Critical discourse analysis

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CBI Scotland Annual Dinner 2012

6 September 2012

António Horta-Osório Chief Executive, Lloyds Banking Group plc

Good evening everyone. Thank you so much for coming this evening.

I am delighted that Lloyds - through Bank of Scotland is once again

supporting the CBI’s annual dinner in Scotland and it is an honour for me

to address such a distinguished audience from the Scottish business

community at Scotland’s premier business event.

Scotland is a major focus for Lloyds Banking Group. The country is

home to some of our most important businesses and to nearly 20,000 of

our employees.

Being from Portugal I have a strong affinity with Scotland. We too are a

small, proud nation although I appreciate there are small differences in

the weather.

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Like me, I am sure, you are looking forward to hearing both the

Chancellor and John Cridland speak this evening.

But given recent events, I wanted to say a few words about why the

banking sector has found itself in such a state – and what I believe we

must do if we are to win back the trust of our customers.

Let me start by saying that I am - at heart - a retail and commercial

banker. Retail and commercial banks should be simple and they should

be boring. You might surmise from that statement that I am simple and

boring. I couldn’t possibly comment on that but, as long as I am Chief

Executive of Lloyds, which is a retail and commercial bank, we will

strive to continue being simple and boring.

For me that means dependable, prudent, safe and trustworthy. I think

these are qualities that the great Scottish bankers of the past would

applaud.

Retail and commercial banking is about supporting the UK economy,

ensuring payments, taking care of people’s deposits, and transferring

those deposits in a prudent way into lending for businesses and for

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people buying their homes. Day in day out, customer by customer, in the

communities we serve, we try to do the right thing.

At Lloyds we serve over half the UK’s population. We have a financial

relationship with nearly every home and support millions of companies,

large and small. And that is the most compelling reason why I joined as

CEO eighteen months ago: Lloyds has one of the biggest impacts on

people's lives.

Therefore I believe we can and will make a real positive contribution to

the economic and social wellbeing of this country.

That is why we are focused on lending to SMEs, the lifeblood of the UK

economy. In the past year our net lending to SMEs increased by 4%

whilst the market shrunk by 4%. By the end of this month we will have

lent all of our allocation - £1.4bn - under the National Loan Guarantee

Scheme, and it is why we have provided over £5 billion, 1 in every 4

mortgages, to first time buyers so far this year.

This is also the reason why I am committed to ensuring Lloyds plays a

full part in passing on the benefits of the recently announced Funding for

Lending scheme to our customers. I am convinced the scheme will

provide a boost to economic growth in the UK and I would commend the

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Chancellor and the Bank of England in the ambition they’ve shown in

creating the scheme.

I want Lloyds and the great businesses it owns to be a source of pride

for our employees. We can only do that through regaining the public’s

trust. The banking industry has done itself no favours in this respect.

Issue-by-issue and scandal-by-scandal the faith and trust in our industry

has been eroded. Why? Because I believe that many banks lost sight of

their core values and became complacent, non-customer-focused and

inefficient:

First, in the run up to the crisis several banks were complacent about

risk, running unsustainable business models and extending credit to

doubtful clients or countries without due thought.

Second, many banks lost their focus on customers. They have branch

opening times built around their convenience. They have closed small-

town branches without considering the impact on the local community.

And the sector generates a level of customer complaints that few other

industries would tolerate.

Finally, several banks became bloated and grew their cost bases so they

had to chase revenues to outpace cost growth. That meant more

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complex products that many customers didn’t need or understand, whilst

incentivising employees to sell them in volume.

This all happened in a context where core banking practices were

progressively relaxed and subordinated to financial short term gains.

This has to stop.

In the absence of trust, banks do not function effectively, undermining

the vital role they play in the economy. We must remember that the way

we see ourselves is not always the way others perceive us. This

perception is critical as the future of the banks and the economy are

inextricably linked. I believe there are no strong economies without

healthy banks and healthy banks require strong economies. Therefore

the industry must change. We must recast the banking model.

The example needs to come from the top, having leaders with the

highest integrity and values, who think and act for the long-term. As the

late moral philosopher Philippa Foot brilliantly put it “one shouldn’t think

that morality must pass the test of rationality, but that rationality must

pass the test of morality.” This illustrates the task we face in the industry.

At Lloyds we will take a zero tolerance approach to issues of

inappropriate conduct, as I have made very clear since I joined. And we

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will ensure our staff uphold the highest ethical standards, are well

trained and are appropriately incentivised.

I have always believed that reward and incentives are a vital influence

on how people behave. In recent years the structure of variable pay in

banking has focused too much on sales targets. This has had a

detrimental impact on behaviour, in part contributing to the problems the

industry has experienced with mis-selling, in the case of retail banking.

This is an unsustainable model. It’s as simple as that. Banks cannot

continue to write profits today that we have to pay back at a later date.

From the top, our focus will be upon ensuring pay is increasingly linked

to the long-term performance of the bank; it must align the long-term

interests of management and shareholders; it must be transparently

linked with success and be capable of being clawed back where

decisions turn out to have damaged the bank’s performance or

adversely affected customers.

For customer-facing employees we have more to do but we have

already linked reward with effective controls on risk, better outcomes for

customers, and far less emphasis on sales targets.

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Underlying all of this, as I have already said, there needs to be a

complementary set of values and a culture that permeates throughout

the organisation, reinforcing the behavioural standards we expect.

These are my values and they are the values that I’ve asked our staff to

live by: an absolute focus on your customers, meritocracy in managing

your business and always to lead by example.

These values need to be supported by simpler, transparent products and

processes, designed from the customer’s point of view. This will, in time

make us more efficient and is a fundamental part of our strategy that we

announced in June last year; as it will allow us to provide better and

better value for money to our customers, creating a sustainable

competitive advantage, and therefore increasing shareholder value.

For example in retail banking, Lloyds is at the forefront of efforts to

increase the transparency of personal current accounts and in

transforming the account switching process. For small businesses, we

are piloting a new process that gets loans into business accounts in half

the time. And in complaints I have committed us to public targets that

are already reducing levels dramatically and ahead of our peers. We

have much more work to do in this area but by becoming a simple and

transparent bank we will make progress.

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We also have to put things right, as we did in the case of Payment

Protection Insurance, PPI. Lloyds was the first bank to break ranks and

provide certainty for customers by offering compensation to those mis-

sold PPI. That was a very expensive decision but it was the right thing to

do.

All of this should lead to a better banking industry in the UK. I have said

many times that I believe the UK does not need more banks; it needs

better banks. Furthermore, it needs to ensure that tax payers’ money is

never again used to prop up a failing bank. Failing banks should be

allowed to fail, like companies in any other sector; that’s the essence of

capitalism. But with that comes the obligation to ensure deposits are

appropriately protected.

The Independent Commission on Banking led by Sir John Vickers

recommended a bold proposal that separates retail and investment

banking through a ring fence but allows them to co-exist under the same

universal banking group umbrella.

Ultimately, it will allow shareholders to see if sufficient advantages still

exist from the universal model. If not, they can demand that they are

spun-off.

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We were the only bank that supported ring-fencing through the

Commission’s consultation. I am convinced that Lloyds should become a

ring-fenced bank and ahead of the current 2019 deadline.

Ring-fencing will be a boost to trust in the industry. It will deliver a much

greater cultural distinction. Retail and commercial banks are culturally

very different from investment banks. And, together with higher capital

requirements, better supervisory, recovery and resolution mechanisms,

this will solve the “too complex to fail” issue.

However, we mustn’t be complacent. There will be many other issues

we will have to deal with as we attempt to put the problems of the past

behind us. I am committed to cleaning up our legacy issues and to

minimising errors in the future.

We are not and will not be perfect, as reality never is. As I say to my

teams the only person that does not miss a penalty is the one that

doesn’t play football. But I do expect them to get 9 out of ten things right

first time. And to fix the errors as quickly as possible, or escalate

immediately if they can’t.

I believe Lloyds is different to the other big banks. It has a customer-

centric culture. It sits at the heart of nearly every high street in Britain.

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And our people want to do the right thing for customers. Those are solid

foundations upon which to build a bank you can trust and one that its

employees are proud of.

We must also break with the culture of the past and work with our

regulators to ensure the right outcomes for our customers. It cannot be

in anyone’s interest to enter into the long, legal disputes of the past. Now

is the time to move on.

As the new regulators come into being next year, we can forge a new

relationship. Banks must be given clear and sensible boundaries in

which to operate. They must be capable of failing in a way that protects

customers’ deposits and does not require tax-payer assistance, as in

any other industry. I have always believed it is in the interest of healthy

banks to have strong, sound and constructive regulation.

The challenge is to strike the right balance between enhancing financial

stability and not going too far to the extent that innovation and

competition are hindered, and credit is not properly extended to the

economy.

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And, in relation to conduct risk, the regulator has to have the courage to

take pre-emptive action so we avoid costly and subjective retrospective

actions as we saw with PPI.

In conclusion, it will take practical deeds, not words, over a sustained

period to rebuild trust in banking. As you know reputations take years to

build and can be destroyed overnight. There are legacy issues that the

industry must deal with effectively and as quickly as possible. Ultimately,

we can reach the point at which trust is rebuilt to the extent that we

develop a sense of mutually beneficial partnership with customers,

businesses and society.

A trusted and healthy banking industry can then play its full part in the

economy, helping to sustain a virtuous circle of business growth, job

creation and wealth generation. That is what we are here to do.

Personally, I am optimistic and absolutely committed to changing Lloyds.

It will be a long journey but it will be worth it. To do this we must return

the bank to profitability. That will allow us to provide further support to

UK businesses and households on a sustainable basis.

The good news is that by doing all these things we will ultimately give

you, UK taxpayers, the opportunity to get your money back.

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You have my personal commitment on this.

Thank you.