The reasons for the collapse of both Northern Rock and Equitable Life have been well known
There was weak board governance, product complexity, risky business models, executive behaviour, and inadequate regulation.
In my judgement, these are not the root cause: that was low interest rates. For the Equitable, guaranteed annuity rates of 5 per cent or more were unsustainable.
For Northern Rock, borrowing cheap short-term money on the wholesale markets was too good to pass by, completely neglecting the risk of borrowing short and lending long.
While the Equitable and Northern Rock were not alone in their inappropriate response to the low interest rates, the financial services industry as a whole has been unable to relentlessly come forward with products that appeal to consumers in a low interest rate world.
Interest rates are going to remain low and businesses need to respond, transparently and constructively.
As long ago as 1993, one of the UK’s greatest bankers, Sir Brian Pitman, said no one had any experience of a low interest low inflation environment and it was bound to shake net interest margins to the bone.
His attention turned to selling more and costing less, and Lloyds Bank’s acquisition of the Cheltenham & Gloucester (C&G) Building Society was a towering strategic response.
C&Gs brand was riding the crest of a wave and bank customers who had not typically considered Lloyds Bank as somewhere to get their mortgage immediately found the service easily provided in-house.
What's more, C&G's cost income ratio was the envy of all, so, overnight, Lloyds mortgage processing costs plummeted.
The acquisition of TSB a couple of years later was a substantive cost reduction play. But cost cutting can only go so far and top line growth was proving increasingly more challenging.
A group of senior executives were called together to figure out how to remedy matters. One off-the-wall suggestion was that bank branches would be great locations to sell greetings cards. Innovative for sure, but a blind alley.
Retail banking is in the liquidity management business, making sure that customers have the cash flow to meet their life needs. From that simple premise, all product innovation should flow.
Innovation does not simply mean new products. It embraces accessibility to the product, transparency of charging, and the easy opportunity for customers to participate in new offerings.
Complex products were significant contributors to the Equitable Life and Northern Rock crises. Technological developments over the last decade have re-ordered from first principles the way information is managed and, with that, comes more complexity.
Many financial services products are based on complicated and often impenetrable models, Bitcoin being a much talked about example. But that is just the tip of the Blockchain iceberg, which has the capacity to revolutionise payment systems.