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Opinion: Banking Must Pursue the Holy Grail of Confidence

By Sir Evelyn de Rothschild

The single most important commodity traded in the City of London is confidence. The public, bankers and the markets need to believe that the UK will continue to be a global financial centre. They must have trust in the quality, ethics and skills of its bankers. And they must believe in the wisdom and careful regulation of its government.

Without confidence, it will be impossible to achieve the “twin challenges of engineering a recovery and reforming the financial system” envisaged by Sir Mervyn King, Bank of England governor.

Political interference in banking, as demonstrated by the ham-fisted removal of Stephen Hester as chief executive of Royal Bank of Scotland with no clear succession plan in place, is hugely destabilising. It seems motivated more by politics than knowledge of the way that business and finance work. Politics is also the reason for the lack of a clear path from ministers for the future of the industry.

This is worrying, to put it mildly. It has been five years since the financial crisis yet plans to restructure the industry – from the separation of retail from investment banking to reviews of capital requirements for leading institutions – remain in flux. Recent revelations of capital inadequacy at our largest banks should have been made years ago, as was the case in the US.

Reform is certainly necessary. As the Parliamentary Commission on Banking Standards found, the sector’s ability “to perform its crucial role in support of the real economy and to maintain international pre-eminence has been eroded by a loss of trust born of profound lapses in banking standards”.

There are many examples of how the banking industry has gone wrong – from the fact that the activities of the “London Whale” trader became so enormous without the knowledge or supervision of his JPMorgan superiors, to the recklessness inherent in a culture where the profits were captured by the bankers but the losses were left to the taxpayer.

The failure of the former Financial Services Authority to understand or investigate the banks’ activities undermines faith that government has the ability to protect us against even the most egregious financial transgressions.

To address this – and for trust to flourish once more – we need a revolution in management, supervision and ethics. So how can this be achieved?

First, there must be a higher level of skill and knowledge required by all those in the banking sector – deeply rooted in personal values – that reflect an understanding of the banker’s ethical duty. For too long, society has been held hostage by a measure of incompetence and moral equivocation within the banks.

There is absolutely no reason why a banker who fails to execute their fiduciary duty to the proper standards should not be struck off like a doctor or a lawyer who breaks ethical norms. There should be consequences for those who over-leverage their institutions, sell products that are not fit for certain classes of investors and, certainly, for those who rig Libor.

As the parliamentary commission has rightly identified, individuals within banks have been protected by an “accountability firewall of collective responsibility” that has prevented anyone from being held either financially or criminally responsible for significant failures within these institutions.

Second, there must be a greater level of scrutiny for senior and non-executive directors. They must be subjected to a higher degree of responsibility in their management of financial institutions, including through more transparency regarding all levels of operations and full accountability to shareholders. It is not good enough for board members to plead that they do not understand the complexities of the business.

Third, a greater level of competence should be demanded of government and regulators who have responsibility for the oversight of banks. It is a concern that so few politicians and supervisors possess the requisite knowledge of banking to ensure its proper governance. Methods to fund higher salaries should be found to attract more talented people into regulation.

Part of the solution is to make better use of the skills and knowledge of people who have served in the City, and who have managed banks ethically and in the best interest of their clients and customers. With more support from experienced professionals, government would be able to move more constructively and boldly in its decision-making.

To maintain its global stature, it is vital that Britain’s financial sector be understood to have rules and regulations that are effective deterrents of bad behaviour, but that also promote the dynamism our economy needs. To achieve this requires a transformation in skills and ethics from bankers, regulators and politicians. Only then will we win back the heart of the public and inspire confidence in the system once more.

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This opinion piece was first publish in The Financial Times and provided to EACC by E.L. Rothschild; © 2013 E.L. Rothschild, All rights reserved.