RBS CEO says banks need culture change to regain trust

Banks must undergo a wholesale change in their culture and refocus their behavior on meeting the needs of customers to restore trust in the industry, Stephen Hester, chief executive of part-nationalised Royal Bank of Scotland , said on Monday

Speaking at the London School of Economics, Hester said he believed the finance industry's problems had arisen as a result of banks losing sight of their role in serving customers.

Britain's banks have been rocked by a series of scandals including interest rate rigging, breaches of anti-money laundering requirements and the mis-selling of loan insurance and complicated interest rate hedging products.

"It is possible to look at the many scandals that have hit banking in recent years and see them as individual episodes of bad judgment or wrong behaviors," Hester said.

"In fact, I think it's more accurate to say that most of them are related to one big scandal: banks have simply not been good enough servants of their customers in the recent past."

Addressing questions after his speech, Hester welcomed plans to reform the process of setting Libor, but said the industry and regulator could have been quicker to respond.

"The sadness on adapting to a new way of setting Libor is that it could have been done a while ago, but neither the regulator nor the industry were focused on that particular index in the way that, with hindsight, they should have been."

"The other enormous sadness is that the misconduct of individuals is bad because it is used to reinforce people's feelings of what banks are like. All industries can have individuals that are bad apples. All of us need to be clear that this behavior can't be tolerated," he said.

The Financial Services Authority on Friday announced a 10-point plan to overhaul Libor, but stopped short of scrapping the benchmark interest rate.

RBS is expected to agree a settlement this year with U.S. and UK authorities investigating its role in to Libor rigging.

"We cannot afford to just fix Libor, to just fix money laundering controls, or to just fix the way we market our products. We have to address the root cause of the industry's failings," he said.

RBS is 82 percent owned by the UK government following a 45 billion pound bailout during the financial crisis in 2008. It is under investigation for its role in a scandal over Libor (the London Interbank Offered Rate) and faces punishment over possible breaches of sanctions against Iran.

The bank has also set aside 1.3 billion pounds ($2.10 billion) to compensate customers mis-sold Payment Protection Insurance (PPI) and faces claims over interest rate swap mis-selling.

"The bank is a British poster child for what went wrong in banking and to fix it we are engaged in probably the largest and most far-reaching company restructuring ever," he said.

Hester said RBS should have largely completed its restructuring by the end of 2013 but had "about 15 months of heavy lifting still to do."

Since joining RBS as chief executive following the bailout, Hester has overseen a 700 billion pound reduction in the bank's balance sheet to bolster its financial strength and cut back on risk.

Hester said the bank was "out of the mire but not yet out of the woods."

RBS shares closed up 3.7 percent at 266.47 pence on Monday, meaning UK taxpayers are currently sitting on a paper loss of 21 billion pounds.

(Reporting by Matt Scuffham. Editing by Jane Merriman & Theodore d'Afflisio)