Banks must put ethical principles at the heart of their operations

Malcolm Hayday looks at how embracing social values can help banks serve their customers and communities better
Barclays bank
The banking industry as a whole must reform to win back the trust of people. Photograph: Graeme Robertson

Ethical banking has been part of the UK financial landscape for a decade now, but still remains a relatively small niche in the industry. As the country calls for reform of the financial sector, now may be the time for it to come to the fore as the industry standard.

The majority of people have no idea of what happens to their money once they deposit it into a bank. According to research conducted by Charity Bank last year, 78% of Britons don't know how or where their savings are invested. In the search for the highest possible returns, high street banks often use money their customers deposit to buy assets worldwide. In the case of some banks, these assets may be obtained from investments depositors may view as unsavoury – if they knew their money was funding them, that is. This lack of transparency and accountability to the communities has led to people feeling disconnected and distrustful of their banks, bankers and the financial services industry as a whole.

The strength of this backlash combined with the anger at excess bonuses and a lack of personal relationships mean that many people are looking for more ethical and transparent ways of saving and investing their money. Organisations like Move your Money are embracing these values and attracting other organisations to put their weight behind the trend, encouraging members of the public to move their savings into ethical banks and local credit unions. Banking with these organisations will ensure their money is being used to support local communities, as well as social enterprises and not-for-profit organisations.

As well as having an ethical investment policy, transparency is a key element of social banking. Ethical consumers want to see the social impact their money is making and where it is being invested. They want to be assured that their money is 'doing good'. This level of accountability should not just be the reserve of 'ethical' banks and consumers, however. Of course it helps banks like Charity Bank to differentiate themselves from the more mainstream competitors, but in an ideal world, it would be considered an industry norm.

For example, high street banks could take steps to build bridges with the communities they serve simply by publishing a list of projects they fund using their depositors' money on their websites. Such transparency would help to build trust with consumers and encourage the banks to look more closely at their own practices. If a bank were required to publish the details of more controversial projects it was funding, such as arms deals or destructive environmental practices, it might choose instead to invest its money elsewhere, rather than face negative publicity and unhappy customers!

The government has recognised that steps need to be taken to make banks more accountable to consumers, but is slow to agree the terms of how to carry out these changes. Still under debate, last year's Vickers report, for example, calls for banks to ringfence their high street businesses from their riskier investment practices. Although this is a positive step, it is still not enough. Banks should be required to be transparent in their practices not only to regain the trust of the consumers, but to hold themselves to account.

The social banking industry also sets a good example of serving communities, a value that most high street banks seem to have lost along the way. Even large, global banks can serve the local communities of their branches by re-investing depositors' money into local businesses and charities, making their services more personal. It wasn't so long ago that bank managers used to walk their customers' dogs while they were doing business in their branches. Times may have changed, but people's desire for more personalised services has not.

While there may have been a time when all that was required from a bank was to deliver the highest interest rates or financial returns, consumer's priorities have shifted. Even in the recession, reputation and service matter more than a few percentage points of interest. In order to repair the damage and mistrust cultivated in the years leading up to the crash, the banking industry as a whole must reform. Now is the time for all banks to rise to the occasion and consider a more sustainable approach to banking. If we all viewed money as a tool for enhancing society rather than purely for maximising profit, it would go a long way to restoring the industry's image. As I get ready to step down from my post at Charity Bank I would like nothing more than to see the adjectives of 'social' and 'ethical' disappear from banks – not because the principles have been abandoned, but because they had become ubiquitous in the industry and are therefore redundant.

Malcolm Hayday is founder and chief executive of Charity Bank
