Please send me SCA's fortnightly briefing:

January 30, 2013

Predictable but shocking behaviour

The lack of sustained public outrage at the latest scandal involving the behaviour of bankers – the illegal fixing of libor interest rates – reflects growing banker-fatigue.  It seems they are impervious to criticism, and irrespective of how negative their public image becomes, they carry on regardless.  The recent behaviour of Lloyds TSB being a case in point.  Amazing what a team of expensive lawyers and no compunction about breaking promises can get you.


Predictable but shocking behaviour 

Ron Ferguson, The Scottish Review

Here is a parable of our times. It tells us a great deal. The story begins in 1799, when a Scottish minister moved to the parish of Ruthwell in Dumfriesshire. The Rev Henry Duncan, a man of large compassion, was appalled by the poverty he saw around about him. He was determined to do something about it. But where to start? He used his own money to buy flax for women to spin at home, and thereby make a living. He also engaged local unemployed men to turn the manse glebe into a model farm. 

Realising that other financial support was needed if indigent families were to be kept out of the poor house, he revived the local Friendly Society, which provided loans to support families in need. In 1810, he persuaded the Earl of Mansfield to donate a derelict cottage to the Friendly Society; thus was born the savings bank movement. Poor people were enabled to build up savings accounts and get loans, which would in turn fund cottage industries. 

Henry Drummond’s great idea inspired not just people in Scotland, but much further afield. The savings bank movement spread to nearly 100 countries. It was this movement that gave birth to the Trustee Savings Bank.

Fast forward to 1986. Still working in the spirit of Henry Drummond, the Trustee Savings Bank group set up four independent charitable foundations in the UK to distribute 1% of pre-tax profits. A Deed of Covenant was established to put the agreement on a legal footing. When the TSB and Lloyds Bank merged, although Lloyds was the bigger player, TSB took over Lloyds and thus the covenant continued. The banking group had no choice other than to accept what was already in place. (The banking group and the charitable foundations operate at ‘arms length’; at no time has the banking group run the foundations. The Lloyds TSB Foundation of Scotland is not simply the charitable arm of the bank – though the banking group itself has benefited from the public relations bonus it has received because of the foundation’s charitable work.)

Because of the size of the banking group, the funds available to the charitable foundations multiplied. Over more than a decade, the Lloyds TSB Foundation for Scotland has received more than £82 million from the Lloyds TSB banking group. The importance of these funds for the voluntary sector in Scotland can hardly be over estimated. The Scottish foundation has helped fund numerous projects up and down the country – projects which have, among other things, helped to alleviate the damaging effects of poverty in Scotland, assisted people in need of support and advice, promoted the arts and sport in grassroots communities and supported pioneering projects that seek to address the problems of alcohol and drugs addiction.

I saw the Scottish foundation’s work at close hand when I was a trustee for six years. I was deeply impressed by the transparency of its processes and the skills and commitment of its staff, now under the fine leadership of chief executive Mary Craig. The presence of the trustees, who receive no payment, means that the overall working of the foundation is constantly under examination. I was very impressed by the fact that the foundation held surgeries up and down Scotland at which they taught community groups how to apply for grants. I also learned that because of its thorough scrutiny of all applications, a grant from the Lloyds TSB Foundation could trigger other successful grant applications.

I was aware when I was a trustee that there were sometimes tensions between the bank and the foundation. Some people at the top of the banking group looked with envy at the money which was being passed on to the foundation every year. There was pressure to pay awards into Lloyds TSB bank accounts and for the bank’s marketing team to follow through on any potential opportunity there might be for business. 

Fast forward to 2009. The global financial crisis, triggered by – among other things – the avarice and negligence of big bankers, started to hit home, creating misery for many families. The Lloyds Banking Group in London saw the crisis as an opportunity to renegotiate the covenant in their favour; they sought to reduce the covenanted share of profits by 50%. 

The other three foundations agreed to the change – from next year they will receive only 0.5% of the profits. The Scottish foundation refused to accept the reduction. They won a legal battle to buy shares in the bank’s placing and compensatory open offer – this money keeps the foundation afloat. Because they did not agree to the changes, Lloyds TSB Foundation for Scotland will still receive their share of 1% of profits until the covenant ends in 2019. (The Lloyds banking group had the right to terminate the contract by giving notice nine years in advance of the termination. In the meantime, the PPI mis-selling scandal has meant that the Lloyds banking group has had to set aside £5.3b for potential claims. The situation gets murkier by the minute.) 


Concerned about the damaging effect the moves would have on Scotland’s voluntary sector, the trustees decided to fight the banking group’s move in the law courts. Lord Glennie ruled against the charitable foundation. 

The Scottish foundation’s trustees decided to appeal against the decision. Scotland’s senior judge the Lord President, Lord Hamilton, sitting with Lord Carloway and Lord Kingarth in the Court of Session, found in favour of Lloyds TSB Foundation for Scotland, and decided that the banking group should pay the foundation £3.5 million. This seemed like a victory for justice, given that the foundation’s grants helped to repair at least some of the damage caused by the reckless behaviour of the banking industry.

Despite the reputational damage caused by its actions, the banking group announced that it would appeal against the Scottish decision. Last week, at the Supreme Court in London, its appeal was upheld. The Scottish foundation will receive just £38,920 instead of £3.5m; it cannot appeal against that decision.

The long-term impact of the Lloyds banking group’s actions will be devastating. The covenant will be reduced from 1% to 0.5% of pre-tax profits. In addition to losing half of its income, Lloyds TSB Foundation for Scotland will be required to align a significant part of its funding to the banking group’s corporate objectives. In other words, the foundation will lose its prized independence as well as its exclusive focus on community needs. 

I would like to be able to say that it’s surprising that the Lloyds banking group should inflict such damage on its own reputation by effectively undermining the efforts of volunteers to alleviate some of the worst effects of the current financial crisis. But, sadly, I’m not surprised at all. 

As well as tipping countless innocent people into wretchedness, the recession has exposed hubris and venality and contempt in high places. The current crisis is spiritual as much as it is economic. The separation of ethics from finance always had disastrous consequences.

A prophet ahead of his times, Henry Duncan understood that when financial matters are ripped out of an ethical matrix, the disadvantaged and vulnerable will suffer most. It’s not a surprise to me that this visionary Presbyterian minister was a strong supporter of the movement to abolish slavery. He also supported Catholic emancipation – a move which would not have made him popular in some quarters. I would argue that he is one of the truly great figures in Scottish history – yet why have so few Scots heard of him?

No doubt champagne corks were popping in London when the latest ruling was announced. When the Lloyds’ corporate advertising boards appear at big race meetings, it will be two fingers down the throat time, given the price that will have been paid by people who have lost jobs and homes. 

I think the time has come for individuals and corporate groups in Scotland to withdraw their accounts from the Lloyds banks. As they do so, they should write to the Lloyds banking group’s central headquarters in London and explain why they are taking this action.

Such a protest will not disturb the sleep of corporate bankers with tin ears, but at least it will cheer up the volunteers who continue to help make Scotland ‘happen’, in the face of callous decisions which make a mockery of the so-called Big Society.