submission to the
Banking Standards Inquiry
20 August 2012
Drafted by Professor Peter Ambrose, Visiting Professor in Housing and Health, University of Brighton, and agreed by;
Dr Stephen Battersby, Chair PHA, past President of the Institute of Environmental Health.
Stephen Hill, Director, – C2O futureplanners
Peter Archer, Chair, Care and Repair.
Angela Maule, past Chief Executive, UK Public Health Association.
Rev Paul Nicolson, Chair Zacchaeus 2000 Trust.
The Pro-Housing Alliance (PHA) is an alliance of organisations and individuals who believe that housing is a key determinant of health. Health inequalities cannot be addressed unless there is universal access to housing that is both truly affordable and healthy. It is a prerequisite for good public health, including mental health.
The members of the Alliance are: Chartered Institute of Environmental Health, Team Homes, Care and Repair England, National Housing Forum, Professor Peter Ambrose, UKPHA, Ecorys, Housing Justice, C2O Future Planners, Camden Federation of Private Tenants, Zacchaeus 2000 Trust.
Two recent reports, Recommendations for the Reform of UK Housing Policy and its accompanying report Housing Crisis in London, can be found on our website. http://www.prohousingalliance.com/resources/
The Banking Standards Inquiry’s Terms of Reference
The terms of reference of the Inquiry are to consider and report on:
a) professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process;
b) lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy; and to make recommendations for legislative and other action.
Bullet points summarizing the submission
- A retrospective look at the consequences of the deregulation of lending, abolition of rent controls and allowing the free movement of capital in and out of the UK in the 1980’s shows that Parliament gave the impression that ‘anything goes’ to make a profit.
- We note that ‘stronger sanctions to tackle abuse of the system’ are included in the initial discussion paper produced on 10 August 2012 by Martin Wheatley’s LIBOR review commissioned by the Cabinet. It is remarkable that such an inquiry is called for and that very severe sanctions for lying about an interest rate, which affects all citizens of the UK, had not already been put in place by Parliament long before the LIBOR crisis emerged..
- The FSA Banking Conduct of Business Sourcebook (BCOBS) lays down clear guidance for the industry and the Handbook and the FSA Statement of Principles has clear definitions about ‘integrity and proper conduct’, the definition of ‘fit and proper persons’, standards of supervision to ensure stability in the sector, the adequate protection of clients’ assets and much else besides.
- It is abundantly clear that the actual conduct of many individuals and banking organisations within the industry, not least in relation to LIBOR, has signally failed to live up to the standards laid down in these documents.
- For the past twenty years and more we have had governments and others criticizing regulators for being ‘heavy handed’ and anti-business when in most cases they are anything but. Whether in banking or dealing with the worst private landlords, enforcement of the legislation and use of powers to control bad practice has been minimal. In the long-term effective regulation is better for business, but we appear to be concerned only with the short-term.
- The PHA believes that ‘professional standards and culture’ must be interpreted to include the impact of the banking sector’s workings on the broader economy and society as well as the internal workings of companies and the conduct of their management and staff.
- Several aspects of the changing lending practices following the 1980s finance sector deregulatory Acts were clearly less than providential, some were irresponsible and others fell well short of professional standards of conduct.
- The huge release of house purchase credit, outstripping general inflation by a factor of four or more between 1980 and the mid 2000s, led to a severe mismatch between income growth and the growth in house prices and rents; this resulted in widespread housing unaffordability and greatly increased personal and household indebtedness which has very serious and costly implications for mental health.
- The overall impact was to cause average house prices in the mid 2000s to be more than three times what they would have been without the disproportionate growth of mortgage lending.
- Given the differential access to owner occupancy (about 70% can access ownership and 30% cannot) this in itself is likely to have had long-term regressive effects on wealth distribution.
- The increased commitment to the servicing of mortgages has also had a range of other adverse social and economic impacts on households’ spending patterns, lifestyles and the work/life balance.
- The application of very large sums of lending to the stimulation of property prices over the 1980 to 2005 period carried huge opportunity costs in terms of other productive uses to which anything up to £1,000bn of investment might have been put (for example in investment in the productive economy or in infrastructure).
- It also led to a vast increase in housing benefit payments as rents increased in a housing market in short supply and this has had the knock-on effect of trapping more people into benefit dependency and complicating the transition into work.
- The general public is now well aware of the adverse impacts of the mortgage lending boom and its aftermath (including the present dearth of bank lending); there is also general awareness of unprofessional and even criminal conduct in the banking sector; public trust in the banking system is therefore at a low ebb.
- One way to begin to repair the damage might be to set up a banking Social Responsibility Commission to consider the range of social and economic impacts, including some set out in these responses, that flow from the operation and conduct of the sector.
Responses to the Inquiry’s specific questions
- 1. To what extent are professional standards in UK banking absent or defective? How does this compare to (a) other leading markets (b) other professions and (c) the historic experience of the UK and its place in global markets?
Responses to 1 (b):
1.1. ‘Professional standards’ are a prerequisite for participation in other fields usually termed ‘professional’ – e.g. medicine, law, accountancy, etc.
1.2. The term carries a number of implications including a high level of certification, strict internal regulation of competencies and conduct, a specific duty of care to the users of the skills of practitioners and arguably a general duty of consideration to society as a whole
1.3. The same standards do not apply in banking and are widely perceived not to do so.
1.4. Part of the reason for this perception has been the changes in lending conduct and practices that followed the period of financial deregulation stemming from the passing of a succession of deregulatory Acts in the early to mid 1980s. Changes in mortgage lending practices over the ensuing decades have included:
- A lengthening of average repayment terms
- An increase in the average loan to income multiple
- The taking into account of an increasing proportion of the household’s second earner’s income when calculating a loan
- The movement towards loans of 100% or more of the value of the property being purchased
- The gradual easing of income certification practices
- In some cases active encouragement to overstate incomes in order to permit a larger loan
1.5. Some of these practices have marked a retreat from previously expected standards of responsible providential lending and some (for example the last two) have clearly fallen short of professional conduct
1.6. In addition there has been the rapid introduction of complex and opaque financial products that have not been adequately explained to borrowers – some have subsequently been found to have been mis-sold and compensation has been paid
1.7. Some of these financial products have permitted the realization of profits in the form of bonuses before those profits have actually been made
1.8. The use of the products referred to in 1.6 and 1.7 has
been widely regarded as examples of unprofessional conduct and has been in apparent contravention of the BCOBS
2. What have been the consequences of the above for (a) consumers, both retail and wholesale, and (b) the economy as a whole?
Responses to 2 (a):
2.1. The impact on indexed mortgage lending volumes of the changes in lending practices set out in 1.4 is shown in the 1980-2005 graph of mortgage lending (attached – also available in the Zacchaeus 2000 Trust Memorandum to the Prime Minister on Unaffordable Housing, published by Z2K in 2005 )
2.2. The effect on consumers of this massively increased
indebtedness has been wide-ranging and profound. For example:
- Mortgage repayments have increased as a proportion of incomes leading to reduced disposable income for other significant items such as heating, recreation, holidays and food all of which are significant to the preservation of health
- Heavy and unmanageable debt has been shown by a recent literature review (University of Brighton, forthcoming) to be deeply implicated in the increased incidence of mental ill-health which costs the country £105bn per year 
- Mortgage repayments have been spread over a longer timeframe, sometimes into retirement
- Increasingly the second earner in the household’s income has been taken into account in the loan calculation, obliging him or her to continue in full or part time work to continue to service the loan
- For many households this has forced both a juggling of work/life balance and a much greater dependence on paid childcare
- Two recent UNICEF reports have shown that the UK is at or near the bottom of the table of comparator EU countries in terms of exposure to risk and unhappiness in children
- Heavy loan repayment obligations have also significantly increased financial pressures (for help with housing costs) and time pressures (for help with childcare) on grandparents
- In extreme cases difficulties in making repayments, often due to changes of circumstances beyond the borrower’s control, have led to increased rates of repossessions
2.3 It is intuitively evident that the steep increase in property values impact differentially on different groups in society. About 70% of the population has had access to the personal asset growth permitted by owner-occupancy and 30% has not. The tenure division has therefore worked to reinforce previously existing wealth inequalities.
2.4. Among the 70% who own, the more vulnerable and economically weaker groups, for example those whose parents have fewer capital resources or who have themselves built up less equity in property, are likely to be suffering far more from exposure to higher debt levels and higher repayments in relation to incomes.
2.5. If these suppositions are correct the much increased mortgage lending flow is in itself having long term wealth and income redistributional effects which contribute to the general inequalities in society; this is a matter of considerable significance and requires urgent consideration.
Responses to 2 (b):
2.6. Table 1 of the Z2K Memorandum to the Prime Minister on Unaffordable Housing showed that the aggregate House Purchase Debt (HPD) outstanding as at 1980 was £53bn (23% of GDP).
2.7. Were this to be updated to 2003 to match the rise in RPI and further adjusted to allow for the rise in the incidence of owner occupancy the HPD as at 2003 would have been £181bn.
2.8. The actual HPD as at 2003 was £774bn (72% of GDP) – this is an ‘excess’ of £593bn over the figure that might reasonably have been expected had lending grown consistent with the RPI, had it reflected owner occupancy growth and had it not seen the significant changes in lending practices listed in 2.2.
2.9. This ‘excess’ HPD has subsequently been updated to 2006 when it was found to be of the order of £800bn. It is highly likely that it now in the order of £1,000bn.
2.10. There have been enormous opportunity costs relating to the application of these huge lending volumes to property purchase rather than to, for example, infrastructural, industrial R and D and similar uses in the productive economy. As approximate examples the cost of a significant upgrade to the rail network was put at £9bn, a recent estimate of the cost of putting the housing stock in good order was £20bn. The capital cost of a new hospital might be of the order of £0.25bn. An estimate some years ago of renewing the entire water supply system in the USA was between £40-160bn over 25 years. Pro rata to population the cost in the UK would be maybe one fifth of this. All these are insignificant compared to the sums loaned, effectively, to boost property values over a 25-year timespan.
2.11. Approximate calculations show that had mortgage lending volumes risen since 1980 consistent with RPI and owner occupancy growth, the average house value in 2011 would have been £61,000, not the actual £161,000. General private sector rent levels would have been commensurately lower since to a large extent they reflect capital values. Thus housing costs across the entire private sector would have been significantly more affordable.
2.12. In the years since the onset of the banking crisis (2007/8) there has been a dearth of mortgage (and other) lending as banks look to repair their balance sheet positions. This has been a major factor in prolonging the historically low output of new homes for sale and for the partial exclusion of first time buyers from the market. Both these effects have serious implications for the long-term health and balance of the housing market and for the viability of the house-building industry.
3. What have been the consequences of any problems identified in question 1 for public trust and in, and expectations of, the banking sector?
Responses to 3:
3.1 The lapses below professional standards of conduct identified in 1 and the consequences set out in 2 have seriously reduced public respect for the banking sector.
3.2. The general public have clearly perceived that the pre-emptive bonus-taking, the imposition of high charges and the public costs involved in the bail-outs have resulted directly from difficulties due to less than providential lending patterns and volumes over a period of at least three decades.
3.3. These bail-outs have led directly to the post-2007 crisis in public finances and the increasing regime of cuts across a wide range of public budgets.
3.4. These cuts again impact most heavily on the more vulnerable in society because they are the groups more dependent on public assistance programmes and publicly funded, as opposed to private, health and education systems.
3.5. As a consequence there is widespread unease and anger at these costs imposed on the public individually and collectively and a general loss of trust in the probity and social responsibility of the entire banking sector.
4. What caused any problems in banking standards identified in question 1? The Commission requests that respondents consider (a) the following general themes:
No responses from the PHA
5. What can and should be done to address any weaknesses identified? To what extent are such weaknesses subject to remedial corporate, regulatory or legislative action, domestically or internationally?
No responses from the PHA
6. Are the changes already proposed by (a) the Government, (b) regulators and (c) the industry sufficient? Respondents may wish to refer to the Financial Services Bill and the Government’s proposals for the Banking Reform Bill. They may also wish to refer to proposals by the Bank of England and the Financial Services Authority on how the Financial Policy Committee, Prudential Regulation Authority and Financial Conduct Authority will operate in practice.
No responses from the PHA
7. What other matters should the Inquiry take into account?
Response to 7:
7.1. The Banking Standards Inquiry should take into account not only ‘standards of conduct’ as strictly defined internally within the banking sector but also crucially standards of conduct as they have consequences for the wider economy and society
7.2. These consequences, some spelled out above, flow inevitably from the pattern and volume of lending carried out by the banking sector year on year
7.3. Because of the central significance of money flows in the economy these lending patterns and volumes (or in some circumstances as at present the lack of them) have extremely important impacts on the long-term competitive success of the UK economy in relation to the world economy
7.4. They also have extremely important effects on the internal distribution of wealth and income between different groups in society
7.5. They are therefore powerful mechanisms in both the management of the economy and the shaping of the society; their regulation has been too weak over the past 30-40 years – stronger regulatory regimes are required that reflect more accurately the highly significant consequences of the conduct of the sector
7.6. The Pro Housing Alliance feel that such is the importance of the banking sector to the health of both the economy and the society that there should be some mechanism to assess and monitor the impact of its workings on society as a whole – a banking Commission for Social Responsibility (CSR). This could be set up either:
- at corporate level by individual banks already known for taking an ethical stance (where a CSR might confer commercial or PR advantage)
- at industry level by some appropriate umbrella organization
- by the Bank of England or some combination of the regulatory authorities
7.7. A banking Commission for Social Responsibility, while in no way undermining the prime duty of the individual bank or sector to maximize returns to the shareholders and to protect the interests of depositors, should keep under review many of the issues identified in this set of responses. In the view of the PHA this would have, among other benefits, that of beginning to rebuild public trust in, and respect for, the banking sector – currently at an extremely low ebb.
Changes in 5 key indicators – 1980 to 2004* July 2012
*from the Zacchaeus 2000 Trust Memorandum to the Prime Minister on Unaffordable Housing, May 2005 (available at www.z2k.org)
Note that over the period the total house purchase debt outstanding rose by a factor of about 18 (clearly involving much ‘sub-prime’ lending) while the amount of housing stock for transaction in the market rose by only about 30%. This largely explains the damaging rise in house prices post-1996 (and the ‘blip’ in the late 80s).
The direct consequences of this lending explosion have been a bursting of the house price ‘bubble’, widespread difficulties in repayment for marginal borrowers and thus rising repossessions, increased forced reliance on housing benefits, massive bad debts requiring transfers from bank reserves, some bank failures and the severe damage to public finances as a result of the cost (£150bn?) of bank bail-outs.
Even more important is the ‘opportunity cost’ of this misplaced lending – seemingly quite undiscussed. The housing debt figure, had it risen since 1980 simply with inflation, would have been in the order of £200bn in 2004. Instead it was around £800bn. What benefits to the economy would have resulted had this ‘excess’ £600bn been applied not to inflating house prices (and rents) but to renewing our ageing infrastructure, modernising the rail network, investing in renewables, supporting R and D for our productive industries, building hospital and schools….. the list goes on?
The point is not what happened in the last 25 years, which cannot be re-run, but what regulatory regime can be put in place to prevent a recurrence of the cycle over the next 10-15 years! This is the structural issue – not bankers’ bonuses. How will the main parties respond to this challenge?
Peter Ambrose Visiting Professor in Housing and Health, Brighton University
Associate Housing Adviser, Zacchaeus 2000 Trust
 Available at http://z2k.org/wp-content/uploads/2011/11/Memorandum-to-the-Prime-Minister-on-Unaffordable-Housing.pdf
 In 2009/10 the total cost of mental ill health in England was £105.2 billion, including £21.3 billion in health and social care costs, £30.3 billion in lost economic output and £53.6 billion in human suffering. Costs of mental health problems, England, 009/10, http://www.centreformentalhealth.org.uk/pdfs/Economic_and_social_costs_2010.pdf
£ billion % of total
Health and social care 21.3 20.2
Output losses 30.3 28.8
Human costs 53.6 51.0
Total 105.2 100.0
The aggregate cost of mental health problems thus increased by 36% between 2002/03 and 2009/10, with a particularly large increase in the costs of health and social care (+70%) since.