UK banks are facing a crisis of confidence – according to recent polls, they are less popular and trusted than politicians or tabloid journalists.
This level of opprobrium is not without cause. A series of scandals have ensured that almost every level of society from ordinary savers through small businesses, institutional shareholders – and of course politicians – feels that they have a reason to resent banks. (Read More: Bankers Told to Watch What They Say at Bar)
“This is going to take an awfully long time to turn around. The bottom line is, there’s a crisis of confidence in banks which has to be addressed if the industry is going to restore itself,” Miles Kennedy, partner in PricewaterhouseCoopers’ financial services team, told CNBC.com.
“Banks need to think fundamentally and remind themselves that they are there for consumers and not for themselves.”
The U.K. is seen as being relatively soft on white-collar crime compared to the U.S. – it is no coincidence that the U.S., with its different regulators competing for headlines and results, has issued several of the heftiest fines in recent months, such as the $340 million Standard Chartered had to pay out over allegations it helped funnel money from Iran. There is growing demand for the U.K. to move towards the U.S. model.
“We need to punish people more publicly. We have to be a lot tougher. Banks can just pay a fine and move on,” Eamonn Butler, director and co-founder of the Adam Smith Institute, a libertarian U.K.-based think tank, told CNBC.com
“Just like athletes caught doping face a ban, if your staff is cheating, then they should be pursued – and maybe your business should be pursued for bad governance.” (Read More: Why UK Bankers Prefer Singapore)
The Financial Services Authority (FSA), the U.K. regulator responsible for policing the City of London, is being disbanded this year and replaced with a new regulator called the Financial Conduct Authority, partly because of concerns about the FSA missing signals during the credit crisis, but hopes for the new body are not high.
“The new authority is just FSA-lite. It’s going to be exactly the same people. We need something more consumer-driven than bureaucracy-driven,” Butler said.
“The last time, they didn’t see the systemic rot because they were looking at the minutae.”
On the other hand, there are also plenty of people still muttering that the U.S. is targeting U.K. based banks unfairly. (Read More: British MPs Accuse US of Anti-UK Bias)
Another school of thought argues that the rapid expansion of the U.K. financial services sector, which grew twice as fast as the broader U.K. economy in the decade before the credit crisis, meant that regulation was always playing catch-up.
The issue of size also feeds into the relationship between investment and retail banking. The debate over whether giant banks should be broken up has stirred on both sides of the Atlantic after former Citi head Sandy Weill called for the separation of investment banking from other banking operations. This was all the more remarkable because he championed building bigger and bigger banks as he helped create Citi, now one of the world’s biggest banks.
In the U.K., Business Secretary Vince Cable has called for ring-fencing of banks’ retail and investment banking operations, to protect ordinary bank customers from the perceived risks of investment banking – even though many of the problems have come from retail banks.
There are also calls for state-backed banks, like Royal Bank of Scotland (RBS) and Lloyds, to do more to stimulate small businesses in the U.K. through lending.
John Mann, MP for the opposition Labour Party and member of the committee of MPs which ex-Barclays Chief Executive Bob Diamond famously appeared in front of following his resignation, argued that Cable’s ideas are “smart” but “not bold enough.”
“We want to hear that aspects of, say, RBS are being ring-fenced and the government will influence what it does and its objectives. We still want risk assessment – the last thing we want is landing the state with the burden of a bad bet,” he told CNBC.com.
Mann argued that the problem with lending is demand rather than supply driven – that solid U.K. businesses which are safe bets for lenders don’t want to borrow more because of the economic uncertainty, and because of the cost of credit.
“People aren’t complaining that they can’t get money: it’s just too expensive. It’s a simple economic factor that needs to be addressed,” he said.
The banking landscape is dominated by a few big players – RBS, Lloyds, HSBC and Barclays – all of which have both investment and retail divisions. When Metro Bank opened a few years ago, it was the first new high street bank to open in the U.K. for more than a century.
“We have enormous banks, partly because regulation is so onerous and nit-picking that you have got to be vast to comply,” Butler said.
“We need more competition – that’s the best regulation. There’s so little competition that it’s easier to fiddle Libor and so on.” (Read More: 'Battle Royale' Over Libor Scandal)
Larger banks will break themselves up if the regulations placed on them are more onerous than on smaller banks, he argued.
Leadership is also going to be a tough question for U.K. banks to tackle, with many of the top executives tainted by association with the credit crisis, or even the scandals which have tainted banks’ reputations recently. Barclays is still hunting for a new chief executive to replace Diamond, and Standard Chartered may institute board changes after its brush with U.S. regulators. There could still be more heads left to roll.
“Leadership of banks is key,” Kennedy said. “The tone from the top is so important and could help a bank move on.”
Written by Catherine Boyle, CNBC. Twitter: @catboyle01