Remediation... bring out your dead

As the frosts of winter really begin to bite, many of the mammoth remediation programmes surrounding the mis-selling of interest rate hedging products (IRHPs) are nearing their end. Since the problem was first brought to the attention of the regulators in 2012 over 14,000 customers have been offered redress with over £1.5 billon having been paid out by the banks to date*; and rarely a day has passed without some kind of sensationalist article, news story or television programme on the topic. Given the sheer scale, cost and notoriety of these projects, one might expect to find an element of 'remediation fatigue' within the nation's financial institutions. Surprisingly, this is not the case.

Whether driven by a sense of moral obligation, the fear of regulatory reprisals, or a desire to regain the trust of the general public, many firms are leveraging their IRHP ‘SWAT teams’ to embark on new and ambitious remediation programmes. This recycling of resources has a number of benefits for the banks, the regulators and even the average man on the street.

Firstly the trend towards leniency for those institutions that first bring to the attention of the regulators any instances of misconduct, operational failures, or errors in which they are implicated, has incentivised the discovery of historical failings of every imaginable sort. By anticipating the next big scandal, banks can save billions in fines and spare themselves the reputational damage caused by embroilment in such things. This 'race to report' is intensified by the granting of ever-greater powers to both national and international regulators in the wake of the financial crisis of 2008. Of course, for those ‘first-past-the-post’ there is also the occasional added bonus of inflicting a gargantuan fine on one or more of their competitors!

Another key instigator of this rash of remediation is the public's increasingly negative perception of banking culture. With ‘banker bashing’ rife and public confidence in the financial sector at an all-time low, there are huge profits to be made by those who succeed in becoming (or at least being perceived to have become) an ethical bank. At the very least this will help firms retain existing customers, and it could even help them to attract new ones. This is increasingly important at a time when customer loyalty is in decline and regulators are seeking measures to make it easier for customers to switch between service providers.

Finally, there is the matter of financial expediency to consider. In order to resolve the IRHP affair, firms had to invest heavily in sourcing armies of highly skilled people and implementing systems especially tailored for the task at hand. Once disassembled, it will cost the banks a great deal of time and money to mobilise such teams. Surely then it's better for them to leverage all of the benefit they can from these projects while they are still alive?

To do this makes perfect sense, within reason.

Regardless of what their motives might be, firms need to solidly define the scope of these remediation projects. Those that fail to do so risk getting caught in a never-ending cycle of remediation, using valuable resources that might be better spent ensuring that future errors and /or breaches do not occur. Equally, we (the public) need to decide what exactly it is that we expect from our financial institutions. Should banks really be expected to invest in countless remediation projects stretching back decades in order to compensate for every historical error, many of which may be from a now non-existent company that was acquired, or may ultimately have been caused by one person's honest mistake?

Whilst all organisations and individuals should certainly be held to account for any instances of fraud and /or misconduct, it is unrealistic and unreasonable to expect them to compensate for every mistake they have ever made. Given their long histories and the scale of their operations, it is inevitable that most banks will have at some point encountered an operational error or two. Perhaps the most pragmatic approach to righting the wrongs of the past is to deal with these as and when they arise, either though BAU processes or regulatory inquiries. Personally, I would like my bank to concentrate its energy on making sure that it does not make such errors in the first place.

In the end customers will tend to choose their bank based on the reliability and quality of their products and services, not the effectiveness of their remediation processes. After all, prevention is better than cure.

* http://www.fca.org.uk/consumers/financial-services-products/banking/interest-rate-hedging-products