Barclays is the sixth turnaround for John McFarlane FCSI. He hopes his operational and cultural changes will place it at the heart of the world’s most competitive global financial centre
by Eila Madden
When John McFarlane FCSI was offered the executive chairmanship of Barclays in July 2015, he didn’t hesitate to accept, stepping down as chairman of Aviva and FirstGroup to do so. He says he did this because he has always thought of Barclays as “the pre-eminent financial institution in the UK.” He continues: “Another factor is that, for reasons which I don’t understand, I’m the guy they bring in when everything else has failed.”
Barclays is John’s sixth turnaround – he has worked directly on two and either been the chairman or chief executive on four. Aviva and the Australia and New Zealand (ANZ) Banking Group are among the list.
At Barclays, his priorities have included boosting shareholder returns by divesting of non-core businesses and making the investment bank more profitable. That included a painful but necessary change of CEO within months of taking over.
Toughest of all has been dealing with the legacy of conduct issues at the bank. It has paid multimillions in regulatory fines in the UK and the US after bank staff were found to have colluded in rigging the benchmark London interbank offered rate (LIBOR), and it has contested US allegations of mortgage-backed securities misselling before the 2008 financial crisis. Now it is back under the spotlight over alleged irregularities in bailout funds from the Qatari government at the height of that crisis. Quite apart from dealing with the financial and reputational fallout of these issues, the bank has required urgent cultural change.
The early yearsJohn was born in a small town in Dumfries, Scotland, in June 1947. After graduating from the University of Edinburgh, he followed his passion for cars and joined the Ford Motor Company.
“Because I enjoyed work, I thought I really needed to invest in this more heavily so I decided to go to business school and do my Masters of Business Administration without any view about where that would take me,” he says. “While I was there I became very interested in finance, and also in marketing, and I believe that you should focus on things that you are passionate about because you generally become good at them.”
That led to John landing a job at Citibank before even completing his MBA and he started with the firm’s corporate banking arm in 1975. Since then, he has built an impressive career in the sector, which has earned him one of the most coveted roles in UK, if not global, financial services.
The Barclays challengeJohn set a clear objective for the bank when he joined: to be “clean and prosperous” by 2018. “With these kinds of [turnaround] situations, it’s about clarity upfront on the agenda,” he says. “Second, it’s about the programme and the pace of execution. And third, it’s about making sure it happens.”
In the early days, he had to make tough decisions about which businesses were less viable in the new regulatory and economic environment and which management team was the right one to steer the bank through this change.
He has form on what he describes as “bringing the difficult decisions forward”. As chairman of Aviva, he led on the move to withdraw from the US, writing off $3bn in the process. At Barclays, his decision to let CEO Antony Jenkins go within months of becoming chairman surprised everyone. Brought in to steady the ship after the LIBOR story broke, Antony was seen as a safe pair of hands but John understood that the retail banking man wasn’t the right leader to drive a turnaround in which the investment bank was a key element.
"At ANZ, I became an owner of the firm and acted like one"
The bank has also divested itself of many parts, and is in the process of withdrawing from Africa, where it employs 42,000 people and has a 100-year heritage. The sales are part of a series of changes designed to rein the bank in from being overextended, very complex and very difficult to manage.
“We will break the back of these changes this year, which is what I wanted to do, and it then allows us to have a clean run towards the end of this year,” says John. “The bank will be less than half the size of where we started. It will be much safer, much more focused, more easily managed, better controlled, more compliant and producing higher returns. I’m pleased with the progress that we’re making.”
Significant changesProgress is something John knows all about. He has seen significant changes in financial services since entering the profession in 1975. US banks introduced unsecured loans to Britain, which paved the way for more innovative credit solutions to be developed, such as securitisation. He was also at the birth of the derivatives market, so to speak.
During his time at Citibank, a colleague invented the interest rate swap and carried out the very first transaction. Around that time, in the early 1980s, John launched the forward rate agreement. “It was highly innovative in those days with new instruments being born and, of course, they are still with us today,” he says.
In the late 1980s he was invited to join the Council of the London Stock Exchange and the Board of The Securities Association, which was the forerunner of the FCA. “That was the onset of a new regulatory type of regime, and it was largely prudential at the time but it has now evolved into prudential and conduct,” says John. That evolution is largely thanks to the sector’s habit of getting into a financial crisis once every 15 years or so. The 2008 crisis was the fourth that John has lived and worked through.
“If you look at where most of the issues have arisen on conduct, they’ve all been associated with incentive remuneration,” says John. “It was sales remuneration on the retail side that led to payment protection insurance misselling. And on the wholesale side you’ve seen issues relating to foreign exchange and LIBOR and you’d have to think that, despite the governing system of the organisation, if there’s a lot of money at stake by cutting a corner, then you can see why people are attracted to that.”
John believes share ownership is an antidote to such temptations. As CEO of the ANZ Banking Group, he could afford to defer all of his salary and bonuses into stock, bar $43 a year, which was deducted to pay for his staff club membership. “That way,” he says, “I became an owner of the firm and acted like an owner of the firm. I wasn’t too worried about short-term returns; I was worried about long-term shareholder value, and it worked very well.” Current Barclays CEO Jes Staley also put his own money at stake, buying $10m worth of shares when he joined the bank in December 2015.
Right and wrongBut more fundamental than being negatively influenced by the promise of big bonuses is simply understanding the difference between right and wrong behaviour. In the early days of his career, John spent time in dealing rooms. Traders were never allowed to have secret conversations. “I remember the chief dealer running across the other side of the room to a dealer who had his hand over the phone and saying: ‘Get your hand off that phone; I want the people beside you to hear what you’re saying’. The values back then were incredible, and so people responded accordingly with their behaviour.”
2015: Joins Barclays’ board in January; becomes chairman in April
2013: Appointed chairman of FirstGroup
2011: Joins board of Aviva; becomes chairman in 2012
2008: Joins Royal Bank of Scotland as non-executive director
2007: Retires from ANZ Banking Group
1997: Moves to Australia to become CEO of Australian and New Zealand (ANZ) Banking Group
1993: Appointed group executive director of Standard Chartered
1975: Joins Citibank, ultimately becoming head of UK and Ireland
1969: Graduates and joins Ford Europe
Today, technology-based communication can make it harder for organisations to control traders’ behaviour and easier for traders to deviate from what’s expected of them. Barclays has established a Board Reputation Committee that considers these matters and ensures the bank creates the right cultural environment in which employees know the difference between right and wrong, and never entertain doing the wrong thing. “It’s been absolutely necessary because practices were weak and incorrect, and we’ve had unlawful activity,” he says.
John sees the CISI’s role in ensuring practitioners act in the best interest of shareholders and customers as pivotal, adding that the Institute’s principles-based approach to this is absolutely right and makes it less likely that people will cross rules-based boundaries.
He is concerned that a rules-based mentality is affecting regulators’ ability to police the industry and, more fundamentally, their authority. If they cannot prove that a particular practice is illegal, they are finding it hard to warn firms off from pursuing it. This is not how it used to be. “When I was at Citibank, I used to get called in to the Bank of England and the head of supervision would say: ‘My people tell me that you’re thinking of doing this’ and I’d say ‘Yes’ and they’d say: ‘Well, we’d rather you didn’t’ and that was the end of it. And that was because he was right, not because he had the power.” That said, John believes statutory rules are needed because self-regulation has not worked. What regulators could do, however, is reflect on and simplify complex rules.
Making Brexit workCould this be on the cards as the UK progresses towards Brexit? Brexiteers did, after all, promise liberation from Brussels-born red tape. As chairman of industry body TheCityUK, John has been lobbying for the best post-Brexit deal for the UK’s financial and related professional services sector.
“The UK is, and will remain, Europe’s financial centre. It is enormously important,” he says. “We want the Government to negotiate the best possible deal for all UK-based business, including foreign participants – American banks, Japanese banks, and so forth – because that’s the bit that’s complicated and difficult to easily move elsewhere.”
The “best possible deal” means mutual market access and recognition of each other’s regulation. Continued access to talent is also key. “We understand we may not get what we would like to have and therefore we have contingency plans in place.” He adds: “Our challenge is to maintain the UK, and London in particular, as the most competitive global financial centre in the world.”
This article was originally published in the Q2 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.