There is a much better way to run a bank

If you’re thinking of moving your account to a bank that holds its customers interests above those of its shareholders or executives then you’re not alone.

Public outrage at the inter-bank rate fixing scandal is driving customers into the arms of ethical banks and building societies. The Cooperative Bank has seen a 42% uplift in new customers in the past week, while deposits at the Ecology Building Society are up by a third on last year.

In the past ethical banks may have been viewed as fringe alternatives. However, customers fed up with poor interest rates and customer service and disgusted by excessive executive pay and dubious practices are increasingly voting with their wallets.

Most high street banks, like Barclays, HSBC and Royal Bank of Scotland, are public companies and their shares trade on the FTSE 100 index. Their main obligation is to generate profits for shareholders and this can mean that customers’ interests come second. 

However, they’re not the only game in town – there are other organisations doing the same job with radically different corporate structures.

[Related link: How to move your bank account]

Mutuals

The Cooperative Bank is part of the Cooperative Group – the UK’s biggest mutual society. The group is owned by its six million customers and is answerable to them, not shareholders.

While it is still a commercial enterprise – the bank made a £69.8million pre-tax profit in 2011 – as a cooperative, it shares its profits with its members and the business is run for their benefit.

“Fundamentally we are a cooperative, so we are not a publically listed company and we are owned by our members,” explains Barry Clavin, ethical policies manager at Cooperative Financial Services.

“We reinvest our profits in the business but also in the community. Being a cooperative means [members] can have a say in how the business is run. Customers have a say in where their money does or doesn’t go, so they can have a direct influence on where we lend money.”

At the instigation of its members, the Coop has an ethical agenda, refusing to lend to companies and banks that invest in projects its members believe are unethical, such as those involving animal testing or human rights abuses. It also promotes fair trade and environmentalism and funds community projects.

Green and pleasant lands new customers

Unlike the Cooperative Bank which has been around for 150 years, the Ecology Building Society (EBS), another UK mutual, was only founded in 1981. It has just £100million of assets and 21 employees but big ethical aspirations. It funds green building projects and practises what it preaches by operating from its own sustainable headquarters in West Yorkshire.

Website hits are up 250% on last year and by 50% in the last week. “EBS is focused on the longer term,” explains chief executive Paul Ellis. “Everything we do is concerned with sustainability, so we give very careful consideration to the projects we lend on. We’re really interested in outcomes – not just making profits.”

The building society avoids giving money to banks with a history of lending which hurts the environment. Unlike some banks, it doesn’t charge for an ordinary savings account and – ex-Barclays chief executive Bob Diamond and friends take note – no executive’s salary is allowed to exceed more than five times the lowest paid salary.

EBS also steers clear of lending to individuals who cannot afford to pay the money back. “We don’t put people in a position where we make short term gains and put them at a disadvantage,” says Ellis. “There is no value to us in lending we aren’t happy with - it would destroy the franchise.”

Stronger as well as nicer

Both the Coop Bank and the Ecology Building Society believe their ethical stance makes their companies more stable and better placed to weather the bad times. “It’s our strength,” argues The Coop’s Clavin. “We believe we can take a longer term, sustainable approach and we don’t have to be as responsive to short-term pressures.”

“Back in 1992 [during the property crash] EBS had no negative equity – we avoided it completely [because of our lending policy],” Ellis points out. “And going into this crisis we didn’t have a situation where we were doing five times income loans. All of our funding has come from our members so we don’t have a dependence on the money markets.”

Other ethically-focused alternatives include Dutch bank Triodos, which funds environmental projects, the Charity Bank, which finances charities and social enterprises, and Reliance Bank, the Salvation Army’s bank, which uses profits to fund its evangelical and charity work.

Of course, all building societies (at least the ones that didn’t turn into banks) are owned and run by their members rather than shareholders. Of these, Nationwide has a market-leading current account, is the largest building society and also the only one that operates as a clearing house – meaning it doesn’t need to use a bank at any stage of the ‘banking’ process.

[Related story: Nationwide cashes in as Britons abandon big banks]

Credit unions – a community-based alternative

Some customers complain that with banks closing branches and focusing on internet and phone-based services, banking has become anonymous and less community-focused. If you find this an issue then joining a credit union could be an option.

Credit unions are community-based financial cooperatives controlled and owned by their members. Members build up a pot of money with which they provide affordable loans. Interest on loans is legally limited to 2% a month on the reducing balance. Some unions also offer the credit union current account, insurance and mortgages.  Currently credit unions manage £703million of savings for 950,000 people in the UK with over £570million on loan.

“The benefits come from owning the organisation yourself – credit unions only exist to meet the needs of their members,” explains Mark Lyonette, chief executive of the Association of British Credit Unions (ABCUL).

“Any profit is invested back into the credit union or shared out among the members, who are also the only shareholders. People are drawn to the more simple business model of credit unions, and to the fact that they have a local focus, set up by people in particular communities or workplaces to serve their neighbours and colleagues.”

Credit unions are regulated by the Financial Services Authority and covered by the Financial Services Compensation Scheme. Lyonette argues that in the USA, where credit unions are more widespread, they have been credited with “keeping the banks honest”. As such, the Government here plans to expand the credit union sector within the UK.

[Related feature: How credit unions work]

An ethical future for banking?

Even ethical banks can make mistakes. The Cooperative Bank had to set aside £90million in 2011 to cover claims over mis-sold payment protection insurance policies. “You try to do these things with the best of intentions, but it was wrong so we put our hands up and are trying to put it right,” explains Clavin.

However, the Ecology Building Society believes that ethical banking is the future. “The moral compass of our banking industry is really off-tilt,” says Ellis.

“Too much banking activity is based on short-term gain at the expense of individuals. We will see more individuals looking for banking services that reflect their values and the thrust of regulation will move us towards a more ethical-based approach.”