases of financial assets, often focusing on long-term government bonds. </p>
<p>This injected liquidity into the markets, allowing financial institutions to rebalance their portfolios. It signalled that central banks were committed to maintaining low interest rates, since the increased demand for long-term bonds drives down long-term rates downwards. And it also injects “new money” into the reserves of retail banks to encourage them to lend more to businesses and consumers. </p>
<p>But quantitative easing has its limits. There is a finite number of low-risk assets that a prudent central bank can purchase. Negative interest rates have now become more likely, and have already been introduced elsewhere. </p>
<p>Sweden actually introduced them in the aftermath of the global financial crisis and then again between <a href="https://www.reuters.com/article/sweden-cenbank-rates-idUSL8N28T1LK">2015 and 2019</a>. <a href="https://www.reuters.com/article/us-danske-bank-results-idUSKBN27K0SM">Denmark</a>, <a href="https://www.reuters.com/article/us-swiss-snb-maechler-idUSKBN1XU2I5">Switzerland</a> and <a href="https://www.frbsf.org/economic-research/publications/economic-letter/2019/august/negative-interest-rates-inflation-expectations-japan/">Japan</a> are all now using negative rates, but perhaps the most important example is <a href="https://www.reuters.com/article/us-ecb-policy-rates-explainer-idUSKCN1VY1D2">the European Central Bank</a> (ECB), which sets interest rates for the 19 states in the euro area.</p>
<h2>Pros and cons</h2>
<p>Negative interest rates could mean that savers abandon bank deposits and keep their savings under the mattress instead – or in safe deposit boxes. That would cause havoc in the banking system, as banks largely rely on deposits to fund their loans to firms and households. Banks that have relied more on money markets for funding – such as Northern Rock – <a href="https://www.bbc.co.uk/news/business-41229513#:%7E:text=Northern%20Rock%20was%20an%20obvious,was%20nationalised%20in%20February%202008">haven’t always fared very well</a>.</p>
<p>To avoid these risks, negative rates have largely been limited to the reserves that commercial banks hold with the central bank. Negative rates have also been low: Japan’s rate is -0.1%, Denmark’s is -0.6% and Switzerland’s is -0.75%, while the ECB’s is -0.5%, and for bank reserves at the central bank only. Sweden’s rates were in the range of -0.1% to -0.5%. </p>
<p>That is not to say that banks might not cut their already low savings rates as they seek to shore up their profitability, but it shows that the policy has been applied cautiously. </p>
<p>However, if this implies little cost to consumers, it remains to be seen whether negative rates actually boost economic activity. For example, <a href="https://voxeu.org/article/swedish-experience-negative-central-bank-rates">the evidence from Sweden</a> points to negligible positive effects at the cost of generating significant imbalances, including increased household indebtedness and excessive rises in property prices. </p>
<h2>Forward guidance</h2>
<p>As <a href="https://theconversation.com/bank-of-england-is-considering-negative-interest-rates-it-doesnt-need-to-yet-144029">I have argued</a> before, central banks can achieve more through giving clear forward guidance about the future path of interest rates rather than taking them negative. The Bank of England occasionally uses forward guidance, but only vaguely compared to other central banks. The ECB has given much clearer signals, stating, for example, that it expects rates to remain low “for an extended period of time”. </p>
<p>This can reduce uncertainty around future borrowing costs, removing a major deterrent for new investment and job creation, and amplifying the positive benefits of low interest rates. </p>
<p>Forward guidance does require considerable preparation and background work on the part of the central bank. It is also more challenging in terms of communication, as it involves explaining future decisions as well as current ones. This can make changing course, should the need arise, difficult, risking damage to a central bank’s credibility in the process.</p>
<p>The interest rate-setting committee also has to agree over the future course of policy, which can be especially difficult when there is a lot of economic uncertainty. The BoE has the additional complication that the votes and views of individual members of the Monetary Policy Committee often strongly diverge and are published after each monthly meeting. If this meant that UK forward guidance had to be very limited or qualified, the benefits might be diluted. </p>
<p>Having said that, extraordinary times require extraordinary measures. If the banking industry can prepare in six months for a policy that has never been used in 327 years, the Bank of England can surely consider ways of further developing its forward guidance.</p><img src="https://counter.theconversation.com/content/154867/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Panicos O Demetriades is a Senior Fellow of Radix, a think tank of the radical centre. In the past he has received external funding from the Economic and Social Research Council for various research projects focusing on the role of banks in the economy and financial crises. During 2012-14, he served as a Governing Council member of the European Central Bank and Governor of the Central Bank of Cyprus.</span></em></p>UK banks have been given six months to prepare for rates going below zero.Panicos O Demetriades, Professor of Financial Economics, University of LeicesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1541162021-01-28T18:39:47Z2021-01-28T18:39:47ZContactless payment limit: raising it to £100 could push more people into debt<figure><img src="https://images.theconversation.com/files/381073/original/file-20210128-15-c8k9cy.jpg?ixlib=rb-1.1.0&rect=212%2C22%2C7240%2C4938&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/cashier-hand-holding-credit-card-reader-1754539082">Rido/Shutterstock</a></span></figcaption></figure><p>In recognition of our changing spending behaviour during the pandemic, the UK’s Financial Conduct Authority (FCA) has announced plans to consult on <a href="https://content.govdelivery.com/accounts/UKFCA/bulletins/2bd4801">increasing the contactless spending limit from £45 to £100</a>. Prior to the COVID-19 outbreak, this same limit was just £30. And while the FCA limit is advisory, it sets an industry standard observed by the vast majority of card providers and retailers.</p>
<p>Clearly, our ability to pay for goods and services via contactless options is useful in a pandemic. Maintaining social distance by reducing queues, plus negating the need to touch keypads, will all help to fight transmission of the virus. Meanwhile, the Bank of England recently reported on the <a href="https://www.bankofengland.co.uk/quarterly-bulletin/2020/2020-q4/cash-in-the-time-of-covid">diminishing need for cash</a>, amplified by the pandemic, which has strengthened calls to increase the contactless payment limit. </p>
<p>On the other hand, increasing the limit for such transactions to £100 will lead to increased fraud, despite the use of <a href="https://www.finextra.com/newsarticle/36542/how-to-combat-payments-fraud-with-machine-learning-in-the-cloud">machine learning methods</a> to spot fraudulent contactless payments quicker. But our real concern is not fraud, but rather personal indebtedness. Behavioural science suggests that raising the contactless spending limit may encourage reckless spending and high levels of credit card debt.</p>
<h2>Shifting frames</h2>
<p>Spending limits have <a href="https://www.frontiersin.org/articles/10.3389/fpsyg.2017.01204/full">behavioural implications</a>, and changing those limits can change our behaviours. One mechanism by which this change might take place is through “<a href="http://psy2.ucsd.edu/%7Emckenzie/Sher&McKenzie2006Cognition.pdf">information leakage</a>”, which occurs when individuals infer additional information from a particular decision or environment – potentially incorrectly or unwisely. </p>
<p>For example, many travel websites strongly encourage you to buy insurance from them when booking a flight. Based on this framing, you might infer that travel insurance is an important or even essential thing to have. This inferred or “leaked” information may then inform your eventual decision, and you may now buy insurance you otherwise wouldn’t have.</p>
<p>The contactless spending limit likely produces information leakage, and changing the limit certainly will. It is likely that by increasing the limit to £100, many people will infer that, for example, it is normal to spend this much in a single transaction. Such an inference may then <a href="https://static1.squarespace.com/static/5353b838e4b0e68461b517cf/t/583ca5acd2b8571174b28e40/1480369581625/48-Beshears_et_al_2016.pdf">nudge them to spend more</a>, in alignment with what they now believe is normal.</p>
<figure class="align-center ">
<img alt="A man in a mask takes a contactless payment from a seated woman" src="https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/381075/original/file-20210128-19-8jugqr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Many merchants and vendors have stopped accepting cash during the pandemic.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/female-customer-making-contactless-payment-waiter-1742688896">Drazen Zigic/Shutterstock</a></span>
</figcaption>
</figure>
<p>On top of this, the convenience and ease of contactless payments reduces our opportunity to reconsider our purchases. Ordinarily, the process of paying provides us with a final touchpoint to reconsider our purchasing decision. At the last minute, we have the chance to ask ourselves whether we really want or need what we’re about to purchase.</p>
<p>Contactless payments are so quick and simple that we’re denied this final touchpoint. Indeed, a cynical way of thinking about financial innovation is as a set of products that make it easier for us to part with our money. The commercial world is well aware of this last barrier to your purchase and has invested in conveniently remembering your card details, signing you into an automatic rolling subscription, or allowing you to buy with a simple click, swipe, or contactless swish.</p>
<p>Seen this way, contactless payments are the “buy it now” button of the physical world – and are affecting spending behaviour accordingly. <a href="https://newsroom.mastercard.com/press-releases/new-mastercard-advisors-study-on-contactless-payments-shows-almost-30-lift-in-total-spend-within-first-year-of-adoption/">A study</a> by MasterCard found that, in the 15 months following the introduction of contactless payments on bank accounts, total spend from those accounts increased by an average of almost 30%. Many people cannot afford such a behaviour change.</p>
<p>It seems that once we’ve had a taste of frictionless payments, our spending behaviour tends to become more automatic and – arguably – reckless. The implications of this could be considerable, especially as contactless features are included on credit cards, which allow us to slip into our overdrafts instead of finding our payment rejected.</p>
<h2>Reckless spending</h2>
<p>We have long known that people spend more using credit cards than cash. Twenty years ago, researchers showed that credit card users were prepared to pay <a href="https://link.springer.com/article/10.1023/A:1008196717017">up to twice as much for sports tickets than cash buyers</a>. Coupling this effect with contactless payments of up to £100 may lead to considerable additional spending – and when this extra spending is on a credit card, it risks thrusting people into debt. </p>
<p>In principle, the increase of the contactless spend limit during a global pandemic is sensible. In the UK, contactless debit cards are now the most popular method of in-person payment, followed by contactless credit cards, <a href="https://www.thetimes.co.uk/article/cash-falls-behind-the-credit-card-in-shops-mj6k5fpk6">which overtook cash to claim second place in 2019</a>. In 2020, nine out of ten UK card payments were contactless - and <a href="https://www.computerweekly.com/news/252495222/Nine-out-of-10-UK-card-payments-in-2020-were-contactless">just 2.5 pence of every £100 spent using contactless payment options was attributed to fraud</a>.</p>
<p>Nonetheless, we would urge regulators to be wary of extending contactless limits for credit card customers in particular. We should fully consider the downsides this new limit may have in encouraging reckless spending, leading consumers to incur additional debt at a time when many are already suffering financial strain.</p><img src="https://counter.theconversation.com/content/154116/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Whittle has previously received funding from the Money Advice Service to research behavioural interventions to counter problem debt accumulation.</span></em></p><p class="fine-print"><em><span>Gavin Brown and Stuart Mills do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Contactless payments may be convenient – but they also make it easier to overspend.Gavin Brown, Associate Professor in Financial Technology, University of LiverpoolRichard Whittle, Research Fellow in Economics, Manchester Metropolitan UniversityStuart Mills, Fellow of Behavioural Science, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1217092019-08-23T10:46:50Z2019-08-23T10:46:50ZPPI claim deadline is looming – but damage to banks from the scandal is far from over<figure><img src="https://images.theconversation.com/files/289104/original/file-20190822-170941-atmzwi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/pound-gbp-coin-gold-money-on-247546294?src=-8jrZaLJe8xRQ-JitZU0RA-1-39">Shutterstock/Valeri Potapova</a></span></figcaption></figure><p>Borrowing money can be a risky business. So, in theory, payment protection insurance (PPI) sounds like a sensible precaution to take – a financial safety net in case loan repayments suddenly become difficult to make because of redundancy or illness. </p>
<p>But charging customers to insure their own borrowing has ended up costing British banks a fortune in compensation, because of the way PPI was sold – or rather mis-sold – to customers. It has also cost them dearly in terms of trust.</p>
<p>Some banks (and other credit providers) told customers that PPI was compulsory, or added it to products without the customer’s knowledge. In some cases, it was sold to customers who were not eligible to claim, like the self-employed. </p>
<p>With the PPI claim <a href="https://www.fca.org.uk/ppi/">deadline looming</a> at 11.59pm on August 29, more than £35.7 billion has already been <a href="https://www.fca.org.uk/data/monthly-ppi-refunds-and-compensation">paid in compensation</a>, with the <a href="https://www.moneyadviceservice.org.uk/en/articles/reclaiming-payment-protection-insurance">average pay-out coming to around £2,000</a>, and the <a href="https://www.moneysavingexpert.com/news/2019/05/retired-couple-s-joy-over-p175-000-ppi-payout-after-using-mse-fo/">largest sum hitting £175,000</a>. </p>
<p>That PPI deadline was partly set to allow banks to finally draw a line under the scandal, move on financially and repair consumer trust. But given the actions taken by banks, trust repair is unlikely – and the sector will remain damaged for many years to come.</p>
<p>One reason for this is simply that not everyone entitled to compensation has been paid. According to the industry regulator, the Financial Conduct Authority (FCA), 64m PPI policies were <a href="https://www.fca.org.uk/ppi/ppi-explained">sold in the UK</a>, mostly from 1990 to 2010. </p>
<p>Millions of customers who were mis-sold PPI have yet to make a claim (for the money they paid, plus accumulated interest), and risk losing out on their share of an <a href="https://www.telegraph.co.uk/money/consumer-affairs/claim-ppi-12bn-still-paid-just-four-weeks-deadline/">estimated £12 billion in unclaimed compensation</a>. </p>
<p>More widely, the PPI scandal has damaged consumer trust in the banks who appear to have consciously prioritised profits over customer interests – a clear failure of integrity. </p>
<p>When customer trust is damaged, companies have various methods they can use to try to repair that trust. But when that trust has been damaged by a lack of integrity, effective options are more limited, because integrity is seen as being controllable and intentional. </p>
<p>With PPI, the banks did little to explain to the general public why they had mis-sold it. Our <a href="https://www.researchgate.net/project/Trust-erosion-and-trust-repair-in-the-financial-services-sector">own research</a> with consumers has identified that most people learned about PPI from the media – and, in particular, the adverts run by “claims management” companies. </p>
<p>Because many banks failed to explain and make sense of the PPI scandal with consumers, the information which subsequently filled this void has further eroded trust. </p>
<p>Trust can sometimes be restored through symbolic acts, such as public apologies, high profile resignations, and the paying of compensation. But <a href="https://www.researchgate.net/project/Trust-erosion-and-trust-repair-in-the-financial-services-sector">our research</a> also highlights a deficiency in the use of such responses by the banks over PPI – particularly the absence of an apology. </p>
<p>The banks were, of course, initially <a href="https://www.theguardian.com/business/2016/apr/26/uk-big-four-banks-face-19bn-compensation-fines-legal-costs-libor-ppi">fined</a> and ordered to pay compensation to their customers. But again this is unlikely to restore trust. </p>
<p>To begin with, the payment of compensation was not voluntary – it was enforced by the industry regulator, and customers had to apply rather than receive it automatically. To make matters worse, the FCA also found that some banks were <a href="https://www.thisismoney.co.uk/money/saving/article-2409646/Banks-unfairly-reject-hundreds-thousands-PPI-claims-year-worst-offender-Lloyds-losing-cases.html">unfairly rejecting</a> valid claims. </p>
<p>The use of a deadline for claims is also problematic, because although it enables banks to better manage their funds, it also puts pressure on customers to claim within an imposed timescale. </p>
<p>And while many people have received compensation, even this has not been found to be very <a href="http://europepmc.org/backend/ptpmcrender.fcgi?accid=PMC4694657&blobtype=pdf">effective</a> in restoring trust lost due to a failure in integrity. </p>
<h2>Banking on trust</h2>
<p>To successfully restore trust, the banks needed to display clear evidence of an intention to get rid of negative influences, embedding ethical values into their routine actions and decisions. We found that customers have not seen this kind of voluntary change in behaviour. </p>
<p>The main problem with trust damaged through lack of integrity is that consumers are not easily convinced that it will not happen again. It seems plausible to suggest that PPI was not the first time banks have displayed a lack of integrity, and nor will it likely be the last.</p>
<p>And thanks to a general lack of knowledge about the financial services sector, consumers often fail to differentiate between different providers and institutions. As a result, any misdeed by a single company tends to contaminate the sector as a whole. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/retail-banks-are-on-a-charm-offensive-but-mis-selling-continues-81918">Retail banks are on a charm offensive – but mis-selling continues</a>
</strong>
</em>
</p>
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<p>So after August 29, banks should not assume that all has been forgiven. As a deadline, it has been reasonably successful in encouraging valid claims. But its secondary purpose of enabling the banks to draw a line under the scandal is less clear cut.</p>
<p>Yes, the banks can draw a line in terms of ring-fencing payments which will enable them to move on financially. But in terms of rebuilding trust, many consumers will continue to feel that the banks owe them a considerable debt.</p><img src="https://counter.theconversation.com/content/121709/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Trust has been broken, and will not be easily fixed.Julie Robson, Associate Professor Marketing, Bournemouth UniversityJillian Dawes Farquhar, Professor of Marketing, Solent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/995642018-07-23T08:22:46Z2018-07-23T08:22:46ZMonzo, Revolut and other challenger banks are shaking up the industry<figure><img src="https://images.theconversation.com/files/227391/original/file-20180712-27030-1pa57h8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Challenger banks are built on the latest tech.</span> <span class="attribution"><span class="source">Monzo</span></span></figcaption></figure><p>Digital technology has transformed the established ways of doing business across industries – and banking is no exception. New start ups are challenging traditional service providers with a more personalised and innovative service. Traditional banks have been slow to adapt but they haven’t – yet – lost too much of their business.</p>
<p>Challenger banks like Starling, Monzo, Revolut, Atom and Tandem are all digital banks without high street branches. They are more flexible, quicker to adapt to user needs, more user friendly and more personal than traditional banks. Their biggest advantage is that they have started fresh with a digital offering and the use of the latest technology available. Traditional banks, meanwhile, are typically slower to respond to market demands and keep up-to-date with technological developments. </p>
<p>In contrast, challenger banks are able to incorporate new products much more quickly and with less friction through their platform business model, which can easily connect customers with new products developed by third parties. This greatly increases customer choice. </p>
<p>For instance, the account opening procedure is a lot easier and quicker with challenger banks, often only involving taking a picture of your ID and a video of yourself. Plus, they offer novel features such as making recommendations based on your transaction data for saving money, making payments to nearby friends via bluetooth, or even blocking gambling transactions from customer accounts. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/227394/original/file-20180712-27039-wdopgf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/227394/original/file-20180712-27039-wdopgf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/227394/original/file-20180712-27039-wdopgf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/227394/original/file-20180712-27039-wdopgf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/227394/original/file-20180712-27039-wdopgf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/227394/original/file-20180712-27039-wdopgf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/227394/original/file-20180712-27039-wdopgf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/227394/original/file-20180712-27039-wdopgf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Sofa-based bank account set up.</span>
<span class="attribution"><span class="source">StarlingBank</span></span>
</figcaption>
</figure>
<p>They can also be better at security and preventing fraudulent behaviour thanks to their more intelligent analytic capabilities. Monzo, for example, recently noticed a data breach of the <a href="https://monzo.com/blog/2018/06/28/ticketmaster-breach/">ticketing platform Ticketmaster</a> and took action to replace all cards that had used Ticketmaster, without waiting to receive customer requests.</p>
<p>The trend of these new providers has been accelerated by recent regulatory changes in the UK (<a href="https://theconversation.com/open-banking-the-invisible-reform-that-will-shake-up-uk-financial-services-89939">Open banking</a>) and across Europe (<a href="https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366_en">PSD2</a>). Taking effect in early 2018, these reforms force banks to share their customers’ data with third parties that can provide financial services if their customers request this. The change aims to boost competition and also challenges the powerful position of the traditional banks in the market by forcing them to share customers with new players. </p>
<p>What most challenger banks have in common is their ability to offer lower fees to their customers due to their lean set up and lower cost structure. Challenger banks (and fintech start ups in general) capitalise on the perception that they are looking after the customers’ best interests, rather than doing what is best or most profitable for themselves (at least not in the short term). </p>
<p>But this benefit to the customer makes it difficult to make profits. This is the norm for most UK challenger banks, as their focus is on accelerated growth and winning over new customers, while trying to work out their business model and how they will turn profits in the long term. Revolut marked itself out as an exception when it reported <a href="https://www.cnbc.com/2018/02/26/fintech-lender-revolut-breaks-even-as-it-prepares-global-expansion.html">breaking even in December 2017</a>.</p>
<h2>Trust issues</h2>
<p>Part of the issue is that, although challenger banks bring obvious benefits to users, we do not see a large number of customers leaving their traditional banks for these new players. While challenger banks increase their customer base and market presence, the number of customers using these banks as their main bank and having their payroll registered to them is low. </p>
<p>The main reason for this is trust. Trust is of paramount importance when it comes to where customers put their money, and here established banks seem to have the upper hand. The common view is that even though the customers do not trust traditional banks for giving them the best deals, they trust these banks for keeping their money safe. </p>
<p>The system failures that new players might face can also cause hesitation among potential customers and make gaining their trust more difficult. For instance, some app-only banks <a href="http://uk.businessinsider.com/uk-fintech-firms-monzo-revolut-curve-loot-down-users-2017-7?IR=T">ran into problems recently</a> due to issues with one of their technology suppliers, resulting in some reduced services. This suggests there’s promise, but also challenges.</p>
<p>The overall picture we see so far in our research into challenger banks is that people stick with their traditional banks for keeping their savings and salaries and prefer making frequent, small payments into their challenger bank accounts to use in their daily lives. </p>
<p>The <a href="https://www.globalbankingandfinance.com/the-battle-of-the-banks-will-the-new-challengers-survive">pessimists say</a> that the challengers will not necessarily win out. Although they are growing their users every day, they will not be able to grow beyond a certain size and will need to be acquired by established players. On the other hand, <a href="https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/lu-millennials-wealth-management-trends-challenges-new-clientele-0106205.pdf">stats show</a> that millennials are much more willing to switch financial providers in order to get better, more customised services. </p>
<p>Plus, despite the uncertainty around the future of challenger banks, there are hints – including new regulations and tech firms getting into financial services – that show there will be no return to banking as we have known it.</p><img src="https://counter.theconversation.com/content/99564/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pinar Ozcan receives funding from the Strategic Management Society Research in Organisations Program.</span></em></p><p class="fine-print"><em><span>Dize Dinçkol receives funding from Strategic Management Society Research in Organisations Program. </span></em></p><p class="fine-print"><em><span>Markos Zachariadis receives funding from Strategic Management Society Research in Organisations Program.</span></em></p>Challenger banks are on the rise but they need to prove themselves to be trustworthy to survive – and profit.Pinar Ozcan, Professor of Strategy, Warwick Business School, University of WarwickDize Dinçkol, PhD Researcher, Warwick Business School, University of WarwickMarkos Zachariadis, Assistant Professor of Information Systems, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/663112016-10-03T15:03:51Z2016-10-03T15:03:51ZHow alternative finance can offer a better banking future<figure><img src="https://images.theconversation.com/files/140092/original/image-20161003-20217-p5718d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>Do you know where your money is? If you immediately think of cash, then there’s a good chance you’ve just patted a pocket or looked in a purse to reassure yourself. But if you thought of your savings and investments, then there’s actually a good chance you have no idea where your money is – other than to draw the quick (and misleading) conclusion that it is “safely in the bank”.</p>
<p>After all, where else would it be?</p>
<p>We recently saw the revelation that another major bank – this time Germany’s Deutsche Bank – <a href="http://www.theatlantic.com/news/archive/2016/09/deutsche-bank-worry-collapse/502463/">could collapse</a>. According to Germany’s economy minister, <a href="http://www.reuters.com/article/uk-germany-deutsche-bank-gabriel-idUKKCN1220TO">Sigmar Gabriel</a>, it “made speculation its business model”, though now claims to be the “victim of speculators”.</p>
<p>But there is an alternative to this banking model that isn’t based on financial speculation. Research that colleagues and I have done into <a href="http://baumaninstitute.leeds.ac.uk/research/fitter/report/">economic resilience</a> would suggest that many people might be better off investing in alternative finance and, to encourage them, the government should guarantee alternative finance investments up to a maximum of £5,000.</p>
<h2>Finally, an alternative</h2>
<p>The UK is the home of Europe’s rapidly-growing alternative finance (or “alt fin”) movement, which is fast becoming a major player in the financial sector. Valued at <a href="https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/pushing-boundaries/#.V-keT6xwYdU">£3.2 billion in 2015</a>, a big part of its appeal is that we can often know more precisely where our money is and what it is doing. Whereas with mainstream banks, your money is used to fund various investments, often on financial markets that you have no control over, investors in alternative finance projects tend to invest in a specific project.</p>
<p>Alternative finance has been around since at least 2004, with the founding of online peer-to-peer lender, <a href="https://www.zopa.com/">Zopa</a>. But a far broader range of options have sprung up since the financial crisis. In our research, we found online peer-to-peer platforms that bypass the banks entirely, community share schemes that allow both direct investment in and democratic influence of a given project, and crowdfunding to support a local SME business take off. Greater transparency so that people know exactly where their money is and what it is doing is key.</p>
<p>Beyond this there are many different financial arrangements, all with different implications for funders and fundraisers. Peer-to-peer loans, bonds and debentures have to be repaid with interest. Community shares are regulated to keep dividend payments low, but give shareholders a say in the governance of the fundraising organisation.</p>
<h2>Government backing?</h2>
<p>Despite the very public loss of reputation suffered by high street banks following the financial crisis in 2007, we still seem to trust them with our money. In wondering how mainstream banks were able to return so quickly to “business as usual”, one answer is that we did too. A big reason for this might be that we didn’t know what else we could do with our money and the perceived risks of new ways of investing.</p>
<p>There are understandable anxieties about alternative investments at a time of significant restraints on household budgets, especially when two in five of the UK workforce have <a href="https://www.moneyadviceservice.org.uk/blog/millions-at-risk-with-savings-of-100-or-less">less than £100 in savings</a>. This is why the government should step in and guarantee retail investments in alternative finance.</p>
<p>It’s a relatively small ask compared to the <a href="http://www.fscs.org.uk/">Financial Services Compensation Scheme</a>, which is the current guarantee of cash deposited in UK-regulated accounts in banks and building societies up to a limit of £75,000 – even though such investments provide very little financial return to savers or deliver tangible social or environmental value from this money. </p>
<p>Alt fin tries to provide us with a way of diverting our money away from habitual patterns of economic behaviour. And it is delivering real social and environmental benefit to communities. These include <a href="https://www.abundanceinvestment.com/">renewable energy schemes</a>, <a href="http://leedscommunityhomes.org.uk/">community home building</a>, or <a href="https://www.spacehive.com/DiscoverProjects">renovating disused land</a> into play spaces for children. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/140112/original/image-20161003-20217-gunrpb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/140112/original/image-20161003-20217-gunrpb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/140112/original/image-20161003-20217-gunrpb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/140112/original/image-20161003-20217-gunrpb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/140112/original/image-20161003-20217-gunrpb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/140112/original/image-20161003-20217-gunrpb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/140112/original/image-20161003-20217-gunrpb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">One of the banks that has been bailed out by the government since the financial crisis.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/ell-r-brown/3915510984/in/photolist-6Y1215-raQzzj-7iVEkQ-85V7Kp-e8BwEH-KEJtD-o6wuYM-e8BwSg-o8AYGK-6bZrz8-o4Mwrd-iqhK9Q-o6H2HA-9z7gUE-4EUNJ6-5Shknx-p3CD6n-9z7gLJ-9MZJ5E-9z7ibj-6bZruX-cdARkq-74x2e1-e8BwGt-9MZLaQ-9fQJbg-dtSRtA-arM9aK-pnKH6c-9fTKMf-fvS5uS-9fTMWS-bYP4nS-9ojgTN-bYNqM7-9fTzN3-fvSarC-e8Hb1Q-pnYdiF-c8buNC-9cDHQT-7xi6KV-diVgr1-9fQtwK-7hyvvX-p6udte-9N18eh-9MXfKZ-9fTBif-e8Bwur">Elliott Brown</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>We argue that the government should help the process of building trust in alternative finance investments by providing this maximum guarantee with the condition that investment is directed into the “real economy” and not just financial markets.</p>
<h2>Proceed with caution</h2>
<p>Of course, any such guarantee should be approached with caution. After all, this suggests a breaking of the “risk/return” cycle – a basic tenet of banking that with any investment comes risk – and potentially opens the way to abuse, with people making risky investments with the comfort of a government backstop. </p>
<p>But if we are to build a more resilient financial system, we need a far greater range of options for where to direct our money. Alternative finance is not perfect, and a growing entanglement with mainstream finance may see the sector start to resemble mainstream practices. To manage the process of truly democratising finance and providing genuine alternatives to putting our money “safely in the bank”, the <a href="https://www.fca.org.uk/">Financial Conduct Authority</a> should play a leading role as regulator.</p>
<p>And if a taxpayer guarantee sounds contentious, it is worth remembering that the risk/return cycle was significantly broken by the process of bailing out the banks in 2007-08. Banks, too big to fail and to jail, <a href="http://positivemoney.org/how-money-works/how-banks-create-money/">currently create 97% of “money” through credit</a>, preferring to speculate on money and financial markets in the hope of creating profit, rather than investing in the “real economy”.</p>
<p>If the practice is good for safeguarding the hidden financial speculation of the few, why not for safeguarding the transparent material social and environmental gains for the many? </p>
<p>In continuing to assume the mainstream banks are the safest place to invest, we might be missing the opportunity to make our money do good by working harder for us and our communities.</p><img src="https://counter.theconversation.com/content/66311/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Davis receives funding from Friends Provident Foundation for the research informing this article. He does not work for or own shares in any company or organisation that would benefit from this article.</span></em></p>With a bit of government backing, alternative finance can give us control over our money and help kickstart the ‘real economy’.Mark Davis, Associate Professor of Sociology, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/637432016-08-10T09:18:43Z2016-08-10T09:18:43ZBanking ‘shake-up’ relies too much on customers shopping around<figure><img src="https://images.theconversation.com/files/133649/original/image-20160810-28926-r8d4eu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Customers need to switch it up.</span> <span class="attribution"><span class="source">Barry Barnes / Shutterstock.com</span></span></figcaption></figure><p>A report that was billed to transform the UK’s retail banking industry has been <a href="http://www.bbc.co.uk/news/business-37014133">criticised</a> for not doing enough to protect customers. The Competition and Markets Authority <a href="https://assets.publishing.service.gov.uk/media/57a8c0fb40f0b608a7000002/summary-of-final-report-retail-banking-investigation.pdf">report</a> was two years in the making and is geared towards improving competition and the products on offer for individuals and small businesses.</p>
<p>But the government watchdog puts the onus on bank customers to improve market conditions. It said their lack of engagement with the market “weakens banks’ incentives to compete” and contributes to the costs involved for challenger banks to gain a foothold in the market. Therefore its package of remedies focuses heavily on measures aimed at stimulating consumers to shop around and making it easier for them to switch. Even with the new technology it proposes, this will be easier said than done.</p>
<p>Central to the reforms is a requirement that banks make their computer systems accessible to trusted third parties so that, with customers’ consent, their banking data can be transferred and used to drive new online services and mobile apps that compare the best banking deals and recommend switching when cost savings are identified. The aim is to have this part of the remedy up and running by 2018. </p>
<p>There are some obvious concerns: the security of data passed to third parties, the possible cost of these new services, and the fact that older generations and rural communities in particular often have no <a href="https://www.fca.org.uk/your-fca/documents/occasional-papers/occasional-paper-17">or poor internet and mobile access</a>, so are not necessarily in a position to benefit. A further barrier may be that consumers are simply overloaded with calls to shop around.</p>
<h2>Unrealistic expectations</h2>
<p>A common cry from regulators of everything from <a href="http://www.bbc.co.uk/news/business-36961798">gas and electricity</a> to <a href="https://www.broadbandchoices.co.uk/news/broadband/from-next-week-you-won%E2%80%99t-need-a-mac-code-to-switch-broadband-00480">broadband</a> and <a href="https://www.the-fca.org.uk/about/promoting-competition">insurance</a> is that consumers must engage more actively to make markets work. From all sides, you are urged to shop around and switch regularly to persuade providers to improve quality and cut prices. </p>
<p>But <a href="http://www.open.ac.uk/business-school-research/pufin/sites/www.open.ac.uk.business-school-research.pufin/files/files/WORKING-PAPER-Shopping-around-in-multiple-markets-Lowe-Nov15.pdf">research I’ve conducted</a> suggests how unrealistic it is to expect households to shop around for every service they use. I looked at the shopping and switching habits of more than 1,000 consumers for 12 common household and financial services, including energy, communications, banking, savings and credit cards. Most used ten or 11 of these services, but at best had shopped around for fewer than half (the blue line in the chart below). </p>
<p>Only a tiny proportion of households shopped around for every service they use (the green line in the chart). Households that shopped around prioritised their car, buildings and house insurance, followed by their gas and electricity provider. They were least likely to shop around for their bank account.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=446&fit=crop&dpr=1 600w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=446&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=446&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=560&fit=crop&dpr=1 754w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=560&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/133567/original/image-20160809-18014-a3j0cy.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=560&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Average number of services for which households had shopped around in the last three years as a percentage of services used by the household and percentage shopping for all the services used.</span>
<span class="attribution"><a class="source" href="http://www.open.ac.uk/business-school-research/pufin/sites/www.open.ac.uk.business-school-research.pufin/files/files/WORKING-PAPER-Shopping-around-in-multiple-markets-Lowe-Nov15.pdf">Jonquil Lowe</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Across all services, the research found that households who had not shopped around tended to overestimate the time and difficulty of the task. But even among households who did shop around for a bank account, one in five found the process took more than a day and nearly one in ten found the process difficult. So part of the challenge facing regulators is to improve, and instil greater confidence in, the industry’s current account switching service (CASS) – something the CMA and the industry <a href="https://www.bacs.co.uk/documentlibrary/cass_making_account_switching_easier.pdf">is trying to do</a>. </p>
<h2>Making life easier</h2>
<p>My research showed that, for all types of household and financial services, most of those that did not shop around tended to think that all providers offer similar deals and that shopping around would save too little to make the chore worthwhile. The new third-party services that are being proposed may help to make banking differences more visible. In addition, the CMA will require banks to gather, publish and share data on the quality of their services, including whether existing customers would recommend their bank to friends, family and colleagues. </p>
<p>Another finding of my research was that households were most likely to shop around for insurance products. An important feature of these products is that they are annual contracts so there is an automatic, regular prompt to shop around. The CMA measures will try to mimic this for bank accounts by requiring banks to send existing customers prompts, suggesting that they shop around for a new account. These may be on a regular basis and also triggered by events, such as your local bank branch closing down.</p>
<p>While the CMA measures aim to tackle the particular shortcomings of bank customers that it has identified, they nonetheless overlook the wider context of households potentially being overburdened by multiple calls to become active and engaged consumers. My research suggests that, as the number of services you use increases, there may be resistance to taking on yet more shopping around. </p>
<p>Attempts by the government to get people to add bank accounts to this list may be an especially tough challenge and there may be a danger that shopping for bank accounts reduces the time and effort you are able to devote to shopping for other services. Regulators need to wake up to the fact that consumers simply may not be willing to take up the workload of driving the demand side of competition across multiple markets for household and financial services.</p><img src="https://counter.theconversation.com/content/63743/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonquil Lowe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A common cry from regulators is that customers must shop around for the best deal – but households rarely look for a better banking deal.Jonquil Lowe, Lecturer in Personal Finance, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/631422016-08-02T16:19:55Z2016-08-02T16:19:55ZDo you know what you’re paying for? How contactless cards are still vulnerable to relay attack<figure><img src="https://images.theconversation.com/files/132830/original/image-20160802-17190-tjhoo3.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">With home-made sleight-of-hand, it’s possible that the cardholder may buy more than they bargained for.</span> <span class="attribution"><span class="license">Author provided</span></span></figcaption></figure><p>Contactless card payments are fast and convenient, but convenience comes at a price: they are vulnerable to fraud. Some of these vulnerabilities are unique to contactless payment cards, and others are shared with the Chip and PIN cards – those that must be plugged into a card reader – upon which they’re based. Both are vulnerable to what’s called a <a href="http://sec.cs.ucl.ac.uk/users/smurdoch/talks/ccc07relayattacks.pdf">relay attack</a>. The risk for contactless cards, however, is far higher because no PIN number is required to complete the transaction. Consequently, the card payments industry has been working on ways to solve this problem.</p>
<p>The relay attack is also known as the “chess grandmaster attack”, by analogy to the <a href="http://en.chessbase.com/post/the-magical-che-experiment">ruse</a> in which someone who doesn’t know how to play chess can beat an expert: the player simultaneously challenges two grandmasters to an online game of chess, and uses the moves chosen by the first grandmaster in the game against the second grandmaster, and vice versa. By relaying the opponents’ moves between the games, the player appears to be a formidable opponent to both grandmasters, and will win (or at least force a draw) in one match.</p>
<p>Similarly, in a relay attack the fraudster’s fake card doesn’t know how to respond properly to the payment terminal because, unlike a genuine card, it doesn’t contain the cryptographic key known only to the card and the bank that verifies the card is genuine. But like the fake chess grandmaster, the fraudster can relay the communication of the genuine card in place of the fake card. </p>
<p>For example, the victim’s card (Alice, in the diagram below) would be in a fake or hacked card payment terminal (Bob) and the criminal would use the fake card (Carol) to attempt a purchase in a genuine terminal (Dave). The bank would challenge the fake card to prove its identity, this challenge is then relayed to the genuine card in the hacked terminal, and the genuine card’s response is relayed back on behalf of the fake card to the bank for verification. The end result is that the terminal used for the real purchase sees the fake card as genuine, and the victim later finds an unexpected and expensive purchase on their statement.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/132810/original/image-20160802-17177-12o458d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/132810/original/image-20160802-17177-12o458d.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=261&fit=crop&dpr=1 600w, https://images.theconversation.com/files/132810/original/image-20160802-17177-12o458d.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=261&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/132810/original/image-20160802-17177-12o458d.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=261&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/132810/original/image-20160802-17177-12o458d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=328&fit=crop&dpr=1 754w, https://images.theconversation.com/files/132810/original/image-20160802-17177-12o458d.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=328&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/132810/original/image-20160802-17177-12o458d.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=328&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The relay attack, where the cards and terminals can be at any distance from each other.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Demonstrating the grandmaster attack</h2>
<p>I first demonstrated that this vulnerability was real with my colleague <a href="http://www.saardrimer.com/sd410/">Saar Drimer</a> at Cambridge, showing on television how the attack could work <a href="https://www.youtube.com/watch?v=X7pjUIxKoEc">in Britain in 2007</a> and <a href="https://vimeo.com/8241248">in the Netherlands in 2009</a>.</p>
<p>In our scenario, the victim put their card in a fake terminal thinking they were buying a coffee when in fact their card details were relayed by a radio link to another shop, where the criminal used a fake card to buy something far more expensive. The fake terminal showed the victim only the price of a cup of coffee, but when the bank statement arrives later the victim has an unpleasant surprise.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/X7pjUIxKoEc?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>At the time, the banking industry agreed that the vulnerability was real, but argued that as it was difficult to carry out in practice <a href="https://www.finextra.com/news/fullstory.aspx?newsitemid=16466">it was not a serious risk</a>. It’s true that, to avoid suspicion, the fraudulent purchase must take place within a few tens of seconds of the victim putting their card into the fake terminal. But this restriction only applies to the Chip and PIN contact cards available at the time. The same vulnerability applies to today’s contactless cards, only now the fraudster need only be physically near the victim at the time – contactless cards can communicate at a distance, even while the card is in the victim’s pocket or bag.</p>
<p>While we had to build hardware ourselves (from off-the-shelf components) to demonstrate the relay attack, today it can be carried out with any modern smartphone equipped with <a href="http://www.techradar.com/news/phone-and-communications/what-is-nfc-and-why-is-it-in-your-phone-948410">near-field communication chips</a>, which can read or imitate contactless cards. All a criminal needs is two cheap smartphones and some software – which could be sold on the black market, if it is not already available. This change is likely the reason why, years after our demonstration, the industry has developed a defence against the relay attack, but only for contactless cards. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/132811/original/image-20160802-428-1e8u9u8.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/132811/original/image-20160802-428-1e8u9u8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/132811/original/image-20160802-428-1e8u9u8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=322&fit=crop&dpr=1 600w, https://images.theconversation.com/files/132811/original/image-20160802-428-1e8u9u8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=322&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/132811/original/image-20160802-428-1e8u9u8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=322&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/132811/original/image-20160802-428-1e8u9u8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=405&fit=crop&dpr=1 754w, https://images.theconversation.com/files/132811/original/image-20160802-428-1e8u9u8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=405&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/132811/original/image-20160802-428-1e8u9u8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=405&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A rigged payment terminal capable of performing the relay attack can be made from off-the-shelf components.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>Closing the loophole</h2>
<p>The industry’s defence is <a href="http://www.cl.cam.ac.uk/research/security/banking/relay/">based on a design</a> that Saar and I developed at the same time that we demonstrated the vulnerability, called distance bounding. When the terminal challenges the card to prove its identity, it measures how long the card takes to respond. During a genuine transaction there should be very little delay, but a fake card will take longer to respond because it is relaying the response of the genuine card, located much further away. The terminal will notice this delay, and cancel the transaction. </p>
<p>We set the maximum delay to 20 nanoseconds – the time it takes a radio signal to travel six metres; this would guarantee the genuine card is no further away than this from the terminal. However, the contactless card designers made some compromises in order to be compatible with the hundreds of thousands of terminals already in use, which allows far less precise timing. The <a href="http://www.emvco.com/download_agreement.aspx?id=1238">new, updated card specification</a> sets the maximum delay the terminal allows at two milliseconds: that’s two million nanoseconds, during which a radio signal could travel 600 kilometres.</p>
<p>Clearly this doesn’t offer the same guarantees as our design, but it would still represent a substantial obstacle to criminals. While it’s enough time for the radio signal to travel far, it’s still a very short window for the software to process the transaction. When we demonstrated the relay attack it regularly introduced delays of hundreds or even thousands of milliseconds.</p>
<p>It will be years before the new secure cards reach customers, and even then only some: there is only one Chip and PIN specification, but there are <a href="https://pomcor.com/2014/09/20/apple-pay-must-be-using-the-mag-stripe-mode-of-the-emv-contactless-specifications/">seven specifications for contactless cards</a>, and only the MasterCard variant includes this defence. It’s not perfect, but it makes pragmatic compromises that should prevent smartphones being used by fraudsters as tools for the relay attack. The sort of custom-designed hardware that could still defeat this protection would require expertise and expense to build – and the banks will hope that they can stay ahead of the criminals until the arrival of whatever replaces contactless cards in the future.</p><img src="https://counter.theconversation.com/content/63142/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven J. Murdoch is a member of The Tor Project and employee of VASCO.</span></em></p>A loophole in a change to contactless card to prevent fraud had this security sleuth on the case.Steven J. Murdoch, Royal Society University Research Fellow, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/545422016-02-11T19:01:43Z2016-02-11T19:01:43ZExplainer: what might upset Australia’s ‘rock solid’ banks<p>Market volatility has affected banks internationally in the US, UK and Europe but even though Australian banks remain insulated from turbulence abroad it might not be all smooth sailing. </p>
<p>The MSCI index of global banks has fallen by 16% since the start of the year, while the S&P index for US banks has fallen by 20%. The chief executive of Deutsche Bank (one of the world’s largest banks) was forced to <a href="https://www.db.com/newsroom_news/2016/ghp/a-message-from-john-cryan-to-deutsche-bank-employees-0902-en-11392.htm">announce </a> that his bank was “rock solid” after the share price had fallen more than 30% from the start of the year and rumours circulated of problems with contingent convertible (<a href="http://www.theaustralian.com.au/news/world/the-times/unwanted-coco-bonds-fall-at-first-hurdle/news-story/a6340e71cd995246de3189a952861722">CoCo</a>) bonds. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=521&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=521&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=521&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bank stocks and the cost of CDS insurance.</span>
<span class="attribution"><span class="source">Datastream</span></span>
</figcaption>
</figure>
<p>The fall in international bank stocks has coincided with a perception of rising risk levels within the banking sector. The iTRAXX CDS index indicates the cost of insuring debt for a selection of global banks – the index increases as the cost of insurance becomes more expensive, indicating the market perceives that the debt is riskier. So far this year the index has risen 65% - the sharpest increase since the European sovereign debt crisis of 2011-12.</p>
<h2>Falling commodity prices are the current focus</h2>
<p>The main source of concern for financial markets at the moment is related to the commodity markets. Past high commodity prices encouraged many firms to invest heavily building huge new mines, liquefied natural gas (LNG) plants, and expanding production in shale oil. This investment required large amounts of borrowing, and banks have provided this directly (loans) and indirectly (purchasing bonds).</p>
<p>In the last year, crude oil prices have fallen 54%, LNG prices have fallen 32%, and iron ore prices are down around 30% (according to Datastream). The result is that many of the projects, some of which are still to come online, are not profitable – some may never be profitable – and the debt may not be repaid. </p>
<p>Credit ratings agencies such as <a href="https://www.moodys.com/research/Moodys-reviews-energy-companies-in-the-US-for-downgrade--PR_342569">Moody’s</a> suggests that much of the debt issued by U.S. energy companies will be downgraded to junk in the near future, while Standard & Poor’s stated that debt at Chesapeake Energy (one of the largest US shale producers) is <a href="http://www.bloomberg.com/news/articles/2016-02-09/chesapeake-credit-rating-cut-deeper-into-distressed-level-by-s-p">unsustainable</a>.</p>
<p>Attempts by the Chinese government at <a href="http://www.theguardian.com/business/2016/jan/12/chinese-efforts-to-talk-up-yuan-fail-to-stop-slide-in-oil-and-stock-prices">intervening in the currency markets</a> have also created volatility for banks. This has served to create a sense of uncertainty within the financial markets – and when this is the case there is often a reduction in the willingness to invest in “risky assets” such as stocks. Unlike in 2008, heavily indebted governments will have much less ammunition to bail out banks that fail this time around.</p>
<p>Longer term, the change in the regulatory environment is affecting the risk-taking ability of banks, and reducing profitability (even viability) of many areas. Increased capital requirements, particularly in areas that regulators deem to be <a href="http://www.ft.com/intl/cms/s/0/a79f8a3c-4070-11e5-b98b-87c7270955cf.html#axzz3zpjUSrrR">too risky</a>, mean that many banks are exiting equity, fixed income, and currency trading – divisions that have previously generated substantial profits for banks. </p>
<p>Of course, there is also ongoing regulatory investigation into a variety of cases of apparent financial market manipulation such as the recent <a href="https://theconversation.com/qanda-what-is-the-libor-scandal-and-why-does-it-matter-45662">LIBOR</a>, and Foreign Exchange, fixing scandals that saw heavy fines imposed on US and European banks. This has even spread to Australia, where ANZ appears to be under investigation by ASIC for <a href="https://theconversation.com/years-on-asic-still-grappling-with-swap-rate-fixing-scandal-35851">possible interest rate rigging</a>.</p>
<h2>Meanwhile in Australia</h2>
<p>In Australia, banks have performed very well over the course of the last five years. At one point in 2012 Australian banks were worth more than the whole of the European banking sector! Record levels of profitability in Australian banks have supported large dividend payments to shareholders and helped push share prices to all-time highs in 2015. </p>
<p>Earlier this week, <a href="https://www.commbank.com.au/about-us/shareholders/financial-information/results.html">CBA announced another rise in earnings</a> for the first half of the year – to A$4.8 billion. Much of this profitability is a result of increasing interest margins. As the Reserve Bank of Australia cash rate has fallen, banks have been quick to cut the rates offered to savers, but slow to pass on the rate decrease to borrowers (if they have done so at all). Even a small increase in this margin can boost profits if total assets are measured in the hundreds of billions of dollars.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=335&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=335&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=335&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=421&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=421&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=421&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Interest margins.</span>
<span class="attribution"><span class="source">rba.gov.au</span></span>
</figcaption>
</figure>
<p>However, this profitability may not last as margins are under pressure on two counts. First, tighter lending standards, particularly for investors, have slowed lending in the housing market. The housing market appears to be <a href="http://www.businessinsider.com.au/anz-australias-softening-housing-market-will-challenge-the-economy-in-2016-2016-1">slowing</a> and this may increase bad debts in the future.</p>
<p>Australian banks are not totally immune to the impact of falling commodity prices, and CBA with ownership of Bankwest may be particularly <a href="http://www.macrobusiness.com.au/2016/02/is-cba-really-worth-it/">exposed</a> to a slowdown in Western Australia.</p>
<p>On the other side of the coin, funding is becoming more expensive for banks at the same time that increased capital requirements require them to hold more. Funding through international sources is particularly scarce (the <a href="http://www.investopedia.com/terms/c/creditdefaultswap.asp">CDS</a> index indicates this is becoming more expensive), and this matters because Australian banks require a substantial amount of offshore funding.</p><img src="https://counter.theconversation.com/content/54542/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Smales does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Commonwealth Bank’s half year results suggest Australian banks are doing well despite the turbulence affecting banks internationally, however they may not be totally immune.Lee Smales, Senior Lecturer, Finance, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/464332015-08-27T05:37:53Z2015-08-27T05:37:53ZWhy the Co-op Bank is better off ditching its ‘ethical’ brand<p>Multiple scandals, from <a href="https://theconversation.com/common-currency-a-forex-scandal-that-epitomises-the-blindness-in-the-banking-crisis-34150">forex rigging</a> to <a href="https://theconversation.com/embattled-banks-hester-departs-rbs-and-lloyds-hit-by-ppi-scandal-15152">PPI</a>, have left the banking sector with a wide credibility gap. And the Co-op Bank’s is wider than most. After a calamitous few years, its standing is at such a low that the UK’s Financial Conduct Authority recently <a href="https://www.fca.org.uk/news/fca-censures-the-co-operative-bank-for-listing-rules-breaches">decided against fining it</a> – despite finding it guilty of misleading investors and pursuing growth at the expense of financial stability – for fear of making the bank’s situation worse.</p>
<p>When even the regulator sees fit to take pity on you, you know the situation is dire. And this was quickly followed by an earnings report of <a href="http://www.thenews.coop/97295/news/banking-and-insurance/co-operative-bank-reports-200m-loss-first-half-year/">more than £200m of losses</a> for the first half of the year and a prediction that it will not return to profit until 2017. But better days are ahead for the troubled bank. </p>
<p>Now under new ownership – the Co-op Group holds <a href="http://www.reuters.com/article/2014/05/10/coop-fundraising-idUSL6N0NW09H20140510">just 20% of shares</a> – the bank, like the wider sector, faces an uphill struggle to win back credibility with the regulator, with investors, and, crucially, with customers. Ironically, this will come with a move away from its former focus on ethical banking.</p>
<h2>Stable footing</h2>
<p>The Co-op Bank brand is damaged and the new owners are unlikely to have much nostalgic attachment to the name or its ethical positioning. For the past 20 years, the Co-op Bank has been at pains to build a reputation for “ethical banking”, swearing off controversial areas like arms and tobacco. But how much of a draw this has been for consumers is questionable.</p>
<p>Now the institution is largely out from under the umbrella of the Co-op Group, the hedge funds which make up the majority shareholding will be looking to reposition the business on a commercial footing. Indeed, their apparent long-term commitment to the bank suggests they believe the potential for future success is strong.</p>
<p>A good model to follow could be that of the Co-operative Permanent Building Society, a now little-known institution which in 1970 emerged from a period of relative stagnation <a href="http://www.nationwide.co.uk/about/corporate-information/our-history">to become Nationwide</a>. As that example shows, with strong leadership and decisive action it is possible to breathe new life into an ailing institution.</p>
<p>Throughout the early part of this decade, there was a clear leadership deficit at Co-op Bank, and the Co-op Group more widely, which prevented the bank from responding decisively to the difficulties it found itself in. But <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10082567/HSBC-veteran-Niall-Booker-to-lead-troubled-Co-op-bank.html">in Niall Booker</a>, the Co-op Bank now has a leader with a wealth of experience across a long career and a history of success in good times and bad, having managed HSBC out of the sub-prime mortgage crisis in the US.</p>
<h2>Rediscovering its customer focus</h2>
<p>So, the Co-op Bank has stable ownership and strong leadership; it now needs a new proposition to take to consumers.</p>
<p>The Co-op’s recent travails are well documented, with mismanagement and scandal all but destroying its ethical credentials. In reality, this positioning has largely been window dressing anyway. The Co-op Bank may not have had weapons manufacturers or tobacco firms as customers, but that had more to do with the institution’s relative minnow status as a clearing bank than its inclination to turn away certain types of business.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/93067/original/image-20150826-15424-kn247k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/93067/original/image-20150826-15424-kn247k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/93067/original/image-20150826-15424-kn247k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/93067/original/image-20150826-15424-kn247k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/93067/original/image-20150826-15424-kn247k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/93067/original/image-20150826-15424-kn247k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/93067/original/image-20150826-15424-kn247k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Co-op needs to shift its focus now.</span>
<span class="attribution"><span class="source">Co-operative Bank</span></span>
</figcaption>
</figure>
<p>The ethical message might have resonated with the public in the past, but any attempt to resurrect it will only draw attention to previous failings. As guilty as the rest <a href="http://www.fsa.gov.uk/library/communication/pr/2013/001.shtml">when it comes to PPI</a>, the Co-op Bank’s <a href="http://www.thisismoney.co.uk/money/markets/article-2543332/Political-considerations-swayed-Lloyds-Banking-Group-choosing-Co-op-Bank-branch-sale-says-bid-rival.html">£1.5 billion capital shortfall</a> when attempting a takeover of Lloyds’ branches, which led to the FCA’s recent investigation, will have done little to regain the public’s trust.</p>
<p>Being the “ethical bank” carries less weight now than when the Co-op Bank adopted its ethical policy in the early 1990s. The rise of corporate social responsibility and targets aimed at sustainable practices has made the endorsement of ethical policy the norm. </p>
<p>Consumers are now making savvier commercial decisions <a href="http://www.ft.com/cms/s/0/c71d4a3c-8859-11e3-85a2-00144feab7de.html#axzz3jiSmT3Lx">when choosing who to bank with</a>. They are focused on banking with a financially viable institution and getting the best deal they can. A reputation for behaving ethically might be a useful add-on, but if the rest of the offer doesn’t stack up – if the bank isn’t quick and easy to use, trustworthy, and offering good rates and returns – it won’t get far.</p>
<p>The Co-op Bank has historically done a good job of this. Its Smile brand, for example, was a <a href="http://www.marketingmagazine.co.uk/article/65778/analysis-co-op-raising-smile-generation---ethical-values-improved-access-form-basis-e-bank-smile-rsquos-new-ad-campaign-claire-billings-reports">pioneer</a> of full service online banking. If the bank is to revive its fortunes, it must rediscover a customer focus. In a world recovering from a financial crisis and mis-selling scandals, treatment of consumers has a more significant resonance.</p>
<p>That is the direction the Co-op Bank should take its ethical banking – showing that if you adopt a common sense approach and build trust with consumers, giving them the best deals and the best customer service, you can start to close the credibility gap. And should the Co-op Bank succeed, it could be a model for the whole of the UK banking sector.</p><img src="https://counter.theconversation.com/content/46433/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Wilson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Co-op Bank faces an uphill struggle to win back credibility with the regulator, with investors, and, crucially, with customers.John Wilson, Director, Newcastle University Business School, Newcastle UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/376742015-02-16T15:41:31Z2015-02-16T15:41:31ZLabour talks tough on banking reform, but little will change<p>Given the <a href="http://www.independent.co.uk/news/business/news/bank-of-england-says-confidence-in-banking-system-is-still-shaky-amid-recent-scandals-and-cyber-threats-9939996.html">scandals</a>, <a href="http://www.theguardian.com/business/2014/mar/11/banking-bonuses-rise-city-of-london">bonus increases</a> and <a href="http://www.bbc.co.uk/news/business-21653603">plummeting lending</a> to small and medium-sized British businesses, reform of the banking system is likely to be a hot topic in the run-up to the general election. It is not surprising then that Labour has launched its <a href="http://www.yourbritain.org.uk/uploads/editor/files/Banking_Reform.pdf">plan on banking reform</a>, which proposes measures to improve competition within the banking sector, lending to smaller businesses, and the culture of banking itself. </p>
<p>On the local and regional issues of increasing bank lending to smaller businesses, the banking reform paper makes some sensible suggestions. Among them are a greater system of guarantees for new and smaller banks to help them establish themselves as lenders, and a more substantial British Investment Bank, funded via the £1 billion anticipated revenue from mobile phone license increases. On the bigger issues of changing the culture of British banking however, any good the report proposes will be watered down when faced with the limited oligopoly of the largest British banks. </p>
<h2>One step beyond</h2>
<p>The continuing crisis of the British banking system has been a problem no government could avoid. The 2007-08 bailouts were only the start, but the £55 billion fall in lending to SMEs since May 2010 and <a href="http://www.ft.com/cms/s/0/aea87dae-0beb-11e3-8840-00144feabdc0.html#axzz3RuwHi43N">repeated scandals</a> that have rocked the city have led to a whole series of measures and reforms under Tory leadership. </p>
<p>The most prominent of these have been the ring-fence, designed to protect taxpayers from higher risk trading activities. Other measures have included institutional changes to enhance supervision powers in and around the Bank of England, and various measures to promote lending, from <a href="http://www.parliament.uk/business/publications/research/briefing-papers/SN06047/project-merlin">Project Merlin</a> to the <a href="https://www.gov.uk/government/news/funding-for-lending-scheme-bank-of-england-and-hm-treasury-announce-extension">Funding for Lending Scheme</a>.</p>
<p>Simply, Labour’s banking reform paper is only one step beyond what the coalition government has already attempted. The report begins by suggesting that “we need a One Nation banking system that serves Britain, rather than having Britain serving our banks”. But this is nothing new. Cameron and Osborne have been using <a href="http://www.thisismoney.co.uk/money/news/article-2032194/Bank-reforms-David-Cameron-warns-banks-economy-risk.html">this type of soundbite</a> for the last three years. </p>
<p>The big message, then, is that Labour’s report adds a few extra layers to the Tories’ existing array of reforms. It commends the Tories’ efforts, but suggests that “implementation … has too often fallen short”. </p>
<p>On competition in the banking sector, it proposes evaluating existing criteria and measures to help ensure the emergence of two new challenger banks. In accessing finance, it proposes developing the Tories’ Business Bank into a British Investment Bank. And in culture and pay it proposes deferring bonuses from the Tories’ suggested five years to a new standard of seven years. These are sensible suggestions, but they are incremental rather than innovative and original. </p>
<h2>A limited oligopoly</h2>
<p>Reading between the lines both the Conservative and Labour parties’ stance vis-à-vis the British banking system tells us that the love affair with the City has been sorely tested. But the reality is that Labour’s banking reform paper is largely performative. No self-respecting opposition party would avoid being seen to take a tough position on the City in the run-up to an election. But little will change if Labour gains power, for many of the same reasons that little has changed under the Tories.</p>
<p>This is because the power commanded by the largest banks stems from their almost unique positioning and structure. They straddle two worlds in a way that banks in few other developed economies can. The UK’s largest banks – from HSBC, to Barclays, to RBS – remain amongst the largest in the world. As such they reflect the longstanding though unwritten privileging of the City of London as a global financial centre. </p>
<p>This privileging has not changed since 2007. Yet these largest banks also form what <a href="http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/612/612i.pdf">the Cruickshank Report</a> once called a “limited oligopoly”, which dominates lending to the British economy. And it is very unlikely that any measure proposed thus far – even the ring-fence – can provide sufficient distance between these two worlds of British banking to diminish the overweening power that these banks wield. </p>
<h2>Policing competitiveness</h2>
<p>What will this mean for Labour? Lending to smaller British businesses matters relatively little to this limited oligopoly. As a result, it will probably not resist a larger British Investment Bank. This may be good news for smaller firms. What the oligopoly will challenge – albeit quietly and behind closed doors – are any measures that are seen to threaten the competitiveness of the City and its ability to attract and maintain the best talent. The longer-term remuneration policy, tougher sanctions, and stricter leverage ratio targets, proposed by Labour, all fall within this category.</p>
<p>The result will be that, in the all-important post-election negotiations, any tougher Labour party proposals will themselves be watered down. Improving the “culture” of banking is good pre-election language. But the fine line between improved culture and damaged competitiveness is one that the largest banks police aggressively. </p>
<p>So, the Labour plans will be diluted. This has clearly been the case with recent Tory measures. For example, at vital points in the Vickers ring-fence consultations, the insider status of the largest banks gave them <a href="http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1069/1069.pdf">particular powers</a> to shape the finer details. </p>
<p>The incremental changes proposed by Labour are a start. But they will not redress our unhealthy preponderance with the City. Nor will they address our equally unhealthy dependence on credit and debt; a theme which Labour targets only in passing. And the road to rebalancing the British economy – which may or may not be aided by a British Investment Bank –- is itself long and treacherous.</p><img src="https://counter.theconversation.com/content/37674/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Huw Macartney does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Given the scandals, bonus increases and plummeting lending to small and medium-sized British businesses, reform of the banking system is likely to be a hot topic in the run-up to the general election…Huw Macartney, Lecturer in Political Economy, University of BirminghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/360432015-01-09T06:13:47Z2015-01-09T06:13:47ZDon’t expect queues around the block to buy the Clydesdale and Yorkshire banks<figure><img src="https://images.theconversation.com/files/68519/original/image-20150108-23810-4fdo9f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Damn, forgot my PIN.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/funfilledgeorgie/11292697785/in/photolist-icU2BX-fv4zHx-arhibw-9LFyXu-9LFAem-9LFzNj-9LCLEt-4U4G71-4TZuCV-8i5kBR-97NCfi-6JM17d-9LFzjC-bckcht-bAryut-86QepX-bWujcH-cdRDWm-ahMyyh-aEjhRj-cdREd5-9Pj6RS-wypoU-dmfPXj-GakHM-dknjKc-djfZhq-djA8M7-8Jfr1Z-bEd5fT-djA9H6-8SdkA2-8SdmK6-cPC1u1-cPAT5N-cPASb3-cPB11j-cPAVZL-cPAX5s-cPAUGU-cPATUu-cPAY5J-cPAWpU-cPAZfh-cPAYLS-cPAWLj">George Redgrave</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>It came as no great surprise when David Thorburn <a href="http://www.ft.com/cms/s/0/2cbaf488-959d-11e4-b3a6-00144feabdc0.html">announced this week</a> that he was stepping down as chief executive of the troubled Clydesdale and Yorkshire banks. Having joined Clydesdale in the 1970s as a graduate trainee and been chief executive since 2011, he described it as “the right time” – and nobody disagreed. </p>
<p>From a strictly professional point of view, there was precious little for him to stick around for. It’s no secret, after all, that National Australia Bank (NAB), the increasingly disenchanted owner of both Clydesdale and Yorkshire, is <a href="http://www.smh.com.au/business/banking-and-finance/nab-looks-at-float-of-uk-business-after-profit-slump-20141030-11dzy1.html">desperate to</a> exit the UK market. </p>
<h2>What went wrong</h2>
<p>The writing was on the wall for NAB in the UK from the onset of the financial crisis. As the Australian economy and banking sector sidestepped the major effects of the crisis, bank profits at NAB continued to grow. In contrast, the failing UK economy and poor judgements combined to derail performance at both Clydesdale and Yorkshire banks and put a drag on NAB’s stronger operations. </p>
<p>The harsh business reality is that Thorburn, who oversaw a <a href="http://www.bbc.co.uk/news/uk-scotland-scotland-business-16919783">strategic review</a> as a reaction to head-office concerns, did what so many have done before: cut costs by <a href="http://www.bbc.co.uk/news/uk-scotland-scotland-business-26731308">making redundancies and closing branches</a>, in a basic attempt to increase performance. In his defence he shouldered the burden of the tough decisions and played his part in increasing performance and readying the brand for sell-off.</p>
<p>As Clydesdale chairman Jim Pettigrew <a href="http://www.bbc.co.uk/news/uk-scotland-scotland-business-30696826">put it</a> in bidding him a typically fond farewell, Thorburn helped “identify the changes needed to deliver sustainable and satisfactory returns”. In other words, he took the unpleasant decisions that may yet render Clydesdale and Yorkshire vaguely attractive to would-be buyers and investors in the event of a <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11248299/Yorkshire-bank-plans-2bn-float.html">seemingly inevitable flotation or sale</a>. Job done; exit stage left.</p>
<h2>Only yesterday …</h2>
<p>It’s difficult to believe that as recently as four years ago NAB – which bought Clydesdale in 1987 and Yorkshire in 1990 – was regarded as a budding rival to the UK’s established high street banking giants. It was seen as a potential buyer of other branch networks and was <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8671289/Lloyds-shares-fall-on-doubts-over-NABs-interest-in-branches.html">heavily linked</a> with a move for hundreds of Lloyds outlets, <a href="http://www.cbonline.co.uk/media/results-financial-information/clydesdale-and-yorkshire-bank-announce-annual-results">having apparently</a> evaded the major effects of the crisis. </p>
<p>The warning signs became clear in early 2012 a year after Thorburn’s elevation, when rumours of redundancies and a sell-off of the UK operation <a href="http://www.ft.com/cms/s/0/8cd7c296-5154-11e1-a9d7-00144feabdc0.html?siteedition=uk#axzz3ODmwZU97">began to circulate</a>. It was not longer before NAB <a href="http://www.moneymarketing.co.uk/nab-to-carry-out-strategic-review-of-clydesdale-and-yorkshire/1045691.article">noted that</a> “difficult conditions have adversely affected the performance of UK banking”. </p>
<p>With shareholders beginning to twitch at the prospect of the results at the Melbourne head office being dragged down, the restructuring plans were unveiled shortly after – infamously during Australian working hours when most of those who would lose their jobs in the UK were asleep.</p>
<p>Clydesdale and Yorkshire nevertheless <a href="http://www.scotsman.com/news/clydesdale-chief-says-bank-survived-credit-crunch-because-of-its-conservatism-1-472832">set out to</a> distance themselves from the ranks of “broken” banks. They had no wish to be lumped in with the likes of RBS and Northern Rock. They had a point insofar as no bailouts were needed, but theirs was hardly a glowing achievement either. </p>
<p>More recently, the apparent conservative approach enacted by Clydesdale and Yorkshire has also begun to show cracks. <a href="http://www.scotsman.com/business/finance/ppi-mis-selling-burden-leaps-at-clydesdale-bank-1-3568518">Hefty charges</a> to compensate victims of mis-sold payment protection insurance and business hedging products added to the storm, as did a raft of <a href="http://www.evolutionmoney.co.uk/news/clydesdale-and-yorkshire-bank-system-crashes-again">costly IT problems</a>. </p>
<p>With this serving as extra drag on sluggish overall performance, NAB <a href="http://www.theguardian.com/business/2014/oct/09/clydesdale-yorkshire-banks-ppi-national-australia-bank">issued a profit warning</a> last autumn and stepped up efforts to dispose of legacy issues and concentrate on its core domestic markets. The focus, in business parlance, has firmly been on “consolidation”. So what happens now?</p>
<h2>Sale prospects</h2>
<p>Jim Pettigrew <a href="http://www.scotsman.com/business/finance/thorburn-stands-down-as-clydesdale-bank-boss-1-3652088">said this week that</a> Clydesdale and Yorkshire are “in much better shape”. “Much better” isn’t the same as “good”, of course, but there has unquestionably been an improvement. A flotation or sale is a now far more realistic prospect than it was two or three years ago, when no-one in their right mind would have touched these banks. As NAB chief executive Andrew Thorburn (no relation) <a href="http://www.theguardian.com/business/2014/oct/30/national-australia-bank-sale-yorkshire-clydesdale">remarked last year</a> in discussing the “absolute priority” of quitting the UK: “We think there’s an opportunity now that probably wasn’t there before.”</p>
<p>Bank flotations have proved something of a mixed bag of late, however. TSB <a href="http://www.independent.co.uk/news/business/news/tsb-off-to-a-flotation-flyer-as-private-investors-like-to-say-yes-on-high-street-9553540.html">was able to</a> spin off from Lloyds with next-to no trouble. Virgin Money <a href="http://www.bbc.co.uk/news/business-29656263">delayed its public listing</a> in light of stock-market volatility. Aldermore, a challenger bank specialising in small businesses, <a href="http://uk.reuters.com/article/2014/10/15/us-aldermore-bank-ipo-idUKKCN0I40VR20141015">scrapped</a> its planned listing altogether. It may be worth noting the <a href="http://www.telegraph.co.uk/finance/markets/questor/11317955/Questor-share-tips-for-2015.html">emerging consensus</a> that 2015 will be a year of some turbulence.</p>
<p>The fact is that banking relies on a sort of natural oligopoly. We live in an age in which the importance of the branch has declined, staffing levels have plummeted, the internet has completely reshaped the landscape and complex instruments are increasingly used both to source funding and to manage risk. And yet the costs of entry remain high and the chances of success low. </p>
<p>This being the case, extraordinary shocks aside, the big players tend to dominate in perpetuity. Having more branches, being high up in the hierarchy and facing limited competition enables outflows and inflows to be calculated with more certainty. Large banks are thus assured that they can maintain most of the money in circulation among themselves. </p>
<p><strong>UK retail banking market shares 2013</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/68521/original/image-20150108-23798-dappf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/68521/original/image-20150108-23798-dappf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68521/original/image-20150108-23798-dappf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=292&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68521/original/image-20150108-23798-dappf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=292&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68521/original/image-20150108-23798-dappf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=292&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68521/original/image-20150108-23798-dappf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=367&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68521/original/image-20150108-23798-dappf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=367&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68521/original/image-20150108-23798-dappf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=367&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.bba.org.uk/wp-content/uploads/2014/06/BBA_Competition_Report_23.06_WEB_2.0.pdf">BBA/OFT 2013</a></span>
</figcaption>
</figure>
<p>This doesn’t make a smaller concern such as Clydesdale/Yorkshire particularly appealing. Yet they are still comparatively solid brands, despite the travails of recent years. They never have been viewed as genuinely “broken”. For a parent bank with a strong commitment to the UK, whose shareholders don’t see a presence in Britain as an eternal thorn in their collective side, they may still hold some appeal.</p>
<p>So Clydesdale and Yorkshire may yet bounce back in style. But it seems reasonable to suggest that when one of the world’s largest banks openly dreams of the day it can escape the UK – regardless of its reasons or motivations – optimism should be kept firmly in check.</p><img src="https://counter.theconversation.com/content/36043/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Webb does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It came as no great surprise when David Thorburn announced this week that he was stepping down as chief executive of the troubled Clydesdale and Yorkshire banks. Having joined Clydesdale in the 1970s as…Robert Webb, Associate Professor in Banking, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/340352014-11-12T13:48:18Z2014-11-12T13:48:18ZBanks fined £2bn but the elite continue to evade justice<p>Regulators in the UK and US are <a href="http://www.bbc.co.uk/news/business-30016007">fining five high street banks</a> for attempting to manipulate foreign exchange rates. Together they have been told to pay £2 billion in compensation following a year-long investigation into concerns that the foreign exchange market was being rigged. </p>
<p>A Serious Fraud Office investigation continues into the individuals involved in the Forex scandal. Those developments follow an announcement by the UK’s <a href="https://theconversation.com/tesco-investigation-comes-amid-calls-for-greater-trust-in-the-city-33611">Serious Fraud Office</a> that it is investigating accounting practises at Tesco. All this comes as the law enforcement system begins to creak audibly under the weight of the work it is charged with carrying out.</p>
<p>Speaking after the fines were announced, Martin Wheatley, head of the Financial Conduct Authority said the individuals involved will “feel the consequences”. In this case they may well do, but experience tells us that the consequences for those at the top of banking and the average person are often rather different. </p>
<p>The convictions that have led to the doubling of the UK prison population since the 1980s, are certainly not the convictions pursued by the Serious Fraud Office or brought to light by the Financial Conduct Authority. The overwhelming majority of custodial sentences handed down by the courts in England and Wales are for low-end property-related crimes such as burglary, robbery, theft, handling stolen goods, fraud and forgery. Last year, the Crown Prosecution Service prosecuted just under <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/231011/criminal-justice-stats-march-2013.pdf">40,000 burglars</a> while the SFO apparently had the resources to prosecute just <a href="http://www.ft.com/cms/s/0/8462c362-ee34-11e2-a325-00144feabdc0.html#axzz3IrDBPvSs">20 people</a>.</p>
<p>The way different social groups are policed – or not – betrays a bias at the heart of our justice system. It is not a bias that can be explained by individually corrupt judges or a lack of commitment on the part of the regulators that are charged with our protection. It is a bias that is embedded in a political system that has supported rapidly rising social inequalities for more than four decades.</p>
<p>We don’t tend to value or praise those who work at the frontline of regulating corporate greed anymore, people like environmental quality officers that monitor air and water pollution or the food safety inspectors who ensure we are not sold diseased meat products. Neither do we value those charged with protecting workers from profit-oriented employers in the same way that we value other public servants.</p>
<p>Instead of seeking to redress this, the current government frequently claims that business is over-regulated and health and safety has gone mad. Yet consecutive governments have, since the 1980s, waged war on red tape and stripped away regulations that threaten corporate profits.</p>
<p>Despite powerful evidence that the undermining and dilution of regulatory standards was a key factor in the 2008 great financial crash, regulators have been under constant government pressure to go easy on the corporate sector.</p>
<p>Tesco and the banks that are being fined are far from the only ones in the spotlight. The Serious Fraud Office is currently involved in investigating pharmaceutical company GlaxoSmithKline, where several executives are serving <a href="http://www.bbc.co.uk/news/business-29274822">suspended sentences</a> for bribery, and Rolls-Royce, which is being investigated for <a href="http://www.telegraph.co.uk/finance/newsbysector/industry/10679362/Rolls-Royce-investigated-in-US-over-bribery-claims.html">bribery</a> in Indonesia and China.</p>
<p>And yet, the office has been under incredible political pressure. In recent weeks, it has been <a href="http://www.telegraph.co.uk/finance/newsbysector/industry/10679362/Rolls-Royce-investigated-in-US-over-bribery-claims.html">reported</a> that home secretary Theresa May is considering shutting it down and bringing it under the control of the National Crime Agency. This instability is compounded by financial pressure. The Serious Fraud Office’s annual budget has been <a href="http://www.theguardian.com/news/datablog/2012/dec/04/government-spending-department-2011-12#lose">cut</a> from around £52m in 2008 to £36m in the last financial year. The agency’s budget is dwarfed by the funds allocated to the National Crime Agency, which gets around 10 times as much funding.</p>
<p>As public sector cuts continue to be made, we need to protect and value some public officials above others. There are some public officials that can provide a challenge to the searing impact of social inequalities. They include those working at the Serious Fraud Office, the <a href="http://www.mirror.co.uk/news/uk-news/health-and-safety-executive-job-losses-1355232">Health and Safety Executive</a> and the <a href="http://www.unitetheunion.org/news/environment-agency-chief-pulls-out-of-job-cuts-meeting-says-unite/">Environment Agency</a>, not to mention the legions of local authority regulators decimated by the most recent <a href="https://www.unison.org.uk/upload/sharepoint/On%20line%20Catalogue/21257.pdf">public sector cuts</a>.</p>
<p>There has recently been a fierce debate on the failure of the government to ring-fence or protect police forces from public sector cuts, fuelled largely by the Police Federation. But where is the fierce debate on ring-fencing and providing adequate resources for state agencies that are supposed to protect us from predatory villains in the upper echelons of the social hierarchy? Where is the fierce debate about the apparently virulent outbreak of high-end corruption cases in the corporate sector? It is time we started to think more seriously about how to properly resource and re-invigorate the public agencies that protect us from corporate greed.</p><img src="https://counter.theconversation.com/content/34035/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Whyte does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Regulators in the UK and US are fining five high street banks for attempting to manipulate foreign exchange rates. Together they have been told to pay £2 billion in compensation following a year-long investigation…David Whyte, Reader in Sociology, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.