Wednesday, 8 February 2012

Why Should we Trust the Banks?

There is no doubt Fred Goodwin was scapegoated, that he was far from being the only guilty party, but those who may have been tempted to feel sympathy for the man, may decide to think again, when they read the latest reports on RBS. Everyone might want to think twice about the banks in general, before they decide to do any business which involves financial services. But RBS first.

It seems the sack cloth and ashes are to be considered compulsory by the current chief of RBS, at least for a wee while yet. Stephen Hester, it is reported, thought hard about leaving the bank,  having underestimated the depth of public feeling about bankers' bonuses, but in the end decided that would be self-indulgent, so decided to remain in post. It is now common knowledge he decided to refuse to accept the almost £1 million bonus to which he was - according to his contract - quite entitled. It is also common knowledge now, that bankers' bonuses seem to have absolutely no relationship to performance and are paid, whatever the performance. Performance itself, is something which also has to be defined. Does it include the rise/fall in share price, the level of profits, customer satisfaction? On at least two counts, share price and customer satisfaction RBS fails badly while on performance and profit, it is still losing but not as much as previously. On reflection therefore, was Mr Hester returning something to which he was hardly entitled in the first place?

In his latest report to the staff of RBS, Hester has provided some information for which the industry has been searching for some time. The cost of re-structuring RBS has amounted to £38 billion to date. This includes disposal costs, covering losses and restructuring changes since the bank collapsed in 2009. By all accounts, this is considered to be a satisfactory outcome. Another cost which has still to be met, is the compensation for the misselling of PPI or Personal Protection Insurance, the biggest misselling scandal of the past decade, more of which below.

Unfortunately for many people, the banks were far too often considered the best bet for "independent" financial advice and there can be few account holders who have missed the pleasure of being targeted by their friendly bank teller, any time they have had cause to appraoch a bank counter, rather than take advantage of the "hole in the wall". RBS has a subsidiary in the Isle of Man, which was asked for advice by an elderly client, about boosting his income. The RBS solution was to sell their customer an annuity, which cost £500,000, was provided by AVIVA and earned the RBS "adviser" £15,000 in commission. Under some circumstances, not many, that might have been reasonably suitable advice, however in this instance, the customer was 80 years of age and was dying with terminal cancer. He died without ever receiving the first payment, which allowed AVIVA to pocket £485,000. Both AVIVA and RBS determined to hold on to their windfalls and refused to acknowledge that either of them had done anything wrong.

Fortunately, the family of the dead customer, were not prepared to allow the matter to rest and after an investigation by the FSA, the contract was annulled and RBS was forced to repay the £500,000 to their deceased customer's estate. It would be good to be able to report that both RBS and AVIVA "bitterly regretted" what was done, that they apologised for "something which should never have happened" but neither feel they did anything wrong. Left to them, the deal would have stood because neither was prepared to acknowledge any fault or even to apologise. Was this an aberration? Unfortunately it is just the tip of the iceberg, as far as misselling and the banks are concerned.

Bob Diamond, CEO of Barclays, offering his apologies for the misselling of PPI, is reported to have said, "We don't always get things right for our customers, when we get them wrong we apologise and put them right". Worthwhile sentiments but only the first part of it is anywhere near the truth. The problem of the misselling of PPI has been rumbling on for years and complaints to the banks were simply ignored. It was not until the FSA were receiving complaints at the rate of 5,000 per month, that they decided to step in and demand that the banks get a move on and resolve the dispute. RBS has already paid out £100 million in compensation, has set aside another £100 million to cover immediate claims, and another £800 million to cover expected claims. Barclays has set aside £1 billion but the figure that really stunned the City is the £3.2 billion set aside by the Lloyds Banking Group, (a construct of Gordon Brown?) which is now hiring hundreds of new staff to deal with the complaints. HSBC has got off lightly in comparison, setting aside only $440 million, which is still estimated to have cut their profits by 14%. They stopped selling PPI in 2007, which is an indication they knew something was seriously wrong with the product, which raises the question why the others continued to sell it right up to last year. Industry analysts estimate the cost to the banks will be in the region of £9 billion.

The really important point of this sorry tale - forbye the sheer dishonesty of the banks of course - is that it all happened on Labour's watch. They set up the FSA. They allowed the banks to have the freedom to missell on such a grand scale. When the complaints were flooding in they did nothing. Even now, as they question the ability of Scots to run their own country, they have to be forced to acknowledge their culpability for almost destroying the entire economic system of the UK. Alex Salmond was a fool to support the purchase of ABN Amro by RBS, because there were plenty of people in the industry warning against it. But at least, he has acknowledged as much, which is a great deal more than Gordon Brown, Alistair Darling, Ed Balls et al have done.

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