In the aftermath of the financial crisis, the Cooperative Bank might have been seen as a potential model for the future of banking. It apparently emerged from the crisis largely unscathed, and as the self-styled ‘ethical bank’, it seemed to understand the public hostility towards a lack of ethics in the sector. A few years later, a £1.5bn black hole was discovered in its balance sheet, and 70% of the business was sold to investors led by American hedge funds. The appointment of Paul Flowers – dubbed the ‘Crystal Methodist’ by the media – as the bank’s Chairman, and its involvement in scandals such as PPI misselling, have further taken the shine off the ‘ethical bank’.
The Co-op has tended to be banker to public sector bodies and charities, and to individuals who support and are sometimes employed in both of these sectors. The bank has adopted the values of this clientele in its marketing, claiming to be ‘still unique in being the only UK high-street bank to have a customer-led Ethical Policy’. But the Co-op is not alone in the business world in claiming to value human rights and the environment, nor is it the only bank, or even the only UK high-street bank, with an international development profile – Barclays has a number of microfinance ventures in Africa and was also a charter member of the Business and Human Rights movement.The Co-op is distinctive because it has connections with both the UK public sector and the co-operative movement.
A co-operative is basically an organisation that produces or distributes something for the benefit of all its members, and that is run according to rules that all members can agree to. Co-operatives, then, have both egalitarian and democratic features. Ironically, it may be in the cooperative mode of organisation, supposedly at the heart of its ethical impetus, that the seeds of the failure of the Co-op can be found. In his scathing report on the ‘manifestly dysfunctional’ governance of the group, Lord Myners criticises the lack of experience and shared purpose of Directors who are elected through a series of regional and area boards. One unnamed Director summed up the conflicting aims of board members: ‘Some want a dividend, some want low prices, some want to do social good and some want free range chickens’. A focus on ethical issues which are largely incidental to the business can a critical failing in a Director, and perhaps even an ethical failing, since business failure is directly damaging to the welfare of depositors, investors, and employees.
Sir Christopher Kelly’s review identified nine major factors that led to the Co-op’s capital shortfall:
- The economic environment;
- Increasing capital requirements imposed on banks in general following the financial crisis and on the Co-operative Bank in particular as a consequence of specific issues that it needed to address;
- The merger with the Britannia Building Society in 2009;
- Failure by the Bank after the merger to plan and manage capital adequately;
- Fundamental weaknesses in the governance and management of risk;
- Material capability gaps, leading to a serious mismatch between aspirations and ability to deliver;
- Past mis-selling of payment protection insurance (PPI);
- A flawed culture;
- A system of governance which led to serious failures of oversight.
Of these he suggests that all apart from the first, and to some extent the second, were within the Coop Group’s, or the bank’s, control. That is, they all represent failures, and perhaps ethical failures.
The Co-op bank has been caught between three distinct sets of ethical concerns: those encapsulated in the (perceived) values of its customers; those inherent in the democratic and egalitarian system of co-operative organisation; and those that stem from the basic obligations that any business has to its owners, employees, customers, and other stakeholders. A badly thought through implementation of co-operative organisation, and a naive focus on promoting the values held by customers, has led to a failure to fulfil the most basic requirement of promoting (or at least protecting) the interests of the groups most closely related to, and dependent on, the business.
Do the troubles at the Co-op suggest that there can be no such thing as an ethical bank? We think not. 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 misselling e.g. payment protection insurance or for raising credit card credit limits.
Another measure of the ethical behaviour of banks is how they deal with people who are excluded from banking services – secure savings accounts, insurance,loans, and financial planning — by unemployment or poverty. An example of a firm that provides deeply personal banking to the financially excluded is Fair Finance, based in London. This and other banks for the financially excluded are not household names. But their relative lack of profile should be reassuring. Ethical banks shouldn’t – morally shouldn’t – claim to be ethical. Some things should be shown and not said. The Co-op Bank got this the wrong way round.
You can read a longer version of this post on the FinCris website.