Ethical Bankers: Should Banking be a Profession?

In a previous article I considered the issue of the technical competence of bank directors and the lack of any formal requirements in the UK and the US for individuals who are tasked with steering systemically important financial institutions to hold professional qualifications. In this article I move on to consider the second of the key factors that has, in my view, contributed to poor decision making within bank boardrooms: the absence of a professional code of conduct for bankers, and bank directors in particular.

The question of whether banking should be a profession, akin to medicine or the law, is not a new one. In 1919, nearly a century ago, an article in American Banker, raised the following question:

Taking into consideration the important functions performed by the banker, his influence in business and industry and the necessary intellectual and moral equipment to make banking a success, is it not time to assign the vocation of a banker a place among the professions?

It would appear that the time was not then right for the professionalisation of banking Nor, it seems, has it been right in the intervening 97 years. But why? The past century has, as we all know, borne witness to numerous financial scandals and crises: from the Wall Street crash of 1929 to the most recent shocks to the financial system in 2008. Whilst it would be too simplistic to directly attribute these failures to a lack of a professional banking code of ethics, the continuing revelations emerging from the financial sector surrounding Libor rigging and FX trading clearly raise the possibility that there is something wrong with the culture of banking.

In a speech given in January 2015 entitled Does Finance Benefit society?, Luigi Zingales (Professor of Economics at the University of Chicago and a Visiting Professor of Economics at Harvard University) commented that

In the medical field, doctors might over-use expensive procedures, but they certainly do not boast that they are doing it with their colleagues. The Hippocratic Oath makes it socially unacceptable for a doctor to maximize income at the expense of patients.

The same is not true in finance. We teach our students how to maximize the tax advantage of debt and how to exploit any arbitrage opportunity. Customers are often not seen as people to respect, but as counterparties to take to the cleaners. It should not come as a surprise, thus, that – according to a whistleblower – investment bankers were referring to their clients as Muppets.  If the only goal is enrichment, there is a risk that abuses and fraud become not a distortion, but a continuation of the same strategy by other means.

Indeed, a recent study published in the scientific journal Nature in December 2014 suggests that the culture of banking may in fact contribute to the dishonesty of bank employees.[1] Researchers at the University of Zurich studied the behaviour of individuals who worked in a variety of fields in experiments in which the subjects won more money if they cheated. Whilst employees of a ‘large, international bank’ behaved, on average, ‘honestly in a control condition’, when their ‘identity as bank employees is rendered salient, a significant proportion of them become dishonest’. The researchers observed that this effect was ‘specific to bank employees’ and that their results ‘suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm’. The research team made the suggestion that bankers should ‘swear a professional oath to consider the impact of their work on society — akin to the Hippocratic oath taken by physicians’.

Whilst the concept of all bankers swearing an oath before embarking on their chosen career may not have previously seemed possible, in the wake of recent financial scandals and crises there has clearly been a gathering momentum for change.

In the UK this momentum saw the creation of the ‘Chartered Banker: Professional Standards Board’ in October 2011. Founded by eight major UK banks and the Chartered Banker Institute, ‘to restore public confidence and trust in the banking industry and promote a culture of professionalism among individual bankers’. The CB:PSB has issued a code of conduct which sets out ‘ethical and professional attitudes and behaviours expected of bankers’, and it is said that the ‘CEOs of all member banks have agreed to subscribe to [the code]’. However, the CB:PSB is a voluntary initiative and the Chartered Banker Institute, like other similar bodies in the banking industry, is not a professional body with disciplinary powers underpinned by legislation. Indeed, much was made in the UK press of the fact that the disgraced former CEO of RBS, Fred Goodwin, was refused membership of a golf-club and had his knighthood removed, but still remained a member of the Chartered Banker Institute.

The question of whether or not banking was, or should be, a profession was specifically dealt with by the report of the Parliamentary Commission on Banking Standards. The Commission was formed in the wake of the Libor rigging scandal and in June 2013 it published a report entitled ‘Changing banking for good’.

Despite observing that ‘Poor standards in banking and the public’s response to them have generated an impetus within the banking industry to make proposals for professional banking standards’, the Commission’s report shied away from recommending the top-down imposition of a mandatory professional body for bankers. The report observed, somewhat forlornly, that ‘the creation of an effective professional body is a long way off and may take at least a generation’. However it did go so far as to state that it was

important that the trajectory towards professionalisation is clearly signaled immediately and that initial practical proposals for such a body are tabled at an early stage. Work can begin immediately on bodies for the most readily identifiable parts of banks which would benefit from professional standards. These include retail banking, the most senior levels and specialist areas such as insolvency and debt recovery.

Following on from the Commission’s report, in September 2013 major UK banks commissioned Richard Lambert (former editor of the Financial Times and Director-General of the CBI) to conduct a ‘Banking Standards Review’. His report published in May 2014 noted that ‘There is no dispute about the general proposition that the banking sector taken as a whole has lost the trust of the public, and needs to earn it back.’ The report recommended the creation of the Banking Standards Review Council (‘BSRC’), the objective of which was said to be

to contribute to a continuous improvement in the behaviour and competence of all banks and building societies doing business in the UK. It will act as an independent champion of better banking standards in the UK, and be driven by the interests of customers and of the wider group of stakeholders with a concern for the well-being of the British banking system.

However, what the BSRC will not be is a professional body for bankers. Instead the BSRC will apparently ‘devote a section of its annual report to the progress being made by the professional bodies in changing perceptions of the value of banking qualifications, and strengthening their membership’.

The BSRC, like the CB:PSB, is a voluntary organisation and recent reports in the Wall Street Journal and elsewhere indicate that some major international banks may not take part for fear of how their participation would overlap with their existing duties to the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’).

Standards and culture within banking are next scheduled to come under the spotlight in the UK in June 2015 when the Bank of England’s Fair and Effective Financial Markets Review is due to publish its report. What impact this report will have on the professionalisation of banking is as yet unknown. Let us hope that it does more than simply recommending the creation of yet another voluntary industry organisation and the publication of another set of toothless codes.

In an industry that has seen a former Goldman Sachs investment banker (who ended his time with the bank in London) reporting that his colleagues referred to clients as muppets and a supposed ‘ethical’ bank such as the Co-op being involved in PPI mis-selling, there is an urgent need for professionalisation.

In my view, we are in danger of losing the momentum for change brought forth by the recent financial crisis. What is needed is the creation of a true professional body of bankers with an ethical code of conduct, properly enforced, over and above the FCA and PRA Conduct Rules. But who are the ‘bankers’ that such a professional body will oversee? One of the reasons the PCBS report appeared to shy away from a full-scale professionalization of banking was the observation that

“Banking” involves a wide range of activities and lacks the large common core of learning which is a feature of most professions.

A discussion of this issue took place in the letter pages of the Financial Times at the beginning of last year, prompted by a 12 February 2014 article entitled ‘There is no such thing as the banking profession’. While it may true that modern banks are often composed of disparate divisions and departments, lacking a unified culture, and with employees expert in distinct specialisms, the same could be said, for example, of lawyers. There is a world of difference between a corporate lawyer at a global law firm dealing with mergers and acquisitions and a criminal defence practitioner working on the high-street representing someone accused of shoplifting. If they both can be members of the same profession, why can we not do the same with banking?

In any event, there is a subgroup of individuals who can be readily identified as ‘bankers’: the bank directors. Surely we can demand that, in the boardroom at least, banks are run by professionals? As the PCBS’s report recognised

Board failures in the banking sector have been widespread and are not restricted to those banks which required taxpayer support or failed during the financial crisis.

In order that these widespread board failures are not repeated we need to foster an environment where, in particular, non-executive directors on the board of banks feel empowered with a sense of professionalism. Let us not wait another century: in the board room at least the professionalization of banking is an idea whose time has come.

[1] Cohn, A., E. Fehr and M. A. Maréchal (2014), “Business Culture and Dishonesty in the Banking Industry”, Nature