How Lloyds Banking Group is restoring trust Article icon


It is only when directors reject a business opportunity because its long-term impact may ultimately outweigh any short-term gains that you can truly say reputation is on the boardroom table, says Matt Young, group corporate affairs director of Lloyds Banking Group.

He should know. Perhaps more than any other high street bank, Lloyds Banking Group understands the legacy of past business choices. Its board has seen the long-term consequences of its predecessor’s decision to sell poorly structured financial products unsuited to customer needs.

Lloyds Banking Group has spent the past three years under chief executive António Horta-Osório settling compensation claims totalling more than £8 billion related to the historic misspelling of payment protection insurance policies (PPI). The final bill is expected to reach £10 billion.

And a further £530 million was recently set aside to compensate small business owners that had mis-sold interest rate hedging products.

When Young arrived in February 2011 with Horta-Osório, his former boss at Santander, the bank was still reeling from its ill-advised £9 billion acquisition of rival HBOS in 2009. The overambitious deal led to a Government bail out, leaving 43 per cent of Lloyds Banking Group, comprising Bank of Scotland, Halifax, Lloyds and TSB, in state hands.

It has been a tumultuous three years. The bank reported annual pre-tax losses of £3.5 billion in 2011, but progress is being made. Last year, it generated pre-tax profits of £415 million. TSB was spun out as a stand-alone banking operation, and recently completed a successful flotation.

‘We have achieved a lot of things,’ says Young. ‘When the Government is able to sell our shares at a profit, then that will be a key moment. And we will see the taxpayer getting their money back.’

It was one of the challenges that encouraged him to take the role and, to some extent, is already happening. The sale of a six per cent stake in Lloyds Banking Group last year raised £3.2 billion, generating a £61 profit million for the Treasury, while a further sale in March raised £4.2 billion, again returning a small profit, and took the Government’s stake to just below 25 per cent.

It is expected that the Government will offload its remaining shares before the next election, so there’s still much to be done.

Young explains: ‘We are trying to transform the bank back to what it used to be, when it stood for good banking values and its employees and customers had pride in the institution.’ The bank currently employs about 91,000 staff and has more than 30 million customers.

It will take a generation

Much will depend on restoring Lloyds Banking Group’s reputation, and while improvements have been made, Young is under no illusion about the scale of the challenge. ‘I have said all along, that this is a generational thing,’ he says. ‘It will take a full generation to change the perception of the UK’s financial services. As in all things in life, there is no easy cure. There is no magic bullet. But a good reputation is dependent on thousands of small things all being done really well. It takes a long time to build a good reputation, but you can kill it very quickly.’

So how does he define reputation? ‘It’s a perception among stakeholders from are we contributing to society to are we, as an institution, doing the right things to the personal interests of our customers; are we providing them with the right products and service?’ explains Young.

It’s also about behaving appropriately. For example, Lloyds Banking Group had long committed to sponsoring London 2012, including the Olympic Torch Relay. But its new circumstances meant a different approach was necessary: four star hotels for guests, rather than five; using public transport rather than priority traffic lanes, and driving a converted vintage coach rather than a fleet of state-of-the-art vehicles like those used by fellow sponsor Coca-Cola.

Companies that routinely ignore their reputations or don’t take the issue seriously ultimately pay the price with higher – and more intrusive – levels of regulation. There are other opportunity costs. Poor reputation and low trust levels requires extra money to be spent on marketing and public relations. ‘There are always consequences,’ says Young.

‘My job as the corporate affairs director is to advise the board on reputational perceptions. I have to make the board aware that committing to take this action today might have these impacts. You know that a board understands the importance of reputation when they are prepared to leave an idea on the table for long-term sustainable earnings. They are prepared to leave money on the table and not do something in order to protect the reputation of the organisation.’

Young believes that the sector’s historic focus on short-term gains has been responsible for the growth of another industry – the claims industry. ‘We offered subsidised loans as loss leaders to get the customers in, and then we sold them PPI policies, which were highly profitable. It was all about cross-selling other products. We were the first bank to start paying out compensation on PPI after we came to the conclusion that it was not a good product, it had not been sold very well and because it was the right thing to do.’ It was one of the first ways to publicly show how the bank was changing.

‘We initially set aside £4 billion to cover PPI mis-selling claims. Today, we expect to pay out around £10 billion and the Financial Conduct Authority estimates it will ultimately cost the industry more than £20 billion.’ To put that number in context, it is enough to pay for the London 2012 Olympic Games twice over. ‘It is right that we clean up the sins of our past,’ says Young.

But while restoring Lloyds’ reputation is the focus of his role, Young has a problem with the term ‘reputation management’. ‘You steward reputation. You don’t manage it. Reputation is dependent on other people and how they perceive it. You can’t manage millions of different stakeholders,’ he says.

‘The board are the guardians of the business. They are looking after its long-term future. We have an open dialogue, and there are disagreements, but our board and our management team get it. They can see the consequences of not doing the right thing. Higher trust levels and a better reputation give you the licence to operate.

‘Reputation has to be the first thing discussed at board level at every meeting. We want to be different from the others [banks]. We have to consider the role that reputation plays in facilitating that.’

Customers are central to Young’s strategy to rebuild Lloyds Banking Group’s reputation. With more than 30 million customers, this is an ambitious project but Young says: ‘It is about doing the right thing for customers. There was a feeling in the past that banks didn’t have the customers’ interests at heart.’

While the recent mis-selling scandals may back that perception, Young also believes that the financial services industry used terminology that suggested customers were viewed as sales targets. ‘We used to talk about ‘share of wallet’, ‘up-selling’ and ‘cross-selling’. Those phrases should be consigned to the bin and the industry needs to change its language,’ says Young. ‘We should be thinking about what customers need and how do we fulfil those needs.’

When it comes to financial services, this may mean changing the product range to suit changing demographics. Many products are designed for the ‘average’ family of 2.4 children with a retirement age of 65. Today, the rise of single person households, a falling birth rate, multi-culturalism and people living longer means that products that may have been suitable 40 years ago are no longer appropriate. The recent changes to annuity rules, for example, throws into question the products available for people coming up to retirement age. ‘The industry is not programmed to do this,’ says Young. ‘We have to look at new products. We have to be more flexible.’

How to measure reputation?

When it comes to measuring Lloyds’ reputation, Young employs a mixture of metrics. ‘It is very granular. We measure different audiences, such as customer and media, and look at a whole mixture of things such as focus groups, customer feedback, surveys, analysts’ notes, media coverage and social media. Whenever we are mentioned, we pick that up and assess it. We are looking at how we are seen in terms of trust and reputation.

‘We are mentioned about 200,000 times a month on social media. We analyse these comments. We are looking for where we can make changes to alter perceptions. Social media is a real step change in how companies can view reputation.’ Social media discussions allow the bank to pick up local issues and to feed those back to individual branches or regional management in order to solve the problem.

Lloyds Banking Group has developed a proprietary model with which it can assess its reputation, the long-term trends and any short-term distortions. ‘I am somewhat sceptical about any diagnostic approaches. I think they have too much volatility,’ says Young. ‘But our reputation is part of my balance score card, as it is for the members of ExCo [executive committee] and the chief executive.’

He adds: ‘The real task is to measure reputation to the nth degree. We have to look at whether changes are real and to feed back what that might mean to our businesses. We have to look at our reputation analysis and ask whether it requires us to change some aspects of our business.’

Young likens the process of measuring reputation to calculating the quarterly results of the bank. ‘There is a great deal that we have to process. There may be a whole series of one-off distortions, and I have to say Look at the long-term trend. If an ATM isn’t working or our network is down, it might affect reputation for a 48-hour period. We need to decide which of these issues might have longer-term issues. We have to look for points in the cycle where we need to be vigilant.’

The trend, he says, is rising, admittedly from a low base. It is not only Lloyds Banking Group that is benefiting. External surveys, such as the Edelman Trust Barometer and Reputation Institute’s annual RepTrak barometer, suggest public faith in financial services is returning. ‘There’s a long way to go. This will take ten years; it is not an overnight phenomenon,’ says Young. ‘But the key statistic that keeps emerging is that customers see the banks as critical to the economy. They want the recovery. And so we are starting to see incremental changes.

‘Reputation is likened to personal experiences. Customers separate their own experiences at the local branch from the bigger [media] picture of pay and bonuses and greedy banks. The customers hold us to a contract. They constantly tell us that if we get the basics right and do them well, then that is what is important. There is no magic bullet. It not about donating lots of money to philanthropic causes – our customers say it’s great that we do that, but it’s what they expect us to do – but they want to see the ATMs working 24/7, that we offer them the right products, that their direct debits and standing orders go through when they’re meant to and that their cards work when they are offered.’

Customers are responding

The bank’s reputation will only truly be restored when its customers receive the service they demand. Its own internal measures suggest customer satisfaction is rising. Last year, Lloyds Banking Group made a very public pledge to reduce customer complaints. Complaints to the Financial Conduct Authority now run at one per 1,000 customers, the lowest of any UK high street bank, while its net promoter customer advocacy score – in other words, asking customers if they would recommend Lloyds to their friends – rose 11 per cent.

Lloyds’ customer surveys now also consider other brands who have built a reputation for customer service, such as John Lewis, Amazon, QVC and Marks & Spencer. ‘Our customers keep saying to us Do what banks do, but just do it well. We have to keep delivering high quality customer service and products. Our biggest competition is not from other banks any more, but companies like Google, Paypal and Apple. They also understand data and relationships better than financial services companies.’

Asked which banking brands he admires, Young doesn’t hesitate. America’s Wells Fargo – ‘they have stuck to their knitting; they are a retail bank and it is all about their customers’ – and Australia’s Commonwealth Bank, which invested heavily in technology and computer systems, at a time when competitors were cutting back to boost the bottom line. ‘The board was prepared to put money into the business and to say We have a long-term view of where we want to be and what we want to offer our customers.’

It seems that now Lloyds Banking Group does too. ‘We want to be the best bank for our customers,’ says Young. The journey is well underway.