Financial scandals wiped out 60% of Britain’s biggest five banks’profits since 2011.
According to the accountancy giant KPMG’s latest report, entitled “A Paradox of Forces,” the Royal Bank of Scotland, Lloyds Banking Group, HSBC, Barclays and Standard Chartered forked out £38.7 billion ($US57.6 billion) in customer remediation, conduct failings and fines since 2011.
KPMG warned that while conduct costs fell by 8% last year to £9.9bn, banking scandals “continue to be a major issue.”
It said that half of the costs related to financial scandal remediation went towards the compensating victims of the mis-selling of
Payment Protection Insurance (PPI) and interest rate hedging products.
Meanwhile, KPMG said that the impact of conduct costs is exacerbating the banks’ need to cut spending and restructure their units to cover its cost of capital. None of the banks surveyed achieved a return on equity of more than 8%, compared with an average 11.6% in 2009.
This is despite combined pre-tax profits reached £20.6 billion in 2014, up 62% from the previous year.
“Banks are undergoing a once-in-a-lifetime change, as they face evolving regulation, technology and society’s expectations,” said Bill Michael, head of financial services at KPMG in the report.
“At the same time, competition is increasing as new challenger banks and peer-to-peer platforms offer customers new ways to borrow and deposit and technology-led services such as PayPal and e-wallets change the way money is transferred and goods and services paid for.
“Domestically focused banking arms are focused on restructuring their business. Those with active investment banking arms face significant challenges around ring-fencing their retail and investment banking activities, which will become mandatory in 2019. The UK as a financial centre has largely been built on non-retail banking. If further regulation creates too many strictures on non-retail banking, the industry risks losing its global relevance.
“Some banks will follow a path of gradual evolution, others will opt for more radical strategic change. In the near-term, banks will continue to focus on cost control and invest in technology to improve services. While it is important to put customers first, embed cultural change and embrace technology, it will be the banks that have a clear and sustainable business model that stand the best chance of success in the future.”
KPMG added that the report “paints a picture of divergent performance across the banks as they begin to reshape their business plans. For example, profitability at the two state-backed banks continued to rise whereas it fell at the three global banks.”
Lloyds, which is 23.9% owned by the government, reported a 2014 underlying profit increase of 26% to £7.8 billion. Pre-tax profits rocketed by 325% to £1.8 billion.
However, Lloyds paid £2.2 billion in PPI-related compensation and administration charges and £900 million for other litigation-related issues.
Meanwhile, RBS, which is 81% owned by the state, booked a £3.5 billion loss in 2014 and spent £2.2 billion on litigation and conduct provisions.
This included an additional provision of £650 million for PPI redress, £720 million spent related to investigations into the foreign exchange market and £185 million in mis-sold interest rate hedging product compensation.