standard Reputational risk in the UK financial sector

Reputation management is imperative to success for business professionals and in banking it is no different. Banks need a favourable reputation to build trust with customers in order to encourage them to deposit their money, take out mortgages or business loans, and purchase financial products.

Like any other profession, bankers must manage their activities appropriately to avoid reputational risk. The image of bankers has been damaged since the banking crisis of 2007–08, although the financial sector in the UK had held a respectable reputation with the public in the past. During the peak of the banking crisis, bankers in Britain were at worst viewed as criminals who toppled the global financial system due to self-idolatry, ignorance, and greed.

When engaging in certain kinds of behaviours, bankers risk damaging not only their personal reputation, but that of the entire financial sector. If people lose trust in banks and other financial companies due to scandals and crises, then it may have further knock-on effects on the financial economy.

Once bankers’ reputation has been stained by crisis, it may not be so easy to wash clean. Financial historian Professor Ranald Michie says that British bankers in the late 19th century had a respectable profession, but today are viewed as ‘bogeymen’ who are irrationally exuberant and morally hazardous. In the past, British bankers were able to mitigate reputational risk essentially by avoiding crisis.

According to Michie, British banks did not always take the risks they do today and built a foundation of trust with the public and government.

This has also to do with the fact that the UK financial system was relatively stable with the exception of crises in 1866 and 2008. Their reputational risk overall was low for many years.

‘The British experience until the recent past reflects a banking system that was allowed to evolve relatively free of legislation intervention and proved to be highly resilient as a result’.

Financial services in the UK, particularly in London, rank amongst some of the largest in the world. As a global financial centre London is nearly equal to that of New York. Therefore, maintaining a reputation that is free from financial crime or scandal is imperative to competing globally.

‘The UK has much to lose from any reputational damage caused by financial crime, especially if financial crime undermines trust in the financial system, or its reputation recruitment is damaged and governments introduce laws that are detrimental to financial services’.

IMG_0340

Since the start of the financial crisis the image of bankers could improve.

In some cases it could be argued that this damage has already been felt in terms of potential future employees of the financial industry.

In a YouGov survey of 1,000 students commissioned by Lloyd’s Bank, 70 per cent of them believed that British bankers were driven by greed. Only two per cent of them were interested in pursuing a career in banking. A similar case in the US was found for Harvard graduates entering the financial sector which dropped from 23 per cent in 2008 to 9 per cent in 2012, but this is more likely because of lack of job opportunities.

In the early 19th century another group of financial intermediaries known as ‘company promoters’ was seen in a light similar to bankers today as told in Max Pemberton’s The Impregnable City published in 1890:

The City of London remained a byword for greed, corruption, and dishonourable conduct whenever the subject of company promotion surfaced, with the only fitting punishment for those who made their living by such means being a sudden and violent death.

‘Despite that reputation London continued to attract highly talented bankers, brokers and other financial experts from throughout the world. It also recruited and trained a large and skilled domestic labour force’.

Michie argues that the biggest risk actually comes from government intervention that attempts to transform the reputation of banks, but in doing so could expose them to higher risks. This includes curbing bonuses which could drive business away from London and the introduction of a transaction tax on financial products such as securities, derivatives, and currency exchanges.

While this tax has encountered resistance from the UK government, it is of considerable interest to other EU countries.

reputational risk

London Stock Exchange

‘If left to government, attempts to improve that reputation could actually damage the UK financial services sector because of the consequences of any legislation and taxes. What is required is the individual and collective effort of all those in the UK financial services sector to restore the reputation it once enjoyed. That was done in the 19th century through the actions of bodies such as the London Stock Exchange and the Bank of England’.

London bankers would do best to improve their reputation by retaining the trust of both the government and the public while remaining competitive globally.

According to Michie, this was achieved in the past not through legislation, ‘but the actions of bodies like the London Stock Exchange, the Bank of England and the Institute of Bankers and these need to be revived and reinforced in the future’.

‘We are again at a tipping point where such a response to build reputation is required. Without such a response the risk is that continental European governments will take advantage of the reputational damage inflicted on the British financial sector over the last 5 years, to introduce measures that will drive business away from the City of London and towards themselves, even at the cost of Europe as a whole losing out through the migration of financial activity to less regulated jurisdictions elsewhere in the world’.

Ranald Michie is a professor in the Department of History at Durham University. He is a project leader on the Tipping Points project, one of the themes of which is crisis in the UK financial sector. Contact: r.c.michie@durham.ac.uk

Post a Comment

Your email address will not be published. Required fields are marked *