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47
Reputational
risk in the UK
financial sector
with Professor
Ranald Michie
London Stock Exchange.
Canary Wharf, London.
Reputation management is imperative to
success for business professionals and in
banking it is no different. Banks need a
favourable reputation to build trust with
customers in order to encourage them to
deposit their money, take out mortgages
or business loans, and purchase financial
products. Like any other profession,
bankers must manage their activities
appropriately to avoid reputational risk.
The image of bankers has been damaged
since the banking crisis of 2007–08,
although the financial sector in the UK
had held a respectable reputation with
the public in the past. During the peak of
the banking crisis, bankers in Britain were
at worst viewed as criminals who toppled
the global financial system due to selfidolatry, ignorance, and greed.
When engaging in certain kinds of
behaviours, bankers risk damaging not
only their personal reputation, but that
of the entire financial sector. If people
lose trust in banks and other financial
companies due to scandals and crises,
then it may have further knock-on effects
on the financial economy. Once bankers’
reputation has been stained by crisis, it
may not be so easy to wash clean.
Financial historian Professor Ranald
Michie says that British bankers in the
late 19th century had a respectable
profession, but today are viewed as
‘bogeymen’ who are irrationally exuberant
and morally hazardous. In the past,
British bankers were able to mitigate
reputational risk essentially by
avoiding crisis.
According to Michie, British banks did
not always take the risks they do today
and built a foundation of trust with the
public and government. This has also to
do with the fact that the UK financial
system was relatively stable with the
exception of crises in 1866 and 2008.
Their reputational risk overall was low for
many years.
The British experience until the recent
past reflects a banking system that
was allowed to evolve relatively free of
legislation intervention and proved to be
highly resilient as a result.
Financial services in the UK, particularly
in London, rank amongst some of the
Since the start of the financial crisis the image of bankers could improve.
largest in the world. As a global financial
centre London is nearly equal to that
of New York. Therefore, maintaining a
reputation that is free from financial
crime or scandal is imperative to
competing globally.
In the early 19th century another group
of financial intermediaries known as
‘company promoters’ was seen in a
light similar to bankers today as told in
Max Pemberton’s The Impregnable City
published in 1890:
The UK has much to lose from any
reputational damage caused by financial
crime, especially if financial crime
undermines trust in the financial system,
or its reputation recruitment is damaged
and governments introduce laws that are
detrimental to financial services.
The City of London remained a byword
for greed, corruption, and dishonourable
conduct whenever the subject of
company promotion surfaced, with the
only fitting punishment for those who
made their living by such means being a
sudden and violent death.
In some cases it could be argued that this
damage has already been felt in terms of
potential future employees of the financial
industry. In a YouGov survey of 1,000
students commissioned by Lloyd’s Bank,
70 per cent of them believed that British
bankers were driven by greed. Only 2 per
cent of them were interested in pursuing
a career in banking. A similar case in
the US was found for Harvard graduates
entering the financial sector which
dropped from 23 per cent in 2008 to 9
per cent in 2012, but this is more likely
because of lack of job opportunities.
Despite that reputation
London continued to
attract highly talented
bankers, brokers and other
financial experts from
throughout the world.
It also recruited and
trained a large and skilled
domestic labour force.
Michie argues that the biggest risk
actually comes from government
intervention that attempts to transform
the reputation of banks, but in doing so
could expose them to higher risks. This
includes curbing bonuses which could
drive business away from London and
the introduction of a transaction tax on
financial products such as securities,
derivatives, and currency exchanges.
While this tax has encountered
resistance from the UK government, it is
of considerable interest to other
EU countries.
If left to government, attempts to
improve that reputation could actually
damage the UK financial services sector
because of the consequences of any
legislation and taxes. What is required is
the individual and collective effort of all
those in the UK financial services sector
to restore the reputation it once enjoyed.
That was done in the 19th century
through the actions of bodies such as
the London Stock Exchange and the
Bank of England.
London bankers would do best to
improve their reputation by retaining
the trust of both the government and
the public while remaining competitive
globally. According to Michie, this
was achieved in the past not through
legislation, ‘but the actions of bodies
like the London Stock Exchange, the
Bank of England and the Institute of
Bankers and these need to be revived
and reinforced in the future’.
We are again at a tipping point where
such a response to build reputation
is required. Without such a response
the risk is that continental European
governments will take advantage of the
reputational damage inflicted on the
British financial sector over the last 5
years, to introduce measures that will
drive business away from the City of
London and towards themselves, even
at the cost of Europe as a whole losing
out through the migration of financial
activity to less regulated jurisdictions
elsewhere in the world.
Ranald Michie is a professor in the
Department of History at Durham
University. He is a project leader on the
Tippin g Points project, one of the themes
of which is crisis in the UK financial
sector. Contact: [email protected]