PREM SIKKA

Too many villages, towns and neighbourhoods are becoming bankless as major banks are shutting braches. According to Which? 2,868 branches have closed since 2015. This may boost bank profits and performance related executive pay, but is likely to turn many towns, villages and neighbourhoods to economic deserts.

Currently, the closure of a branch is presented as a fait accompli to people. Banks claim that branches are making losses, but their case cannot be scrutinised and challenged because the internal analysis of the costs and impact on local communities is not published. Under a protocol negotiated between the UK government and the British Bankers Association, a trade association representing the UK banking sector, banks are not required to consult customers before the decision to close. They do provide a twelve week notice to up sticks and tell people where the alternative services can be found.

The mass closure of bank branches and degradation of the financial infrastructure is incompatible with regulatory objectives. The London-based Financial Conduct Authority (FCA), the UK banking regulator, has a statutory duty to “promote effective competition in the interests of consumers in the markets” and ensure that “markets work well – for individuals, for business, large and small, and for the economy as a whole”. The closure of bank branches means that the financial services market is not working well as many individuals and businesses are unable to access financial services on a timely and effective basis. Access to local banking services is a key requirement for any form of competition in the sector.

We need a people-centered approach to branch closure decisions, enshrined in law rather than any voluntary protocols. Only the statutory basis gives people legally enforceable rights. At the very least, legislation should specify the following:

1 Prior to the closure of any branch, banks must undertake consultation with all customers (borrowers, savers, others) of the branch which it proposes to close. It must also consult representatives of the relevant local community to consider the impact of the decision on the local environment. Twelve weeks should be sufficient for consultation.

2 The bank must publish full details of the reasons for closure, including its financial calculations showing the revenues and costs of the relevant branch, and the impact of closure on local community.

3 The consultation process must be overseen by the FCA to ensure that it is fair and reasonable.

4 The FCA must ensure that the closure of the branch does not degrade the local financial infrastructure as that would conflict with the statutory aims and objectives assigned to the FCA.

5 The FCA’s approval should be needed for any branch closure as it needs to ensure that markets work well.

6 Upon approval by FCA, customers and local communities must be given six month notice to enable them to make appropriate arrangements.

7 The FCA should consider whether alternative facilities in local shops, post offices, village halls, mobile venues, or other places provide adequate alternatives. If so, the exiting bank must bear the cost of training staff and setting-up the alternatives facilities and access to such facilities.

8 If alternatives to branch closure are chosen then twelve months after the branch closure, the FCA and the bank must produce a report showing whether the assumed objectives have been met. If not, the bank must specify the steps that it will take to ensure that the local community is not worse-off compared to the time when the bank branch was open.

9 Aggrieved parties should be able to take their case to the Financial Ombudsman Service, if necessary, who can consider the facts and ensure that all the statutory procedures have been properly followed.

No doubt some would object to the above proposals, but they are a small return for the vast financial and political support that people provide to banks. Here are examples of social support provided to banks.

Banks, their shareholders and executives enjoy the benefit of limited liability. This gives them a licence to walk away from losses, if the situation arises, and dump them on to society. People have spent billion to bailout distressed banks. The government has printed £435 billion of money in the form of quantitative easing and handed it to over banks to enable them to improve their balance sheets. The artificially low interest rates have eroded the purchasing power of people’s savings, but have enabled banks to obtain cash, their raw materials, at little cost. No other industry gets its raw material so cheaply. The government bolsters confidence in banks by providing a deposit-taking licence, depositor protection scheme and acts as the lender of the last resort to ensure that banks have liquidity. By routing pensions and welfare payments through the banking system, the government has directly expanded the customer base of banks and enabled them to sell financial services to millions of customers.

In return, all that is asked is that banks behave responsibility, listen to their customers, be transparent and consider the impact of their policies on people. Not much to ask, is it?

Prem Sikka is professor of accounting and finance at the University of Sheffield.