In this month’s digital discussion, the motion is: “Nothing less than proper reform will restore credibility to the banking sector.” Each month, we ask two communications practitioners to debate an issue via an exchange of emails.

Suzanne Hewitt is director of the Banking & Finance practice of Hotwire PR. She’ll be arguing that better engagement and stakeholder communication can restore trust. Ken Starkey, a professor at Nottingham University Business School, believes that only root-and-brand reform will do.

Dear Ken,
Credibility or ‘the quality of being believed or trusted’ is critical to the success of any brand. So, how is credibility built and maintained? Many regulators and industry observers are advocating greater reform as a means of digging the banking sector out of its current depths of unpopularity. While reform may go some way to placating shareholders, corporates and consumers, is it really the silver bullet to restoring the sector’s credibility?

Reform takes time to devise and implement, and even longer to take effect. In an industry that is already heavily regulated, stakeholders could be forgiven for being cynical about the impact of further reform. As banks already struggle to comply with the 27 new regulatory requirements introduced by the G20 alone and make sense of the 90,000 pages of consultation papers that have been developed, I think few would admit that these enormous efforts expended on reform have had a significant impact on their credibility.

In today’s digital age however, communications can and does have an immediate impact. I would argue that more direct, open and regular communications between a bank’s leadership and its stakeholders, alongside reforms, will have a proportionately greater impact on rebuilding the sector’s credibility than reform alone that takes years to come to fruition and has little direct impact on customers’ day-to-day dealings with their bank.
Regards,
Suzanne

Hi Suzanne,
Certainly I would support any measures taken by banks to improve the quality of their relationships with their stakeholders. However, I am sceptical that, as the banks themselves argue, leaving the banks to sort out their own excesses is the best way forward. The banks have proved remarkably deaf in their responses to the criticism levelled at them, with profits and bonuses rising again inexorably to pre-crisis levels when the rest of the economy and of society is having to bear the burden of their mistakes.

We have allowed the banks to adopt a trading strategy that is clearly not sustainable. This was accepted because of the liberal belief in the power of the market to generate the best possible outcomes and the lack of transparency in what banks were doing.

Even now the chief executive of Goldman Sachs can declare that the banks are doing “God’s work”! Few outside the upper reaches of the banking sector believe this myth.

We have to ask ourselves, as George Soros has, how on earth, and why, we allowed the banks licence to print money for which the state ended up paying. Banking profits were privatised by the wealthy at the top of banks. Losses were socialised – by bank customers, by the state and by the taxpayer.

The sector needs far-reaching reform if it is to play its part in building a healthy economy in a time of austerity.
Best regards,
Ken

Hi Ken,
While reform may seem like the easy answer, there’s little evidence to suggest that more and more regulation works. In fact, the creation of the FSA under Labour led to an unprecedented flood of rules and regulations, none of
which protected the public from the recent crisis.

The other problem with more rules is that they require a supervisor. The shortcomings of the UK’s tripartite system were plain to see, with no-one quite sure where ultimate power resided. Even with the abolishment of the FSA, there’s no evidence to suggest that the Bank of England would have been any better at averting the banking crisis.

What’s more, by imposing rules and reform on an industry, you are removing responsibility from people for their own actions. In doing so, you also take away the element of choice that enables organisations and individuals to behave decently as a matter of conscience. Playing by the rules, no matter how stretched, becomes acceptable behaviour.

As one City commentator put it, “Really serious banking crises happen with a regularity determined not by an absence of regulation, but by the death or retirement of the last person of any importance in the bank who can remember the last one.” It’s unlikely that reform will abolish either natural human instincts or the cyclical nature of economies.

Closing the widening communications gap between a bank’s leadership and its customers will however go some way toward reinstating a sense of trust between banks and their customers.
Thanks,
Suzanne

“Closing the widening communications gap between a bank’s leadership and its customers will however go some way towards reinstating a sense of trust between banks and their customers”

Dear Suzanne,
Some of these objections to regulation are good ones. I agree it would be better if we could trust banks to do the right thing and that the regulation of regulation is itself challenging. One might, though, suggest that the failure of  the FSA was in part a consequence of an era which would only support weak regulation and suffered from the illusion that markets are always efficient and self-correcting. The FSA, therefore, was not granted enough power, or resources. This suggests that we need stronger regulation, not less.

I agree it would be great to be able to trust that people were acting from a sense of responsibility. While an optimist generally about human nature, I think there is a small minority whose excesses need tight control, otherwise it does great damage to all in pursuit only of its own self-interest. Unfortunately, banking seems to have attracted more than its fair share of this kind of individual.

Banks certainly need to connect better with their customers. But before they can close the communications gap, they need to put their house in order so that customers and the broader society believe once again in their value to
society.

Regulation must play a part here. It might also be that new entrants, the retailers such as Tesco, will bring a genuinely new sense of customer focus to an industry that desperately needs it. For all our sakes.
Best wishes,
Ken

Hi Ken,
I would agree that placing 100% trust in people to always act from a sense of responsibility for the general good is too idealistic. But, I do think that too stringent, all encompassing regulation completely removes the normal self-checks and balances to which most individuals subscribe. By encouraging a culture of box-ticking ‘compliance’ rather than individual moral judgment, the question that gets asked in highly regulated markets is not: “Are we doing the right thing?” but “Can we get away with this?”

The shortcomings of regulation seem to strike a chord with the respondents to a study we are currently running amongst the financial services community. The interim results show that 61% do not believe that regulation will be enough to restore confidence and pride in the UK banking industry and over half say that corporate communications will be key to improving the sector’s reputation.

I wonder whether the role of corporate communications has been accorded this importance in part due to the relentless rise of social media today. We’ve seen social media act as a force for small business and consumers in breaking the back of long held bank policies that have been unyielding even in the most regulated markets.

It seems we have reached an age where those organisations which are transparent, open and engaged with their customers are rewarded. Those who refuse to participate in conversations with their customers or understand social media, for example, will arguably find themselves more exposed than by any piece of regulation.
Best regards,
Suzanne

“Banks certainly need to connect better with their customers. But before they can close the communications gap, they need to put their house in order”

Dear Suzanne,
I welcome the idea of a banking sector that communicates well with its customers and has a message that we can believe in and support. However, I think we have some way to go before we reach this happy state of affairs.

The origins of the financial crisis lie in the murky world of the shadow banking sector. Only regulation can curb its excesses. The more we understand what went on in the shadows, the more we realise that we as individuals and as a society cannot allow the excess that prevailed to continue. There is now a large literature on crisis, for example, Gillian Tett’s Fool’s Gold and Michael Lewis’s The Big Short. Read this and weep. What went on beggars belief.

Even market zealots like Alan Greenspan admit that something went very badly wrong and that change is necessary. The relationship between financial markets, the economy and society has been allowed to become unbalanced, if not broken. We can close our eyes to what happened during the crisis – which may well not be over – and carry on hoping that bankers will come to their senses and put their own house in order. This is a very risky gamble, in my opinion. The idea of the greater good does not figure very highly in the financial trader’s hierarchy of values. Chief executives need to make it very clear what is and is not acceptable in the behaviours of their staff.

The financial crisis marks a tipping point. We need to learn from it that an unregulated banking sector only serves the interest of a few at the expense of the many. The challenge now is create a more sensible, balanced regulatory regime that prevents such a crisis happening again.
Regards,
Ken