CBI Scotland Annual Dinner 2012

Transcription

1 CBI Scotland Annual Dinner September 2012 António Horta-Osório Chief Executive, Lloyds Banking Group plc Good evening everyone. Thank you so much for coming this evening. I am delighted that Lloyds - through Bank of Scotland is once again supporting the CBI s annual dinner in Scotland and it is an honour for me to address such a distinguished audience from the Scottish business community at Scotland s premier business event. Scotland is a major focus for Lloyds Banking Group. The country is home to some of our most important businesses and to nearly 20,000 of our employees. Being from Portugal I have a strong affinity with Scotland. We too are a small, proud nation although I appreciate there are small differences in the weather. 1

2 Like me, I am sure, you are looking forward to hearing both the Chancellor and John Cridland speak this evening. But given recent events, I wanted to say a few words about why the banking sector has found itself in such a state and what I believe we must do if we are to win back the trust of our customers. Let me start by saying that I am - at heart - a retail and commercial banker. Retail and commercial banks should be simple and they should be boring. You might surmise from that statement that I am simple and boring. I couldn t possibly comment on that but, as long as I am Chief Executive of Lloyds, which is a retail and commercial bank, we will strive to continue being simple and boring. For me that means dependable, prudent, safe and trustworthy. I think these are qualities that the great Scottish bankers of the past would applaud. Retail and commercial banking is about supporting the UK economy, ensuring payments, taking care of people s deposits, and transferring those deposits in a prudent way into lending for businesses and for 2

3 people buying their homes. Day in day out, customer by customer, in the communities we serve, we try to do the right thing. At Lloyds we serve over half the UK s population. We have a financial relationship with nearly every home and support millions of companies, large and small. And that is the most compelling reason why I joined as CEO eighteen months ago: Lloyds has one of the biggest impacts on people's lives. Therefore I believe we can and will make a real positive contribution to the economic and social wellbeing of this country. That is why we are focused on lending to SMEs, the lifeblood of the UK economy. In the past year our net lending to SMEs increased by 4% whilst the market shrunk by 4%. By the end of this month we will have lent all of our allocation - 1.4bn - under the National Loan Guarantee Scheme, and it is why we have provided over 5 billion, 1 in every 4 mortgages, to first time buyers so far this year. This is also the reason why I am committed to ensuring Lloyds plays a full part in passing on the benefits of the recently announced Funding for Lending scheme to our customers. I am convinced the scheme will provide a boost to economic growth in the UK and I would commend the 3

4 Chancellor and the Bank of England in the ambition they ve shown in creating the scheme. I want Lloyds and the great businesses it owns to be a source of pride for our employees. We can only do that through regaining the public s trust. The banking industry has done itself no favours in this respect. Issue-by-issue and scandal-by-scandal the faith and trust in our industry has been eroded. Why? Because I believe that many banks lost sight of their core values and became complacent, non-customer-focused and inefficient: First, in the run up to the crisis several banks were complacent about risk, running unsustainable business models and extending credit to doubtful clients or countries without due thought. Second, many banks lost their focus on customers. They have branch opening times built around their convenience. They have closed smalltown branches without considering the impact on the local community. And the sector generates a level of customer complaints that few other industries would tolerate. Finally, several banks became bloated and grew their cost bases so they had to chase revenues to outpace cost growth. That meant more 4

5 complex products that many customers didn t need or understand, whilst incentivising employees to sell them in volume. This all happened in a context where core banking practices were progressively relaxed and subordinated to financial short term gains. This has to stop. In the absence of trust, banks do not function effectively, undermining the vital role they play in the economy. We must remember that the way we see ourselves is not always the way others perceive us. This perception is critical as the future of the banks and the economy are inextricably linked. I believe there are no strong economies without healthy banks and healthy banks require strong economies. Therefore the industry must change. We must recast the banking model. The example needs to come from the top, having leaders with the highest integrity and values, who think and act for the long-term. As the late moral philosopher Philippa Foot brilliantly put it one shouldn t think that morality must pass the test of rationality, but that rationality must pass the test of morality. This illustrates the task we face in the industry. At Lloyds we will take a zero tolerance approach to issues of inappropriate conduct, as I have made very clear since I joined. And we 5

6 will ensure our staff uphold the highest ethical standards, are well trained and are appropriately incentivised. I have always believed that reward and incentives are a vital influence on how people behave. In recent years the structure of variable pay in banking has focused too much on sales targets. This has had a detrimental impact on behaviour, in part contributing to the problems the industry has experienced with mis-selling, in the case of retail banking. This is an unsustainable model. It s as simple as that. Banks cannot continue to write profits today that we have to pay back at a later date. From the top, our focus will be upon ensuring pay is increasingly linked to the long-term performance of the bank; it must align the long-term interests of management and shareholders; it must be transparently linked with success and be capable of being clawed back where decisions turn out to have damaged the bank s performance or adversely affected customers. For customer-facing employees we have more to do but we have already linked reward with effective controls on risk, better outcomes for customers, and far less emphasis on sales targets. 6

7 Underlying all of this, as I have already said, there needs to be a complementary set of values and a culture that permeates throughout the organisation, reinforcing the behavioural standards we expect. These are my values and they are the values that I ve asked our staff to live by: an absolute focus on your customers, meritocracy in managing your business and always to lead by example. These values need to be supported by simpler, transparent products and processes, designed from the customer s point of view. This will, in time make us more efficient and is a fundamental part of our strategy that we announced in June last year; as it will allow us to provide better and better value for money to our customers, creating a sustainable competitive advantage, and therefore increasing shareholder value. For example in retail banking, Lloyds is at the forefront of efforts to increase the transparency of personal current accounts and in transforming the account switching process. For small businesses, we are piloting a new process that gets loans into business accounts in half the time. And in complaints I have committed us to public targets that are already reducing levels dramatically and ahead of our peers. We have much more work to do in this area but by becoming a simple and transparent bank we will make progress. 7

8 We also have to put things right, as we did in the case of Payment Protection Insurance, PPI. Lloyds was the first bank to break ranks and provide certainty for customers by offering compensation to those missold PPI. That was a very expensive decision but it was the right thing to do. All of this should lead to a better banking industry in the UK. I have said many times that I believe the UK does not need more banks; it needs better banks. Furthermore, it needs to ensure that tax payers money is never again used to prop up a failing bank. Failing banks should be allowed to fail, like companies in any other sector; that s the essence of capitalism. But with that comes the obligation to ensure deposits are appropriately protected. The Independent Commission on Banking led by Sir John Vickers recommended a bold proposal that separates retail and investment banking through a ring fence but allows them to co-exist under the same universal banking group umbrella. Ultimately, it will allow shareholders to see if sufficient advantages still exist from the universal model. If not, they can demand that they are spun-off. 8

9 We were the only bank that supported ring-fencing through the Commission s consultation. I am convinced that Lloyds should become a ring-fenced bank and ahead of the current 2019 deadline. Ring-fencing will be a boost to trust in the industry. It will deliver a much greater cultural distinction. Retail and commercial banks are culturally very different from investment banks. And, together with higher capital requirements, better supervisory, recovery and resolution mechanisms, this will solve the too complex to fail issue. However, we mustn t be complacent. There will be many other issues we will have to deal with as we attempt to put the problems of the past behind us. I am committed to cleaning up our legacy issues and to minimising errors in the future. We are not and will not be perfect, as reality never is. As I say to my teams the only person that does not miss a penalty is the one that doesn t play football. But I do expect them to get 9 out of ten things right first time. And to fix the errors as quickly as possible, or escalate immediately if they can t. I believe Lloyds is different to the other big banks. It has a customercentric culture. It sits at the heart of nearly every high street in Britain. 9

10 And our people want to do the right thing for customers. Those are solid foundations upon which to build a bank you can trust and one that its employees are proud of. We must also break with the culture of the past and work with our regulators to ensure the right outcomes for our customers. It cannot be in anyone s interest to enter into the long, legal disputes of the past. Now is the time to move on. As the new regulators come into being next year, we can forge a new relationship. Banks must be given clear and sensible boundaries in which to operate. They must be capable of failing in a way that protects customers deposits and does not require tax-payer assistance, as in any other industry. I have always believed it is in the interest of healthy banks to have strong, sound and constructive regulation. The challenge is to strike the right balance between enhancing financial stability and not going too far to the extent that innovation and competition are hindered, and credit is not properly extended to the economy. 10

11 And, in relation to conduct risk, the regulator has to have the courage to take pre-emptive action so we avoid costly and subjective retrospective actions as we saw with PPI. In conclusion, it will take practical deeds, not words, over a sustained period to rebuild trust in banking. As you know reputations take years to build and can be destroyed overnight. There are legacy issues that the industry must deal with effectively and as quickly as possible. Ultimately, we can reach the point at which trust is rebuilt to the extent that we develop a sense of mutually beneficial partnership with customers, businesses and society. A trusted and healthy banking industry can then play its full part in the economy, helping to sustain a virtuous circle of business growth, job creation and wealth generation. That is what we are here to do. Personally, I am optimistic and absolutely committed to changing Lloyds. It will be a long journey but it will be worth it. To do this we must return the bank to profitability. That will allow us to provide further support to UK businesses and households on a sustainable basis. The good news is that by doing all these things we will ultimately give you, UK taxpayers, the opportunity to get your money back. 11

12 You have my personal commitment on this. Thank you. 12