Trust broken – can it be mended?

By Ronald Hepburn, Etoile Partner

The Economist this week leads with an indictment of the lack of morals of the banking industry, globally (see Banksters). They it accuses them of “a culture of casual dishonesty”; collusion, cartels, greed and a scant regard for the truth are not trust makers. The finance industry relies on one thing, trust. It is the core attribute which persuades people to allow the industry to handle their money; but trust is now the last thing we can bestow upon our bankers.

I have a small confession to make; I worked in the investment banking industry for 10 years, through the heady Champagne days of the 90s. I saw the deregulation of the industry and the free-for-all that ensued. I saw first-hand the destruction of value of the broking house for which I worked as it collapsed. At first it thought it was above regulation, then it tried to fiddle its way out of trouble, then it lost the trust of the regulators and shareholders. This was a Japanese collapse and the shock to the people of Japan was as palpable as they were forced to question their faith in the system.

Then as now, the issue remains the same. Bankers – and for that matter all people involved in the financial services industry – go wrong when they forget the fundamental social purpose they are there to serve. That purpose is not to make money for shareholders – that is merely a by-product. 

Banks need to rediscover their social purpose
About three years ago, just after Lord Turner, then Chairman of the FSA, accused the industry he regulated as being “socially useless” (Financial Services Authority chairman backs tax on 'socially useless' banks), I found myself chairing a meeting of City communications directors. I challenged them to answer the “socially useless” accusation of their own regulator. To a man and woman, they referred to their CSR policies – the thin veneer of do-goodery of the financial services corporation. After some further discussion there was general agreement that in fact they had no “social” purpose - other than to make money for the shareholders – and themselves of course, which could be seen as anti-social. And here is the rub. With such an attitude, moral rectitude in business dealings flies out of the window. They were all wrong in fact and I shall explain why.

Money and the single-minded pursuit of it flies in the face of the real purpose of the financial services industry, the social purpose which gives it permission to exists, which is to take custody of money lent to it by the public (shareholders, savers) and make sure it doesn’t get stolen or frittered away. Ideally it should also grow and be safe, while be put to good use. Most importantly it should still be there when the people whose money it is need it. This is the social purpose of the finance industry in an oversimplified nutshell.

Ah! But clearly there must be exceptions? Please let me have them? Proprietary trading? Surely that has no social purpose? It does actually, although the traders themselves wouldn’t recognise it. Proprietary traders (who use their own funds to trade securities for profit) provide much needed liquidity in the market. Derivatives traders? Amongst other things they provide farmers in Lincolnshire, Denmark and Alabama with valuable information about the price of their pork bellies in the future and allow oil and gas exploration teams to estimate the future viability of their finds.

The banking industry needs to buy back its soul, remember its real purpose and keep in mind that the money they are playing with is not theirs. They are just keeping it in trust. And the people, the regulators, the governments don’t trust them.