The financial crisis in the UK

Dominic HookNational OfficerUnite the union

UK Financial Services

• 2008 – 1.2m jobs in financial services in UK• 150,000 jobs lost since 2008 – almost all losses

are low paid staff, perhaps earning £15,000• Royal Bank of Scotland – UK taxpayer holds

82% of total share capital• Lloyds Banking Group – taxpayer holds 40% of

total share capital• Big scandals – Libor and mis-selling

The credit crisis - timeline• Stage 1 - August 2007 – start of the liquidity crisis – UK bank Northern Rock

resorts to Bank of England for support – leads to run on the bank• Stage 2 - Autumn 2007 – problems in US sub-prime mortgage market leads

to banks reporting large losses with frequent revisions. In October UBS bank said it had made a $4bn loss on sub-prime mortgages, but in December increased estimate to $10bn

• Stage 3 – Spring 2008 – Bear Stearns US investment bank receives emergency funding from Federal Reserve before being bought by JP Morgan for a fraction of the share price of just a year before. Number of UK banks undertake rights issues to bolster capital positions

• Stage 4 – September 2008 – Lehman Brothers collapses – leads to consolidation across global banking sector – Halifax/Bank of Scotland bought by Lloyds – Bradford & Bingley (formerly a UK mutual with long history) broken up – near-meltdown across world banking system

The credit crisis - timeline• Stage 5 – Autumn 2008 – Recapitalisation of banks by governments

– UK Government capital injections of £37bn into Royal Bank of Scotland, and Lloyds TSB and Halifax/Bank of Scotland – monetary policy support, including coordinated rate cut (UK Bank rate falls from 5% in September 2008 to lowest ever 0.5% by March 2009)

• Stage 6 – Winter 2009 – Renewed concerns about the stability of banks – stock markets fall – second wave of financial support from governments – Royal Bank of Scotland and Lloyds Banking Group partiticpate in Government insurance scheme available to banks for losses on existing loans

• And now – VERY SLOW RECOVERY? Banks returning to profit, but...

And now?

• Four UK banks (“big four”) dominate (75% of personal bank accounts)

• Each making large profits• But still cutting jobs – over 6,000 announced

so far this year just by big four• HSBC: 1st quarter profits of over $8bn, but

planning $1bn of savings this year

What do people think of “bankers”?

• According to YouGov, 73% of people describe the reputation of banking as bad - that is the highest figure of 26 industries tested. Utilities such as gas, electricity and water come second, some distance away on 62%.

• Just 4% reckon banks observe high ethical and moral standards – a joint-worst rating shared with casinos, betting shops and online gambling.

• Just 17% trust the people running British banks to tell the truth; with investment bankers the figure is even lower, at 13% they vie with MPs, estate agents and tabloid journalists for the public’s contempt.

• 73% think that “senior management at banks in the UK come across as arrogant”• One silver lining though: when asked about “staff at my local bank”, 67% of us

trust them to tell the truth, about the same as for judges.• In a different poll just 2% of students said they would consider a career in financial

services, and a quarter would be embarrassed to tell their parents if they got a job with a bank!

How did we get here?A lesson from Barclays Bank

• Salz Review, a £15m report into Barclays’ business practices.• Here are some of its findings:

– “Through the 2000s, there was a very short-term focus on profit which led to a problem with culture and values. It appeared to emphasise financial performance rather than looking after customers. That was reinforced by the pay structures”.

– “We could not avoid concluding that pay contributed significantly to a sense among a few that they were somehow unaffected by the ordinary rules.”

– “A few investment bankers seemed to lose a sense of proportion and humility... We concluded that the reputational problems stem in part from the perception that, at least in the UK, some bankers have appeared oblivious to reality”

Salz Review• 34 recommendations include:

– “setting high standards”– “learning from mistakes”– “Meeting customers’ needs and expectations”– “Bringing the values to life through learning programmes”– “Monitoring progress”– “Maintaining a global code of conduct.”– “Barclays should include among its non-executive directors a sufficient number with

directly relevant banking expertise … “– “The board must be actively engaged in the process of improving its own

effectiveness … ”– “The group CEO should be responsible for building a cohesive senior executive

team”– “Barclays should produce a clear policy statement as to how it fulfils its purpose

with respect to its employees."

UK Banking Culture

• Almost universal agreement that banking culture is to blame

• For example, can’t fix Libor for over a decade without lots of people knowing

• Bonus culture particular problem• Needs to change!

Performance Management – stress and bullying at work

• League tables are circulated by email or on a white board in the office.• ‘Name and shame' culture increases pressure on staff to sell products and

reach targets instead of focusing on the needs of the customer.• Measuring good performance primarily on achieving sales targets leads to

dysfunctional selling.• Aggressive management behaviour is a style of leadership which would not

have been out of place in the Victorian era with little autonomy, management by control and poor management practices.

• There is no clear and definite link between performance and reward - it is unclear that incentive related pay delivers consistently improved individual or group performance.

• Performance management systems have delivered an increasingly stressful and intensive working environment, along with increased sickness absence and a disillusioned workforce.

The future?• Ordinary employees and ordinary citizens pay when banks fail.• In a time of austerity, taxpayers can't afford to bail out any more banks,

so we must– reduce the probability of bank failure,– reduce the likelihood of government intervention, and– reduce the cost of government intervention.

• So “separation” is a critical part of making sure that government and taxpayers are not saddled with a huge bill to bail out banks in the future.– we must separate those things which must be saved from the rest– deposits and payment systems can't be interrupted for a day, so governments

must intervene to save them when other routes have failed– These must be clearly separated from other banking activities that can be

interrupted.

The future?• Unite's policy is for the complete separation of retail and

investment banking at the earliest opportunity. We must get rid of too-big-to-fail banks.

• We want the creation of a National Investment Bank to increase lending to SMEs, to stimulate growth and focus on investment projects.

• We want greater democratic control of the banks. We disagree that we should privatise the state-owned parts of RBS and Lloyds.

• If there is a place for casino-style investment banking, it should not place at risk the rest of the banking system.

Our demands

• Banks are in profit so they must:– Stop sacking workers– Pay them fairly, and– Treat them properly