In May 2022, Big Society Capital (BSC) announced that it was reducing its target rate of return from 4-5% to 1%. While this change is welcome, BSC with its £600m is part of a market it estimates to be worth £6.4bn (2020 data). Commercial banks and other lenders had £464bn in business loans in 2020, the comparative year with BSC data. This puts social investment at around 1.4% of total business lending, and BSC at 0.14% of that. Given the relatively small scale of social investments, it would seem wise to encourage traditional financial institutions to increase their lending to the social economy.
Reform the banks
It is no coincidence that social banks such as Charity Bank, Ecology Building Society, Triodos Bank and Unity Trust Bank exist. Their existence tells us that the traditional financial services industry is not serving the social economy well enough. If this were the case, these specialized banks would not be necessary.
There have been many calls and efforts for banking reform in this country. Since the global financial crisis of 2007, we have seen substantial regulatory-focused improvements. Our banks are better capitalized and structured, thanks to the meticulous and diligent work of our financial regulators.
The existence of social banks tells us that the traditional financial services sector is not serving the social economy well enough
There have also been many good one-off social and community initiatives from the banks over the years. The latest concerns a proposal for the maximum distance to the nearest free bank withdrawal point or bank branch. There have been good efforts to try to provide better services to the homeless. Commercial banks have sometimes invested in us at Big Issue Invest and other community development finance institutions; on some occasions they have been co-investors as senior lenders and the aforementioned social banks are our most regular co-investors. The potential for a better banking system is therefore clearly there. It is not just an economic logic of investing in a sector that needs it. As taxpayers, our society supports the banks. We are the ones who will pay, in the event of a bank failure, to protect customer deposits against loss. If we, collectively as a society, support our banking system, then it makes sense for the banking system to honor that promise by supporting society in return.
Changing the Culture of Banking and Investment
I’ve been in the banking system for almost 30 years now and piecemeal approaches haven’t fundamentally reversed banks’ disengagement from their communities. Since it is the incentives that drive the culture of our system, here are my suggestions for changing the incentives. If we refocus our banking system on customer service, community engagement, and personal relationships, my hypothesis is that we will have a banking system that is much more likely to serve our social economy.
First, legislate that bonuses can only be paid for customer service, not revenue. Define customer service as the widespread provision of quality banking and financial services across the country and to all sectors and segments of society. Let each bank decide what good service looks like and each year the regulator, the Prudential Regulatory Authority, can decide whether that service standard is appropriate. As this would fall outside the scope of the PRA, reform the role of Big Society Capital so that it is responsible for deciding whether banks are adequately serving society.
Banks can be our biggest social investors
Second, customize the implementation of anti-money laundering and anti-fraud “know your customer” measures. Each person can know about 150 people well. Legislate so that each investment bank manager knows each of his clients personally. It doesn’t have to be a face-to-face, in-branch relationship. We have so many new social media tools to use. We are in the age of modernity, but define efficiency by the quality of the relationship and encourage our banks to reflect the communities they serve. And who decides if this relationship is good enough? Give the regulatory contract to people like Relate, Citizen’s Advice or another personal or advice agency, alongside the PRA.
Third, introduce a salary cap for deposit instructions, banks and building societies, in line with the salaries of the entire workforce that uses the banking system. I’m not talking about low wages here. A salary cap of 10 times the living wage would have a London-based banker on £200,000. You could supplement this with a bonus, limited to twice your salary, based on customer service and the quality of the relationship. Greater diversity and engagement from all sectors of society will ensure that banks serve all members of society and that aligning wages with the rest of the economy would align banking leaders with the businesses and communities that they serve. Let the Living Wage Foundation be our guide, alongside the PRA.
Finally, a modest corporate tax relief on banking profits for banks that meet the regulator’s requirements in terms of customer service and quality of the relationship. If it is the shareholder who drives corporate performance, then align shareholder interests for more profits by lowering taxes for better social performance. Let Her Majesty’s Revenue and Customs be the judge. HMRC has a strong motivation to maximize the tax take for the country, so I don’t think they would let the banks claim their tax relief lightly.
Would that harm the viability of our banks?
It can require an upfront investment, it can save money – locating staff outside of London and in communities can provide sustainable jobs and hire workers in more affordable locations. One would hope that better knowledge of people and their businesses, combined with modern analytical tools, would lead to better credit decisions, reducing risk and helping to identify investment opportunities.
What would this new banking world look like?
Of all the companies you interact with, this would be the bank you know and love best. You would know that the bank is acting in your interest, because that is how the whole bank is incentivized.
Social cohesion and society do not exist through a fundamental act of creation. We must invest in them. Banks can be our greatest social investors.
- Danyal Sattar is CEO of Big Issue Invest.
Illustration by pch.vector on Freepik
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