Banks look to the blockchain and Barclays' website woes

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Welcome to Banking Weekly from The Financial Times. With me, Martin Arnold, the FT's banking editor. Joining me in the studio is Emma Dunkley, our retail banking correspondent, and Caroline Binham, our financial regulation correspondent. While we'll be joined over the phone by Ben McClanahan, our US banking editor, and Lee Braine of Barclays.

First, we'll be discussing how some of the world's biggest banks have teamed up to develop a new form of digital cash for financial markets, based on blockchain technology. While, at the same time, Chinese regulators are warning about the dangers of blockchain based cryptocurrency fundraising schemes, known as initial coin offerings. Then we'll hear about how Barclays has upset hundreds of thousands of customers by moving them to a new stockbroking website that is being plagued by glitches. And, finally, we'll hear about Wells Fargo's latest embarrassing admissions in its fake account scandal.

So firstly, to blockchain technology and news that big banks are teaming up, and six of them have joined a consortium to develop a new form of digital cash that they hope to launch next year for clearing and settling financial transactions over the technology that underpins Bitcoin, the world's biggest cryptocurrency. Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG, and State Street have all teamed up to work with on this utility settlement coin, created by Switzerland's UBS to make financial markets more efficient.

Joining me to discuss this is Lee Braine, who works in the chief technology office of Barclays investment bank.

Lee Braine, you are part of the chief technology office in Barclays Investment Bank, and Barclays is one of the six big banks that has joined the so-called Utilities Settlement Coin Project, that was founded by UBS, to use blockchain technology to create a digital currency that makes financial markets more efficient. Tell me how this blockchain technology will work, and why is Barclays interested in it?

Well, Barclays is involved in evaluating many financial technology innovations. So recently, in the distributed ledger space, we've been collaborating with consortia and institutions, whether that be ISDA, DTCC, et cetera, and exploring and evaluating everything from blockchain standards to including smart contracts and distributed ledgers for the capital market space. So the Utility Settlement Coin Consortium, we've been following that for about 18 months, and we joined it last month.

There are a few potential benefits that appeal to us. At the core of it was the idea of the potential to shorten the settlement lifecycle. So this can permit a number of potential improvements. So, for example, to capital efficiency, you have less funds tied up during the settlement process, and also for risk reduction, in terms of counterparty credit risk et cetera.

So it's more certain and quicker, as well, in having it on blockchain technology, rather than the existing payments and settlements and clearing technology, or the systems that we have currently?

Indeed. That's the promise of the technology, because you need to bear in mind the current capital markets ecosystem, if you look at the technology landscape, includes a lot of work arounds, because settlement finality is not instant. And one of the potential features of this utility supplement coin, it's starting with cash, is to allow instant settlement finality.

Yeah. And is it right that it's essentially a way of getting the cash that sits on central banks into digital form, so that that cash can be switched almost instantaneously between financial market participants? Is that how it's going to work?

Well, the transfer of the token, between two institutions, should be the equivalent of achieving legal settlement finality. In terms of the nature of the coin, regarding its issuance, that there are a spectrum of options that have been explored in the last few years, ranging from a central bank itself issuing a digital currency-- and there's a lot of research in that space, for example, universities produce prototypes on behalf of central banks-- right the way through to commercial banks issuing their own tokens, and you consider that as a type of emoney. And then, at the more extreme end, you can imagine virtual currencies that are not backed by any state. So there's a range of design options--

Like Bitcoins?

--in that. For example. So we're able to look at those range-- or that range of options, and select the design features that are required to support the capital markets settlement. And, in that space, we accept that it will be quite a few years before central banks could be in the position of issuing their own digital currencies. So therefore, we would look for them to be issued via an alternative means, and yet be able to still retain settlement finality, because they're assets that are backed by funds at a central bank.

Yeah. So you're not creating new currencies. You're taking existing currencies, and putting them all on blockchain technology, so that they can be moved around faster.

Indeed. So that each token is linked to a corresponding central bank's fiat currency. So you could imagine a utility settlement coin dollar, a utility settlement coin euro, pound, and so on. So that's the nature of the concept.

And when this launches, in the first instance, it won't be as, you know, the fully fledged putting of the whole of financial markets on blockchain technology. It'll be quite a sort of staggered launch, and initially just be for payments between financial institutions. Is that right?

Indeed. So if you consider a roadmap view, starting with the simpler transaction types, so a pure cash payment transaction would probably be the initial transaction type. But we do understand and accept that, in order to have broader adoption, you'd need to move into other asset classes, as well. So the idea being that in order to get the benefits of the instant settlement across more transaction types, consider, for example, a delivery versus payment, where you would have both a cash leg and a securities leg. You would get the benefits when you're able to atomically move the two transactions--

Yeah.

--the two legs at the same time.

But then you have to have the securities, like bonds or equities, on blockchain themselves. And that hasn't been done yet, so that might take some more time. Hm.

Indeed. So I would say that's much further in the future to have other asset classes, also represented in this tokenised way, that are suitable for atomic swap.

Lee Braine, of Barclays Investment Banks Chief Technology Office, thank you very much for talking to us.

Thank you.

Now, Caroline, it's interesting that banks are doubling down on blockchain technology, and teaming up to develop the potential for this technology. While, at the same time, regulators are coming out and warning about a different use of blockchain technology, which is the initial coding offerings that have spawned a new form of fund raising, and seen many small companies-- many technology companies-- come out and raise vast amounts of money by issuing these tokens on blockchain. What's the latest that's happened in China? Tell us about that.

Yeah. So the Central Bank of China, on Monday, came out and sort of went one further than other warnings that we've seen from regulators in the states and others. They came out and just said, well, these ICOs, these initial coins offerings, are illegal, and they suspect that they're being used as sort of shadowy way to raise finance.

They've told issuers that have already gone ahead with ICOs to refund investors. They haven't exactly specified how that would be. And they've said that they'll crack down on any feature ICOs. So it's really the starkest warning that we've heard yet, as authorities around the world try to crack down on what really has been a bubble this year in ICOs.

The authorities in Hong Kong, quite soon after the Chinese authorities, came out with their own warning. They weren't quite as robust in their attack on ICOs. They followed more the line that the American Securities and Exchange Commission has said, earlier this summer, which is essentially that, in their view, ICOs likely would fall under the remit of them as a securities regulator. They're securities rather than commodities, in other words.

Yeah, and until they are classed as securities around the world, and therefore subject to all the financial regulation that that applies to securities offerings, they're pretty much totally unregulated. So you've got companies that are raising this cash in return for these-- the investors in these tokens are getting no rights in the companies. There's very little disclosure necessarily. It can all be very vague. Some of them are, you know, really quite extraordinary things. I mean, there's one which is a Ponzi ICO, which, I mean, is surely just going a step too far, isn't it?

Well, I think there's certainly a regulatory grey area here. And I think the issue has been that you see a lot of tech challenges coming into this finance space thinking that they can do things better and easier, and it's a brave new world. When, actually, when you boil it down to some of the practises are the same as you see, as you rightly said, to essentially what's a Ponzi scheme, and where we've had decades, if not centuries, of regulation to ensure that sharp practise is eradicated as much as possible and investors don't lose their shirts. So I think we've got this interesting tension right now, as we see challenges come into this fintech space as to how the regulators really deal with it. And, yeah, I think, until perhaps there's a more global concerted effort to label what these instruments actually are doing, then perhaps there still will be a few questions to be answered.

Meanwhile, the price of Bitcoin bounces around--

Yeah.

--to reflect all of these things.

Yeah.

The latest moves in China have hit the price.

Very, very much. I mean, the interesting thing about Bitcoin is that it tends to be a sort of safe haven asset, similar to gold. So you see gold and Bitcoin rising in price in times of geopolitical strife, things like that. And you would think that this week, with everything that's going on in North Korea, that would also be the case. But as we saw earlier this summer, when the SEC first came out with its warning about ICOs, Bitcoin has really been hit hard by the Chinese statement on Monday, and that's continued through this week.

Yeah. Thanks, Caroline.

Now, turning to Barclays. Emma, you're here to tell us about how hundreds of customers, who-- of Barclays stockbroking service-- have found they've been transferred to a new online service that Barclays has launched, that they hoped would have a broader appeal, but it seems to be plagued with all kind of glitches. And now many of the customers are complaining that they can't even leave the service very quickly. They're having to wait weeks and weeks to get out of this service. What's happening?

So Barclays launched a new DIY investment platform, which is essentially an execution only investment site, to replace its 30-year-old stockbrokers business unit. So this new site, called Smart Investor, was launched over the bank holiday weekend, but it was instantly hit with many problems. So, for example, a number of customers complained about the fact that they were receiving error messages. They also complained about the fact that they couldn't get through to the customer services team. The customer services team said were open until 7:00, but in fact it closed at 6:00. And there are many complaints that came through.

A number of customers have also complained about the fact that the new pricing structure means that if you're a frequent trader of stocks and shares, as many of our readers are, then, in fact, you're going to be facing higher prices. And the move by Barclays is aimed at rolling its investment service into the retail bank, so that more of its customers will likely be buy and hold fund investors. So, arguably, a lot of customers will receive lower charges, but those traditional share dealing customers will face higher fees as a result.

So we've seen a number of customers looking to move. And as a result of this bottleneck, Barclays has been hit with a number of delays in providing the transfers for these customers to rival platforms. Some customers have said that they were told by Barclays that they could face a transfer time of up to three months, which is, I think, three times longer than the typical time frame.

Is this another story of banks trying to modernise and embrace the new digital disruption era of robo advisors, et cetera, and ending up getting it wrong?

I think this is more a case of Barclays attempting to get more of its retail customer base to use its DIY investment service. It realises that many investors are perhaps too scared to dip their toe into the share market, but they're more likely to buy funds and be longer buy and hold investors. So in that regard, by rolling in the separate business division into its retail bank, it's likely to expand its customer base, but also it can save on costs by removing this separate stockbroker's division.

But the move does-- the move has agitated many of its customers, that have been with stock brokers for more than 30 years, who do focus on trading shares and more complicated exotic types investments, who now find it costlier to do so. And also a bit disgruntled about the new site and its functions, which are more geared towards longer buy and hold fund investors.

Presumably, the robo advisors, and the other fintechs that provide this service, will be licking their lips at Barclays difficulties. Thanks, Emma.

Wells Fargo has announced that it's uncovered nearly 70% more potentially unauthorised accounts than originally thought, dealing a fresh blow to the big US bank that struggling to shake off the effects of this scandal that erupted a year ago. Joining us to discuss the latest developments is Ben McClanahan, our US banking editor.

Ben, why is Wells failing to get a grips on this scandal?

Yeah. Hi, Martin. I think-- I don't think the bank is taking it sufficiently seriously. I think that's the core of the problem.

Just a few months before all this blew up, I went to see John Stumpf, in May of last year, and, of course, I asked him about the sort of groundswell of press reports about a potential scandal brewing. And he seemed to think it was no big deal. He talked about, you know, less than 1% of staff affected and a legacy problem, and the vast majority of people at Wells Fargo are turning up every day determined to do the right thing.

I don't doubt that's the truth, but the problem is he had 5,300 senior managers sacked for straining illegally to hit sales targets that the bank now accepts were illegitimate. So you got the rest of the vast bank, 99% of people, also set at similar targets, and also under enormous strain to hit them. So it seems to me it's a deep seated cultural problem the bankers just failed to get to grips with.

Of course, it's booted out Jon Stumpf, it's booted out the chairman, which-- who replaced, well, effectively, John Stumpf for a year. Quite a few senior executives who have gone; they clawed back pay and so on. But still, there is a constant drip drip of other scandals potentially brewing.

In that story, I talk about the auto insurance enrollment, which is a bit like the UK PPI scandal. You know, people signed up for cover that they didn't necessarily need and necessarily didn't want. There's another one about locking in rates for mortgages, which the bank will do for a fee, and then it will apparently delay and delay and delay until you're forced to pay another fee for extending it. So it's a top to bottom problem, I think, which certainly wasn't recognised at the time it blew up.

Sounds like a pretty deep seated cultural issues there. How bad do you think this could get for Wells? And are other banks under scrutiny for similar behaviour?

Yeah. Well, how bad for Wells? Well, it's certainly not getting better, on a day to day basis. I was looking at the valuation premium that Wells used to have of the rest the big US banks, and in price to book terms, Wells used to have a 60 basis point, you know, advantage. That's now down to 12, and I can see it vanishing completely.

And is that because of anticipation of fines, or because of their losing customers?

I think it's business model, which was thought to be, you know, a cut above the rest. Wells seemed to have a magic that the others didn't possess, you know, the ability to sell six or seven products to the same household without overstepping any boundaries. That's proven to be essentially wrong.

Moody's today had a report saying this latest escalation, you know, this 60% increase-- or 67% increase in fake accounts was a credit negative blow. So everyone's lining up now to take potshots. And it's not just the financial markets, it's its senators, it's Congress, potentially having another series of hearings, and all the class action lawsuits which are emerging. People sacked for failing to hit these targets, some of them want their jobs back, lots of them want money from Wells. And there was a separate class action settlement about the fake account scandal that was approved on a provisional basis in July, and that could unravel given that the latest revelations.

Yeah. Yeah. OK. And other banks in the spotlight, do you think?

Yeah-- not directly, but TD Bank, the bank up in Toronto, which has a-- yeah, based in Toronto, they have a quite a big US retail network, which could potentially be subject to some scrutiny of the OCC, because of practises north of the border. There was a Canadian Broadcasting Corporation documentary, a few months ago, alleging similar stuff that Wells was up to.

The OCC, which is one of the big bank regulations over here, has an ongoing probe into sales practises, so banks are very conscious about the, you know, low rate environment that has caused pressure on the top line. What they've done to incentivise sales staff to hit targets, it's all under the microscope.

And my reporting leads me to believe that there's at least one other big bank-- I shouldn't really name who they are-- up to no good. Apparently, in California, had a similar internal purge at Wells. So I'm certainly going to keep on picking at this seam. I think there's lots more stories to come from it.

OK, we'll follow that closely. Thanks very much, Ben.

Thanks, Martin.

That's it for this week. All that's left to do is to thank Emma, Caroline, Ben, and Lee for their contributions, and thank you for listening.

Remember, you can keep up to date with all the latest banking stories at ft.com/banking. Banking Weekly was produced by David Blunt. Until next week, goodbye.

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