An Introduction to Ethical Banking

An introduction to ethical banking

There is a reason why the word ‘bankster’ has made it into the Financial Times’ lexicon of acceptable words. Its definition is this: one who pursues aggressive risk reward strategies, without professional regard to the potential effects such strategies can have on shareholders and other stakeholders. It is common knowledge that the banking industry has some gigantic financial misdemeanours to say sorry for.

Have the big banks changed?

Bankers and the banking industry have had it pretty rough over the past few years, facing all of the scrutiny from the public in the wake of the financial crash of 2007/8. According to Standard & Poor’s, an American financial research and analysis company, the main four banks in the UK (Barclays, HSBC, RBS, and Lloyds) have paid out £42bn in charges for bad conduct and litigation in the five years leading up to 2014, while over in the US Wall Street and their foreign rivals have paid out over $100bn in legal settlements, with over half of that sum being paid out between 2013-2014.

The question on everybody’s lips was whether the financial crash has had any levelling or humbling effect on the behaviour of bankers in the city. Have these charges and fines been enough to get the major financial institutions to behave better? While at first glance those figures might seem large, the answer becomes painfully clear when you compare them to the amount that bankers have been paid in bonuses over the past few years.

Have these charges and fines been enough to get the major financial institutions to behave better?

In the UK, for example, it was revealed that the bonus pool in the City was twice as big as the financial sector’s corporation tax bill. Seemingly unbelievable on the face of it, HM Revenue and Customs figures show that the financial sector paid £32.4bn in corporation tax in total between 2008-9 and 2012-14, a figure that is dwarfed by the £67.6bn paid into the bonus pool during the same timeframe.

In the US, as the issue of bonuses became more and more heated and President Obama became more desperate to flex his muscle over the financial sector, sums paid out to bankers went up rather than becoming more modest. According to the New York Comptroller of the Currency, the average bonus for investment bankers hit $164,530 (£99,037) for 2013, up 15 per cent on the previous year.

The result was anger, on both sides of the pond. But what did we do? Did we all rise up against the bankers and ‘banksters’? When celebrities like Eric Cantona called for everyone the world over to withdraw their money and bring down the banks, did it work? He demanded another crash, only this time the man on the street would not be collateral damage, but he didn’t get it.

For all this gusto, and a relaxation of the rules in the UK to get people to move their money and switch bank accounts, there is still a lot of work to do.

Rejecting the big banks

We spoke to Joel Benjamin, a spokesperson for Move Your Money (a national campaign in the UK helping individuals to build a better banking system), to find out why more and more people are choosing to leave the big banks.

“Most often people move because of bad service and/or being ripped off by their existing bank with fees or charges,” he said. “For many others who have suffered bad service, it still takes a spark event such as Barclays involvement in LIBOR rigging or HSBC tax evasion, which often sees people depart the big high street banks, for local or ethical banking alternatives.

“Most recently, thousands of people have been departing the big banks because of concerns over climate change and investments in tar sands and fracking as part of the growing divestment movement.”

The UK Move Your Money ethical scorecard clearly shows that for high gains on what banking customers want – honesty, customer service, culture, and supporting the economy – the best bet is a building society. But perhaps the reason there isn’t a mass exodus from one banking institution to another in the UK is because consumers don’t see a great difference in the high street brands they come across.

for high gains on what banking customers want – honesty, customer service, culture, and supporting the economy – the best bet is a building society.

As Alex Kwiatkowski, a senior analyst at IDC Insights, has said when looking at some possible drawbacks: “Switching was designed to stimulate competition, but if the choice of products on offer is broadly similar, then it makes justifying the change of account hard”.

Ultimately this could be because the most ethical financial institutions have the quietest voice and the least amount of money to justify on plush advertising campaigns. Which provides the sharpest of double edged swords: the most ethical financial institutions are the ones you are least likely to have heard of: building societies, Credit Unions and Community Finance Development Institutions (CDFIs).

the most ethical financial institutions have the quietest voice and the least amount of money to justify on plush advertising campaigns.

Less mainstream ways to look after your money

Credit Unions are local savings and loans companies that are member-owned and fully democratic. While not as well-known as the high street banks, with more than 360 in the UK alone, such as the London Mutual Credit Union and Glasgow Credit Union (the biggest in the UK) there is likely to be a Credit Union near you. In 2014 nearly 2m people used Credit Unions, up by 7 per cent in the year before.

In the US Credit Unions are far more common, with around 46 per cent of the country members of at least one. Navy Federal Credit Union is the largest of its kind, both by the size of its assets ($58bn) and by number of members (4,786,101 in 2014), while the Chicago based Alliant Credit Union has over 280,000 members worldwide.

A building society is a financial institution owned by its members and run as a mutual organisation, where any member money going through it is ultimately used to benefit the members themselves, not external shareholders.

Like Credit Unions in the UK the number of building societies – such as the biggest one in the UK the Nationwide Building Society – went down over the period of the 2007/8 financial crisis. In some part this was due to mergers which have allowed smaller societies to team up with each other and pool together more members collectively.

CDFIs (Community Development Financial Institutions), similarly, are social enterprises that provide finance to people and businesses that would otherwise struggle with mainstream banking outlets. With around 60 CDFIs in all of the UK they need to grow before they can begin to compete with the mainstream banks, but with growing support – from corners as diverse as the Duchess of Cornwall to the Archbishop of Canterbury – there is a real future for them yet.

What makes a ‘good’ bank?

Banking in itself is not bad. What marks out a good organisation that provides banking from a bad one includes aspects such as whether they pay the correct tax in their country of operation and what they choose to invest in. Scandals have been all too frequent on the subject of banks helping wealthy clients dodge tax in recent times; furthermore, campaigns exposing the extent to which high street banks have been investing in fossil fuels and the destruction of the environment are beginning to take root.

What marks out a good organisation that provides banking from a bad one includes aspects such as whether they pay the correct tax in their country of operation and what they choose to invest in.

More of us are starting to become aware of these campaigns. At the same time, being able to do banking with an organisation that doesn’t rely on unethical behaviour is becoming a lot easier. If you’re taking first steps into ethical banking, Credit Unions, building societies and CDFIs are all worth your attention.

For too long banking and finance has been allowed to go on ‘business as usual’ – and although we’ve still got a long way to go, maybe this is starting to change. Ethical banking is no longer merely a pipe dream but a viable, and powerful, reality.


About the author

Carl Packman is a writer and researcher. He is the author of Loan Sharks: The Rise and Rise of Payday Lending (2012), Payday Lending: Global Growth of the High-Cost Credit Market (2014), and a regular commentator on such issues as finance and personal debt.

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