Oh Brother: paying the price for banking’s original sin

The rocket fuel for all of this was the money of small investors in the UK and the US. As the financial world pauses for a second from the tumult of daily trading, it may be ready to listen again to Dr John Vincent, the veteran campaigner who battled for the interests of Trustee Savings Bank depositors back in 1986 – taking the battle to the House of Lords.

If anyone has the right to say “I told you so” it is Vincent,a sprightly 79-year-old clergyman-academic. As some sort of stability returns after the Lehman-instigated meltdown, this vindicated veteran who prophesied the meltdown says that the UK must take a far more fundamental look again at how its banks deal with poorer members of society. Vincent, an academic from Sheffield, was one of the high-profile opponents of the flotation of the Trustee Savings Bank in 1986, which later became Lloyds TSB.

In a rare interview, the former firebrand told the Sunday Herald that Scotland, the country that produced Henry Duncan (1774-1846), the father of modern co-operative ­banking, was well placed to lead a return back to ­financial values that worked both morally and economically.

“The kind of action we took [over Lloyds] in 1986 – and which the Reverend Henry Duncan took at Ruthwell in Dumfriesshire in 1810 when he created the first savings bank – needs to be done all over again. We need the revival of the co-operative and mutual movement and the creation of more community and ethical banks to service local communities and people,” he says.

Vincent was a founder of the TSB ­Depositors’ Association of England and Wales, which mirrored a similar group set up in Scotland by James Ross, a retired civil servant in the ­Scottish Office. Vincent received the support of tens of thousands of small depositors who had savings in Trustee Savings Banks up and down the country and were opposed to changes in the TSB structure and its flotation on the stock market.

He added: “There is a current moral crisis facing the whole banking industry due to the fact that the money of the poor has been siphoned off into the pockets of the rich. Much of this stems back to the politicians allowing the disappearance of the mutual savings banks – and giving the clearing banks too much power and share of the market.

“With limited resources, but immense goodwill, we fought all the way to the High Court and House of Lords in London raising the basic issue that savings banks belonged to the depositors and must act in their best interests,” he says.

There are parallels between the creation of TSB as a banking plc and the repeal in the United States of the Glass-Steagall Act by President Bill Clinton. In both cases the change in the law allowed investment bankers to get their hands on large amounts of small depositors’ cash. The subprime mortgage collapse in the US and the spectacular failure of Lehman Brothers was fuelled by the Democrats’ political imperative to create a home-owning class among the poor and minority classes in America. The Glass-Steagall Act of 1933 had been a deliberate barrier for 60 years which prevented small investors’ money being plundered by large institutions taking undue risks. The announcement of the merger between Citicorp, one of America’s biggest banks, and Travelers Insurance, which controlled investment bank Smith Barney, in 1998, was a starting point for Clinton’s reform. The creation of Citigroup signalled the repeal of the Act in 1999 and the creation of bancassurance models in the US and the UK

Now with access to these safer funds, Wall Street went on a nine-year spending binge which ended in disaster best symbolised by Lehmans. Lloyds Banking Group, which is 43% owned by the taxpayer after last year’s bail-out, is now the UK’s most dominant bancassurance group.

In 1984, Sir John Read, the TSB chairman, was keen to get access to the large amount of savings held by TSB and called for a flotation. He outlined proposed legislation to change the status.

At the time, the rationale for merging all of the national trustee savings bank in 1976 was compelling. As the UK’s home ownership was booming, the clearing banks and the ­building societies were winning business and able to offer increased services, so the TSB faced drastic changes to become the “third force” in UK banking, offering cheque accounts, unit trusts, personal loans, overdrafts and then mortgages. Yet, Sir Athelstan Caroe, one of its board, had warned in 1972: “Without personal savings there could be no personal freedom. Everyone would be beholden to the welfare state for their comfort and support.”

The bill for TSB’s flotation was vigorously opposed in the west of Scotland and Lord Taylor of Gryfe, a social democrat peer, claimed TSB Scotland was a unique ­organisation ­serving its depositors and was therefore being betrayed.

This led to the bill being defeated. It was only after the TSB Scotland chairman gave Jo Grimond and other Scottish peers guarantees of the bank’s independence in Scotland and its commitment to hold annual meetings north of the Border that the bill was finally amended and approved.

An action was brought by the Scottish depositors’ association, formed in 1984, to challenge the legality of the flotation. James Ross’s complaint was that as a long-standing customer, the TSB failed to consult the depositors about the future direction of the banks. The Scottish TSB Depositors’ Association, in a paper entitled Trustee Savings Banks: The Case For Mutuality, said: “A bank run by nominees of the depositors which has staff whose paramount loyalty is to their depositors rather than trying to take advantage of that loyalty for the benefit of shareholders … such a mutual would give the public a ­different choice of bank which would complement and compete with the conventional clearing banks.”

Lord Davidson in Edinburgh ruled that the Treasury had no powers to vest the assets of TSB Scotland into a new company. He said that the TSBs were “unincorporated associations” whose assets belonged to its depositors.

But the TSB board argued it required the funds as capital to take on the other banks. At a controversial meeting, the Scottish depositors’ association opposition was defeated in a private session which was heavily criticised by the Scottish National Party.

Down south, Vincent, his wife, who was a teacher, and the English campaigners fought a similar battle.

“The TSB board delivered a writ against the English depositors in December 1983 to state that it was going to establish a bank and that the depositors had no claim beyond that of their deposits and the income accrued on their deposits,” recalls Vincent. “A local lawyer called John Howell asked me if I wanted to contest that and I said: ‘Yes, let’s try’.”

In London, the conclusion of Judge Scott was that it was true that the depositors had no more rights other than the deposits and their accrued interest, but that no other source or body had the right to the organisation that was the TSB. It was his view that it was a “nationalised” institution. This caused the Conservative government, keen for the privatisation of major public assets, great consternation. “Because the institution had been set up with public money, it was viewed as a public institution,” recalls Vincent.

The TSB board took the matter to the House of Lords and Lord Donaldson, the then master of the rolls, declared it a political matter. “The chancellor of the exchequer allowed it to go for flotation when we were still debating the issue. It was a shocking deal,” he says.

“I said at the time and I repeat now that my concern was about the small depositors who put money into savings. I wanted the creation of a people’s bank for the 21st century which would not desecrate the origins of the movement. The Tory government were desperate to find a way around the issues. It was the start of the banks having more power than the building societies or friendly societies.”

Back in the here and now, Vincent says that there is no indication that banks were willing and able to be regulated properly. They can cherry-pick customers and are neglecting their duty to provide services to all customers – who now require bank accounts to be part of ­regular life. “At the time, I met all of the senior figures within the TSB and they were keen to promise the bank’s commitment to small savers and depositors. That now appears to have been largely forgotten,” he says.

He also agrees that there has been a disastrous decline in appreciation of savings and thrift. He recognises that the merits of savings have been swept away by a more consumer society. “The alliance of socialism and Christianity which had worked to improve the lives of working people for 100 years has been totally undermined by New Labour, which has taken over the mantle of Thatcher. The churches should be speaking out about the banks, the erosion of savings and pensions. Unfortunately, the government is in the pocket of the powerful banks,” he concludes.

In an effort to heal the wounds, the TSB central board made commitments about its status as a savings bank, which included a proportion of annual profits going to the TSB Foundation, a charity with independent status. When Lloyds Bank plc and TSB Bank Scotland plc joined forces in June 1999, Lloyds TSB Scotland was born and these commitments were continued.

Shockingly, the merger of HBOS and Lloyds TSB has led to the virtual disappearance of the TSB legacy. Robin Bennett, a Fife lawyer who was a founder and secretary of the Scottish TSB Depositors’ Association, said: “If the Lloyds Banking Group is now too big, then a resumption of the old trustee savings bank values of mutuality based in Scotland is well worth considering.”

Professor Michael Moss of Glasgow University, who wrote a 1994 history of the TSB, says that the original savings bank movement set up by Henry Duncan and quickly replicated across the UK did not in fact provide deposit accounts for the very poor.

“There is a bit of a myth about this. Henry Duncan in Ruthwell 200 years ago was able to set up a bank for the artisans of labour, those with a few extra ha’pennies to spare. For the very poor, saving was not an option; they didn’t have the money for savings.”

But he also says the TSB flotation was a failure which squandered the depositors’ cash. Much of the money raised was used to purchase new divisions for the savings bank, such as a fund management wing and an insurance business.

A senior Lloyds TSB Scotland employee, who worked for TSB in Glasgow, said: “It’s fair to say the trustee savings bank culture has gone inside the Lloyds Banking Group – it has been diluted and in reality after the merger of HBOS there is little to connect it back to Henry Duncan, except for the Lloyds TSB Scotland Foundation which continues to do a great deal of good work in Scotland.”

Lloyds TSB was a prudent bank that appeared relatively unscathed by the scramble for subprime assets and CDOs (collateralised debt obligations), yet its merger with HBOS, up to its neck in toxic lending, was the final step which severed forever its link with the honourable Scottish heritage of the great Henry Duncan. The unintended consequence has been to curtail consumers’ banking choice in the UK, a disaster whose repercussions will only be judged in future centuries.

JOHN VINCENT: Prophet of Doom

What he said about TSB’s “exploitative tactics” on the road to flotation in 1986: “Immense pressure is put on depositors to sign up for investment plans, both aggressive mail advertising and selling in people’s homes. Insurance policies and unit trusts are sold to people who don’t need them.”

What happened: Such practices have been widespread in UK banking since then.

What he said: “In the past, depositors have always looked on their manager as a source of unbiased advice. This is no longer so. Many depositors are aware that now what matters most is the sale.”

What happened: The demise of the bank manager figure and the rise of the sale-led culture in UK banking.

What he said: “Managers are encouraged to allow accounts to be overdrawn so that penal charges can be triggered.”

What happened: This became another widescale practice in UK banking, with members of the public taking legal action against such charges.

What he said on salaries: “The 1984 group report shows 37 employees received over £30,000 a year. In 1985 that figure was 60. Trustees, who in the past were forbidden to receive any payment whatsoever, now draw huge salaries. The chairperson receives £40,000.”

What happened: Fat-cat salaries have become a topic of huge national interest since then.