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RBS and the huge cost of doing bad business

Chief executive Stephen Hester admits the bank's culture was bad as he reports a leap in half-year losses. The question is, what is he doing about it?

RBS and the huge cost of doing bad business

It’s getting to the point with banks’ financial results that we need a separate line in the accounts titled ‘the cost of doing bad business’.

Royal Bank of Scotland (RBS.L) is the latest bank to issue its half-year results and, like Barclays (BARC.L), Lloyds (LLOY.L) and HSBC (HSBA.L), its figures are marred by more provisions for its mis-selling of loan insurance to personal and business customers.

There’s an extra £125 million set aside for mis-selling payment protection insurance (PPI), bringing the total cost to RBS so far to £1.3 billion, of which just over half (£700 million) has been paid out in compensation.

Then there is the first appearance of interest rate swap mis-selling in RBS’s accounts. Swaps were another form of loan insurance using derivatives that were sold to small business owners who had no idea, because the bank didn’t explain, of what they were getting into.

That’s another £50 million please, which I know is small change to a bank of RBS’s size, although the figure is bound to rise.

Then there is the Libor rate-fixing scandal, which is enormous but whose financial implications are so far unknown. RBS, which is 81% owned by taxpayers, confirmed today that it had sacked a number of employees for misconduct. Like many other banks it is still under investigation by regulators.

‘The Libor situation is on our agenda and is a stark reminder of the damage that individual wrongdoing and inadequate systems and controls can have in terms of financial and reputational impact,’ said chief executive Stephen Hester.

Quite so. Hester’s words could also apply to the computer meltdown that hit millions of RBS customers in June and prevented them from accessing their accounts. Sorting out that mess has cost the bank another £125 million.

The reason for what the bank insists on calling a ‘technology incident’ has not been uncovered. It may emerge that it was the fault of underinvestment, although RBS says it increased spending on technology in the past three years. Until then, however, as a non-RBS customer, I’m prepared to be a bit charitable about the disaster. Hugely damaging though it is to a bank’s reputation to be unable to tell people where their money is, technology errors do occur in business and can be described as one-offs.

But I’m getting tired of seeing the provisions for mis-selling presented as a series of separate incidents when in fact they are all one manifestation of a bad culture within the banks.

In his commentary Hester concedes that the culture of banking was all wrong and that banks like RBS must be rebuilt around the one ‘central truth’ that is ‘good and enduring customer service’.

It would be good to see RBS set some targets here. Post-bailout banking is not just about how much lending is being done or how fast dodgy loans and toxic assets are being disposed of. It’s also about how much of a positive impact banks are having on customers’ lives.

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7 comments so far. Why not have your say?


Aug 03, 2012 at 17:30

Bank salaries and bonuses combined should be limited to no more than 30x average pay in the organisation.

Bonuses should be based 1/3 on customer satisfaction 1/3 on shareholder satisfaction and 50% on community service.

Penalties for wrong doing should be paid 10% by the directors personally and 90% by the company.

Unfortunately these measures will never be implemented because the governing class comes from the banking class and the average citizen is a sheep only fit for sheering.

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Aug 03, 2012 at 17:36

"In his commentary Hester concedes that the culture of banking was all wrong and that banks like RBS must be rebuilt around the one ‘central truth’ that is ‘good and enduring customer service’."

It's not my bank but I don't remember any other banks emphasizing the blooming obvious! Well done Hester.

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mo khan

Aug 03, 2012 at 17:53

He is in charge, instead of prevaricating, he should face up to his job responsibilities. He must sack those who he calls " individual wrong doers" or get out, to date he has done neither....or is simply, just as suspected, being revealed as incompetent.

‘central truth’ with Bankers, What a Joke...........

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Roger Savage

Aug 03, 2012 at 17:57

So the title title talks of the huge cost of doing bad business. To who though? It certainly doesn't relate to the individuals concerned, does it? RBS and others get handed cheap or free money by the BoE / taxpayer to carry on as before.

In fact, Carry on Banking would be an ideal title for a new film, if of course in reailty the activities of UK banks and bankers (plus their chums in the BoE and government) weren't such an appalling disgrace.

The recent rumour that RBS could be taken over completely by the taxpayer wouldn't surprise me - more cash to paper over incompetence / failure.

In essence - even at the current level of taxpayer 'investment', RBS (and their bailed out contemporaries) represent capitalism meeting socialism in the most vile way - i.e. using taxpayers' money to enrich failures.

I have nothing against capitalism at all - it actually represents human behaviour far better than socialism. However, we seem to have quasi capitalism now and it isn't just bankers benefitting from inappropriate state assistance - it extends to the housebuilding leeches as well - their chums in government responding to party donations. This turns my stomach.

When and where are the consequences for any of those responsible for the breakdown of a sensible banking system going to pay?

Probably never, sadly, whilst the solution for the problems they caused is to provide more funding for cheap loans and rewards for doing so - i.e. the medicine and disease are one in the same.

The irony is that all this is done under the banner of helping people when in effect, each successive scheme is done with the sole intention of keeping the plates spinning and the house of cards intact, without providing a genuine or long-lasting tangible solution.


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Aug 03, 2012 at 18:02

If it prevents my branch from being taken over by Santander then there is a lot to be said in favour of nationalisation.

To bank with the "Royal Bank of the United Kingdom" is much more preferable to banking with Santander.

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Alan Tonks

Aug 03, 2012 at 22:43

Roger, I couldn't have put it better myself.

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Aug 05, 2012 at 13:26

My father was 45 and had to pass many an exam before he was allowed the title of Bank Manager. That's when bank managers were considered pillars of society. Now they are under 30 and probably stupid enough to have bought Facebook shares.

So what has happened? The experience went out the window in the form of early retirement gladly accepted by the gracious gentlemen and the baby boomers took over, unguided and unwittingly changed the face of banking. Profit should not be their goal for simply looking after our money! Trust and respect at an international level should have been their course.

And RBS's technical glitch? Channel 4 news had an interesting piece, blaming India, which was denied, confirming the glitch had occured in Edinborugh. The article went further to confirm it had been caused by an Indian employee. They then produced quotes from staff there stating that the Indian staff had great CVs but little experience. So, they were cheap. There lies the paradox. This cheap labour has cost the bank £125M+.

The trouble is, banking is not the only business to suffer these attitudes.

We have clients who now place their work in the UK to be executed by Western nationals because they too previously suffered from the illusion of a cheap labour market and its inherent mistakes.

Obvoiusly the reputation of a British work ethic still has its merits, but with scandals like this continually surfacing, how long will it continue?

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