One of the most depressing features of the Co-op Bank debacle was the evidence that its commitment to “ethical banking” was hollow.
Even while widespread corruption at the heart of the Co-op Bank’s operations was being exposed, along with systematic defrauding of customers under the PPI scheme, Co-op Bank still claimed to be an “ethical” bank.
Move Your Money, which scores banks for their ethical commitments, continued to give the Co-op Bank much higher scores than commercial banks because of its stated commitment to ethical investment.
But there is no doubt that customers who had moved their money to the Co-op Bank because of the unethical behaviour of other banks felt betrayed. After this, what did “ethical banking” even mean? Could any bank that claimed to be “ethical” really be believed?
Ethical principles in banking and finance have a long pedigree. The founding fathers of such banks as Barclays were Quakers who refused to invest in industries to which they were morally opposed, notably alcohol, gambling and the slave trade. In the 1920s, the Methodist Church of North America screened out “sin stocks” from its investments.
The first “ethical investment” funds appeared in the 1960s in response to consumer demand for investments that could bring about social change.
And in the 1980s, Barclays – which by then had long abandoned its ethical foundations – was internationally boycotted because of its activities in South Africa under the apartheid regime.
Today, there are more than 600 “ethical” investment funds worldwide, and a growing number of “ethical” banks. But the term “ethical” has been hijacked. Financial firms offer “ethical funds” alongside other funds with less lofty motives: and perhaps more importantly, the behaviour of the firms themselves is less than ethical. The Co-op Bank was certainly not the only firm to use “ethical” as a marketing strategy.
For customers looking for ethical finance, finding a bank or an investment firm that meets their needs has become a nightmare.
How do we evaluate the ethical standards of a firm when it only tells us what it wants us to know? What are we to think of firms who provide “ethical” bank accounts and investments, but whose behaviour towards customers, employees and society as a whole leaves much to be desired?
We cannot assume that a bank or a financial institution is “ethical” simply because it is co-operatively owned, small, local or serves a particular market segment. Not-for-profit and publicly owned banks can be rotten to the core, as the disaster that overtook Spain’s Caja banks in 2012 showed.
Co-operative banks, mutuals and credit unions can betray their principles, as I have discussed in this column before. Banks that serve particular social purposes, such as microfinance banks whose aim is to relieve poverty, can be corrupt and politically captive. Peer-to-peer lenders are famously transparent, but that doesn’t necessarily make them either safe or responsible.
We owe it to ourselves, and to the people we wish to support through our financial choices, not to make blind assumptions.
It is also unsafe to assume that banks and financial institutions are “ethical” simply because they say they are. These days, ethical investment is fashionable and every bank under the sun is anxious to prove that it is socially responsible.
Supporting numerous social projects and good causes is not enough to demonstrate core commitment to ethical standards. And sadly, neither is having an “ethical policy”. Policy statements and marketing literature can all too easily disguise the real nature of the beast.
Tom Sorrell and James Dempsey of Warwick University argue that firms that actively market themselves as “ethical” should be regarded with suspicion.
“Ethical banks shouldn’t – morally shouldn’t – claim to be ethical,” they pointed out. “Some things should be shown and not said.”
For Sorrell and Dempsey, it is the behaviour of banks towards their more vulnerable customers that primarily indicates their ethical stance.
For example, consider small depositors or small businesses holding loans – the groups who are closer to losing everything if they are sold risky financial products, and sometimes the groups whose financial know-how is relatively slight.
An ethical bank needs policies of communicating risks to these groups with crystal clarity, and even for making members of these groups ineligible for the riskiest products. These policies could be enforced with internal policies for punishing mis-selling.
Another measure of the ethical behaviour of banks is how they deal with those people who are excluded from banking services – secure savings accounts, insurance, loans and financial planning – because they have suffered unemployment or poverty.
The researchers’ message is “don’t be fooled by what banks say, look at what they do”. Ethics in finance is not just a matter of refusing to invest in tobacco, palm oil, fossil fuels or armaments.
Nor is it demonstrated by “corporate social responsibility” and involvement with community projects and initiatives to reduce poverty. Barclays does all of these things: but how many people would regard it as an “ethical” bank?
Its executives are still paid eye-watering amounts of money, there is still a bonus culture among its investment bankers and it is still receiving fines for a range of frankly unethical and even criminal practices.
Christine Lagarde of the IMF, in a recent speech in Washington DC, observed that ethical standards in finance must come from within.
“Ultimately, we need more individual accountability,” she said. “Good corporate governance is forged by the ethics of its individuals.
“That involves moving beyond corporate “rules-based” behavior to “values-based” behaviour. We need a greater focus on promoting individual integrity. In the Aristotelian tradition, virtues are molded from habit – developing and nurturing good behavior over time.
One clear solution is to set a strong tone at the top of the institution – establishing a culture where ethical behavior is rewarded and where lapses in ethical integrity are not tolerated.”
The PPI scandal demonstrated the abject failure of the financial industry to self-regulate, and exposed its obsession with profits and its obstructive attitude when called to account for misconduct. There is now a huge industry devoted to ensuring that bankers act in the best interests of society. But this won’t do as a long-term solution.
If ethical finance is to become mainstream, fundamental change is needed. To be considered “ethical”, a financial institution needs to demonstrate five features consistently.
• Total transparency of reporting and communication
• Genuine concern for the needs of customers, including providing services to vulnerable groups even at the bank’s own cost
• Fair and reasonable pay and incentive structures, avoiding excessive payments to a few individuals, bonus schemes that encourage poor treatment of customers, and harsh penalties for poor performance
• Protection of whistleblowers (as Gillian Tett argues in a recent FT op-ed)
• Prudent balance sheet management and responsible lending, including refusing to lend where it is not in the customer’s best interests.
I would add here that blowing up property bubbles by lending far too much to the wrong people is not ethical, however much the government wants them to do it. Ethical financial institutions should be able to say “No” to governments.
Only when all of these are fully satisfied should the range of lending and investments undertaken by a financial institution be considered.
Avoiding investments in (say) environmentally damaging industries, arms manufacture or nuclear generation is important, of course, as is engaging with socially important ventures and helping to relieve poverty.
But the basic business of financial industries is managing people’s savings, facilitating payments and providing finance to people and businesses. If they cannot do these core functions ethically and responsibly, no amount of “ethical investing” will change their spots.