UPDATE 1-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 withflagging financial returns while failing to tackle overpaidinvestment bankers and customer alienation, a senior Bank ofEngland policymaker said on Wednesday.

Martin Taylor, a member of the BoE's Financial PolicyCommittee which sets the regulatory tone for supervising banks,said lenders may be pursuing "unsustainably" high returns onequity 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 added that nearlynine years since the financial crisis started in 2007 banks areshowing signs of recognising that their business models needfundamental change.

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

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

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

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

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

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

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

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

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

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

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

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