UK banks must change to end customer alienation: policymaker

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By Huw Jones

LONDON, May 25 (Reuters) - Britain's banks are stuck with flagging financial returns while failing to tackle overpaid investment bankers and customer alienation, a senior Bank of England policymaker said on Wednesday.

Martin Taylor, a member of the BoE's Financial Policy Committee which sets the regulatory tone for supervising banks, said lenders may be pursuing "unsustainably" high returns on equity of 10-15 percent at a time of low interest rates.

"We are in Siberia, where many people feel bankers belong," Taylor said in a speech.

The former chief executive of Barclays (LSE: BARC.L - news) added that nearly nine years since the financial crisis started in 2007 banks are showing signs of recognising that their business models need fundamental change.

"The length of time it has taken for this penny to drop has proved very costly," Taylor said.

Behind the "improbably glossy surface", retail banks have still not rebuilt trust with customers.

"Sermons won't fix it, and nor will advertising," Taylor said.

Banks must get out of "ghastly collective jams" such as free-in-credit banking, which subsidises the better off at the expense of those who pay penalty charges on overdrafts, he said, and the overpayment of investment bankers is so baked in that it appears easier go out of business or to fire people than to pay them less.

Bankers fear that abandoning distortions that create customer alienation could create "first-mover disadvantage".

"I have no easy solutions to offer, but feel that until issues like these are confronted, customer trust will continue to elude the industry," Taylor said.

He was the second senior BoE official in as many weeks to offer a harsh assessment of banks' progress since the crisis.

Taylor joined a string of BoE policymakers to reject criticism over bank capital levels from John Vickers, with whom Taylor served on the Independent Commission on Banking to reform a sector taxpayers propped up during the financial crisis.

Vickers has accused BoE of watering down the commission's recommendations on capitalising "ring fenced" retail arms of lenders from 2019.

But the difference between what the BoE is implementing and what the commission recommended is "more or less invisible to the naked eye", Taylor said.

Vickers may have been influenced by the "atmospherics" of various commentators alleging BoE "wimpishness", Taylor added.

Reports of "ring-fenced" banks not being able to pay dividends were also "complete tripe", he said. (Editing by Andrew MacAskill/Ruth Pitchford)