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Mis-selling Britain in an Age of Irresponsibility

Bankers-or-Us-a-Derivative-MessBy John S Warren

Even with the generous help of an FPTP system, Unionist politicians in Westminster on all sides have failed convincingly to persuade the electorate throughout the UK that they merit the right to govern the country with a substantial majority; or to deserve the full confidence of the people. The withdrawal of confidence in Unionist politics, revealed so dramatically in Scotland at the general election, can be seen playing out in Westminster – Labour, LibDems and the over-promoted UKIP failed to capture the imagination of electors, and the Conservatives, virtually by default (and somewhat reluctantly) have been awarded a half-hearted, small and uncomfortably vulnerable majority by the electors. The result will only test the fragile resolve and suspect unity of the Conservative Party in difficult times, as no doubt voters intended: and there will be difficult times.

Meanwhile we, the public, are supposed to invest our wholehearted confidence in the markets and institutions that permeate our economy, that the Conservative Government celebrate, and that are so often, and so shrilly claimed to represent the highest values of Conservatism. Confidence we are supposed to possess for example, in ‘markets’ in utilities, in interest rates, in Foreign Exchange (ForEx) and more generally products like PPI in banking or insurance. Markets, it should be noted, that have demonstrably been abused or manipulated, but that the Conservatives studiously did nothing to prevent or correct the obvious shortcomings or flaws that were apparent through decades of power; and who continue to do notably little now.

We should be wary of any alleged Conservative Damascene conversion to belief in Markets; markets and market economics that the clerisy of Conservatism fought against root-and-branch for most of its history; but then, Conservatism’s greatest accomplishment has always been the facility with which it rewrites history in its own image. When Conservatism embraces markets it is usually bad news, either for markets themselves, for the continuing meaning of words, or for any remaining interest in or aspiration for markets the mere consumer or the general population may erroneously cherish. It is worth remembering in this context that many of these so-called ‘markets’ currently operate in that modern, yet historic Temple of Solomon within which the Conservative Party is so often to be found displaying its most reverential behaviour; possibly in prayer, but certainly on its knees: before the altar of the City of London.

Most people will see the impact interest rates have on their lives (on mortgage repayments, credit card payments, or savings) readily enough, but perhaps they will not readily appreciate the impact of ForEx (not just on the cost of holidays or currency for holiday spending, but on a vast range of imported food, commodities or consumer goods). I am referring here to the distorted ideology of ‘Markets’ that underlies the political ideology of modern Conservatism. Free Markets? Markets that work? Too many of these so-called “markets” that effect our lives directly or indirectly, but in either case powerfully, from LIBOR (a benchmark interest-rate set in London), through ForEx (some £3Tn constantly passes through London), to utilities, and the quasi-insurance consumer products of the banking industry, have all been variously beset in recent years by scandal, regulatory investigations into market-rigging, rate-rigging, mis-selling or even money-laundering; investigations that have too often ended badly with apparently heavy fines for the guilty institutions. We should expect that such penalties would end the misbehaviour once-and-for-all in well regulated markets, or among responsible participants in a fair market; but the fact is, the reprehensible activities still go on; and on and on: and the fines just go on and on, and up and up.

The fines quite clearly do not work, because as some acute US critics in particular have observed, the bigger fines in the US (billions of dollars) than pertain in the UK have had little demonstrable effect on behaviour. What conclusion may we draw? The Credit Crunch was not the end to an Age of Irresponsibility, but a demonstration of its power, its scale and a sobering reminder to the rest of us that the institutions are always one step ahead of the game; or is that simply one step beyond all public control? Nevertheless the FCA believes that fines work as a strong disincentive to recalcitrant behaviour. So let us look at the facts.

The FCA produces an annual Fines List, which it updates regularly with the latest fines of institutions and individuals for misconduct of one kind or another. The FCA list replaced the FSA list (the previous failed regulator) in 2012, but we can chart the trend in fines through both regulators. We should remember that the Credit Crunch happened in 2007-8; after which we were told everything had changed; institutions had earned the lesson; a new era had dawned. We shall see.

In 2015 the current annual rolling FCA Fines List total is £814.1m (for just over 5 months; up to 5th June). It would be reasonable to suggest that the 2015 annual total fines will be above the 2014 total:

Total FCA Fines 2014: 1,471.4
Total FCA Fines 2013: 474.3
Total FSA Fines 2012: 311.6
Total FSA Fines 2011: 66.1
otal FCA/FSA Fines 2011-15: £3.1Bn. Almost 73% of the fines over the last four-and-a-half years have thus been levied within the last eighteen months; over seven years after the Credit Crunch. So much for solving the problem through fines.

Comparing £3.1Bn of FCA fines over the last four years, with the US regulatory regime of fines (which extends its reach to international operations of UK banks or to US banks for activities in London) reduces the FCA’s efforts to insignificance (total UK fines are well below 10% of total US fines). One single recently announced US fine levied on five banks (including two UK banks) was for $6.5Bn (circa £4.3Bn) alone; far more than the total UK fines over four years, exceeded in a single US fine.

It is noticeable that most informed US commentators are not impressed even by the level or impact of US fines. The critics do not believe that fines, in principle, provide an effective deterrent against the future activities of banks. Such critics have included William Dudley of the New York Reserve, or Anat Admati of Stanford University who has crisply and perspicaciously grasped the root of the problem:

“The fines can be viewed as [a] ‘cost of doing business’. They don’t get at the heart of the problem, and aren’t effective to change behaviour, because the strong incentives by individuals within the banks to keep engaging in the same practices remain in place” (FT.com 25th March, 2014).

This means a regime of fines, even on the far higher US scale of monetary penalty has simply failed.

Back in the UK the eminent British criminal and regulatory litigator David Corker has written powerfully about the issue of fines, and the intrinsic weakness of fines as a sanction or deterrent:

“The greatest deterrent is the threat of imprisonment; corporate fines may fail to offset benefits and provide a far weaker impulse to directors not to choose the opportunity to mis-sell a product or form a cartel” (D Corker; NLJ, 27th July, 2012).

In spite of wise US scepticism and the acute, trenchant opinion of Corker, the FCA persists in its anxious determination to demonstrate publicly that the Fines list is a robust response to misconduct, compared to the relative inactivity of the previous regulatory regime (FSA); but in the process rather missing the larger, underlying point, or rather two points, more pertinently suggested by the fines data.

First, while no doubt the FCA has increased the thoroughness of their investigations over the previous light-touch regulation, there is no clear sign that increasing the scale of fines or the intensity of FCA investigations has had a material effect on the scale of misconduct; indeed it appears that the misconduct has been largely undiminished since the Credit Crunch. The institutions just pay a great deal more in fines. Fines clearly do not work. Large fines that impress the innocent general public because they are paid in hundred-millions or billions (of £s, $s or €s), are in fact cheap at the price. Admati and Corker are more acute in their interpretations of the real impact of the regulatory fines regime than the FCA.

We should also remember that the FCA is distinctively a British regulatory response to the problem; it has a history that arises from a political culture with a long and dubious track record in anointing failed regulators. There is a reason for this, and it arises in turn out of the peculiar character and inherent weaknesses of British political culture: regulation is typically designed first to meet the requirements of the industry being regulated (over the consumer), to achieve the least inconvenience or cost to the industry. ‘Regulatory capture’ by the regulated is a byword for British regulatory history. It is perhaps a function of our Westminster system that legislators in Britain typically associate their interests more closely with the organised, vested interests of the regulated than the unfocused interests of anonymous consumers. We pay a heavy price for that failing. Regulation in Britain is thus typically an exercise in (small-c) conservatism; devised and implemented to conserve rather than change the prevailing industry culture and interests, and given the nature of the modern City and the UK financial sector, that profound flaw is at the heart of the current problem; and not the accidentalism or one ‘bad-egg’ hypothesis beloved of Westminster to excuse the failures of British vested interests in banking.

British regulators thus often fail as a matter of course and established history; and somewhat disconcertingly they routinely come-and-go. It is long-established that regulators have been prone to ‘industry capture’; from the Ministry of Agriculture (remember it?); through the BBA (a representative industry body that was effectively responsible for self-regulating a benchmark financial market – it would be funny if it wasn’t so serious); to the ignominious FSA. This is not a surprise, it happens because it has been a fundamental, remarkably deep-seated, insidious part of the political values of Westminster for decades.

One aspect of the pernicious effects of these values and attitudes in Westminster has been the warm-glow of respect afforded to self-regulatory bodies in Britain. Self-regulation has a special place in the hearts of British legislators; it makes political life much easier to accommodate the self-regulation of influential organised interests, it serves powerful vested interests inside and outside the major political parties (and whose opponents are typically powerless, hapless consumers who are unheard, unorganised and easily exploited), and it feeds an erroneous but pious sense of complacent British moral security. Together these corrosive effects of power in turn influence the degree of supervisory oversight regulators seek, and informs the irresponsible ‘light-touch’ (which usually comes to mean ‘no-touch’) regulation credo. In all material markets self-regulation is absurd, and is nothing more than an open invitation to gratuitous exploitation of consumers. Westminster’s (all government parties) long-standing prosecution of a ‘light-touch’ regulation culture, in all things from banking and broadcasting to utilities, has for decades provided the environment and opportunity for the Credit Crunch to happen, and all the nasty consequences that have followed. Worse, what happened was predictable.

Following ‘Big Bang’ in 1986 the culture of banking, and the purposes of banking, changed fundamentally in the UK. The deep, three hundred-plus years of professional banking culture and tradition built up in Britain (which also destroyed the distinctive banking culture of Scotland ‘at a stroke’) was peremptorily set aside, and the highly experienced cohort of professional bankers were more-or-less dispensed with, or required to conform; dancing to the tune of a new kind of non-banker in charge, and a new ethos in banking; driven from top to bottom by the stockmarket and by the ill-defined values of the City of London. The new bankers clearly understood the concept of reward, but were slow to grasp, or were indifferent to the subtly treacherous nature of managing risk. The rest is notably unhappy history, which even the public has noticed, badly affected everyday life in Britain from 2007-8 to the present day, and not least in consequences noticed by the taxpayer (representing the ‘public sector’ that is so often held in contempt by Conservatives and media both before and after the banks dump their losses, liabilities and bad ‘assets’ in its safe hands), who has been left with the whole unpaid bill; although most of this dismal history is yet to be written by professional economic historians.

So much for ‘theory’; let us, second, examine the most recent, large and widely reported FCA fine as a real illustration of the British approach to regulation. Lloyds Bank has been served the largest ever retail fine of £117m from the FCA for “failing to treat their customers fairly when handling Payment Protection Insurance (PPI) complaints between March 2012 and May 2013”. Notice the dates 2012-13; long after the Credit Crunch, and long after the public could reasonably expect such activities were supposed to be a thing of the past; if not in the minds of bankers, then in the expectation that Westminster would represent and prosecute vigorously the public’s vital interests. Westminster has failed. Where was Westminster when needed? In whose interest has this state of affairs been tolerated?

The following is the opening summary of the FCA’s Lloyds Bank PPI decision, in its Press Release announcing and explaining the fine:

“During the relevant period Lloyds assessed customer complaints relating to more than 2.3 million PPI policies and rejected 37 percent of those complaints.
Firms are required to assess complaints impartially and can reject unfounded claims.

In March 2012, Lloyds issued guidance instructing complaint handlers that the overriding principle when assessing complaints was that Lloyds’ PPI sales processes were compliant and robust unless told otherwise (the Overriding Principle).

In addition, Lloyds did not notify complaint handlers of known failings identified in its PPI sales processes during the relevant period.

Some complaint handlers relied on the Overriding Principle to dismiss customers’ personal accounts of what had happened during the PPI sale or to not fully investigate customers’ complaints. In some instances, Lloyds did not contact customers to enable them to give their account of the sale.
As a result of Lloyds’ misconduct, a significant number of customer complaints were unfairly rejected.”

Early settlement of the case allowed Lloyds to receive a 30% discount on a fine of £167.8m.

The matter is worse. Here is a hastily assembled list of earlier Lloyds fines by the FCA:

For serious LIBOR and BBA Repo benchmark failings: 105.0 (28th July, 2014)
For serious sales incentive failings: 28.0 (11th December, 2013)
For delayed PPI redress payments: 4.3 (19th February, 2013)

Early settlement of the February, 2013 PPI case allowed Lloyds to receive a 30% discount on a fine of £6.2m. The FCA is going round in ever decreasing circles. What does the FCA think this accomplishes, or what conclusions about future behaviour all the banks it regulates may fairly draw?

Having delayed PPI redress payments (for up to six months) to which the bank had agreed to pay between May 2011 and March 2012, we find that from March 2012, Lloyds was rejecting other PPI claims unfairly. Indeed the bank has now twice been awarded a discount for early settlement, for failings in the same product area, around the same time, and which had required two fines thought to be penal (but offering 30% discounts) within two years. This is patently ridiculous.

Even if the second fine levied on Lloyds for PPI failures was considered adequate (and I doubt it) on what grounds could the FCA conceivably believe it was appropriate to offer a 30% discount for early settlement? ‘Once bitten, twice shy’ is a better rule. Even if it was believed that fines actually work as a deterrent, offering big discounts scarcely establishes the punitive significance of the original fine; a quasi-judicial punishment is turned by the regulator into a trade, a deal to be cut, a commercial settlement with the offender. The mechanism should have been to fine the bank (at least) £167m as intended, but in equity and justice allow the bank to defend its position; but on the understanding that if it failed to defend its position successfully, there would be a 30% penalty for wrongly delaying the decision, leading to a total fine of £218m; for the price of delay is clearly something the banks understand.

More fundamental than the details of the fines, on what grounds can the FCA now claim in general terms that fines actually work? Clearly they do not work. The FCA is hoist by its own petard; its own Fines List. As a deterrent the fines regime is clearly a failure; the FCA is failing the public, although I suspect this really means that it does not have the tools to do its job properly; Westminster provided the tools for the regulator to use, and it is Westminster that has yet again catastrophically failed the public. This is no surprise, because in legislating the Regulator Westminster listened closest not to consumers, electors and taxpayers (the exploited) but to the City. Notably it ignored the warnings against changing any of his recommendations, by the man who devised the original proposals (Sir John Vickers) that were nevertheless altered by the government after the government consulted the City.

It is astonishing the publicity, furore and public anger generated around the FIFA scandal; a matter of mere (and I choose the word carefully) football. Yet there is no effort by the media or politicians to reflect the very real public anger at the banks, the financial sector and the City of London for the mess the FCA Fines Table daily reminds us we are in; in spite of the fact that banking and finance are far more critical to the public’s prosperity and security than football.

Clearly banking and finance is global; on a much larger scale than football, but nevertheless a global reach it shares with football; and in both cases a reach that has economic and political implications: there is therefore, perhaps an opportunity here for parallel constructive action. In football the interest of Loretta Young and the FBI was no doubt a consequence of the fact that in (any) genuine global spheres of economic interest (even football), the economic power of the US is such that at least some of the global conduits of money or influence that flow from truly global activity are likely, somewhere, somewhen, to come under US legal jurisdiction. The intervention of the FBI has already clearly and decisively changed the nature of the issues surrounding FIFA and football, whatever happens from here: minds have suddenly been concentrated.

Here is an answer to the conundrum of regulation in the global field of banking; after all, recent regulatory fines of global banks in the US have already referenced “criminal felony”; while past fines in the US and UK have cited contexts that included “money laundering”. At the same time recent events remind us that only the US possesses a legal authority which combines with genuine global reach, and the ambition or power to exert that authority. In short, perhaps we should expect Loretta Young and the FBI soon to turn away from the smaller significance of global football, to global banking; and investigate any relevant US jurisdiction issues that may arise out of the regulatory failures that have arisen in global banking: it would, at least, concentrate minds wonderfully.





Comments (17)

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  1. Les Wilson says:

    I guess very many people of all kinds of occupations and positions in life, are more aware than ever that the UK is utterly corrupt, the government and its institutions.
    They control everything except our heartbeats, and maybe even then.
    Big Big changes are what is required, a step off the roulette wheel of Westminster, hedge funds, and Bankers ( did I spell that right?)

    Would the population rebel? while many speak out on these corrupt elements of our present day Government, there is no real escape in sight as we are all trapped in their clutches.
    It would need a revolution, and that appears to be no where near happening. That said, at base level people do have power, so it is to the base level we must look, ordinary folks who have had enough.
    When the point of corruption has hit the heart of the people, that may be the time of “No more!)

    At some point people will be so sick of corruption that they will force changes, they will need to be draconian if we stand a chance of ridding all corners of this country of those who are responsible.

  2. Strato says:

    Interesting piece but there’s a fundamental contradiction in the rationale. On the one hand it lays the blame for ‘bad banking’ on the British state, but then on the other hand admits that only the US can effectively challenge what is a global problem of regulation?

    1. John S Warren says:

      Apologies. My reply here was misdirected by me and appears below.

  3. KMulhern says:

    Markets with no oversight/regulation are not sustainable, they do not balance themselves, you need regulation to ensure there is no corruption, and in some instances markets are just not fit for purpose.

    It is worth looking at the language used in the current trade deals like TTIP, CETA, TISA… For Example in CETA there is a section on Competition, which begins:

    “1. The Parties recognize the importance of free and undistorted competition in their trade
    relations. The Parties acknowledge that anti-competitive business conduct has the
    potential to distort the proper functioning of markets and undermine the benefits of trade

    Note the terms ‘proper functioning of the markets’, ‘benefits of trade liberalization.’ have these things been thoroughly proven, there has been a lot of damage done to countries by trade liberalization, but we are getting trade agreements that demand we ‘recognise’ this.

    And with distractions like the FIFA and the lack of public debate regarding any of the above in the MSM. With the trade deals currently being negotiated in a manner where our MEP’s have no direct influence over them, it is all very concerning.

  4. John S Warren says:

    Thank you for your comment. Only the US has anything approaching global reach, but I do not argue anywhere that the British state can do nothing (or nothing effective). It is rather my argument that the British state chooses to do too little. The failure is substantially at least self-inflicted.

    The regulatory framework in the UK is inadequate; and a regulator with appropriate powers could be much more effective in regulating the activities of UK financial institutions. Westminster chooses not to do so. Note that the regulatory framework we now have is not what Vickers proposed, and he specifically warned that his proposals should be implemented only in their entirety; I would add that I have reservations about Vickers, but I think if the Report was to be implemented Vickers’ advice should have been scrupulously followed. It wasn’t.

    The UK cannot solve all the global regulatory problems, but that is a bad excuse for the UK doing too little to regulate British institutions operating in the UK. I do not see the “contradiction”, a suggestion which rests I think on the fallacy of ‘petitio principii’.

    1. Strato says:

      Yes, both can regulate depending on extent and reach. Get you now.

  5. Broadbield says:

    A thought provoking analysis. Part of the problem is not only regulatory capture, which you mention, but also members of the regulated becoming embedded in the process of creating regulation, where you have, for example, staff from the big accountancy firms being seconded to HMRC to “help” and “advise”.

    We also suffer from political capture in two ways. First, the neoliberal “fakeconomics” (Prof. J Weeks) has captured the political agenda of most of the UK parties – markets are efficient, government’s job it to get out of the way and shrink in size. Second, big business has captured many of our legislators (in both houses) not only through the revolving-door by also by employing them as consultants etc.

    And of course many politicians, senior bankers, judges, lawyers, business people, regualotors and even journalists share the same privileged background and group-think of private school followed by oxbridge.

    I believe the Governor of the BoE has just said City wrongdoers should be gaoled.

    1. Alan says:

      Philip Mirowski’s book on the crisis has extensive discussion of this in the US: there is a revolving door connecting the regulators, big Wall Street firms, and academic economics departments. It’s one big racket.

      And the issue is not lack of regulation. There’s lots of regulation but it’s regulation to benefit the few at the expense of the public.

      1. Broadbield says:

        Nicholas Shaxson’s book “The Finance Curse” is a devastating critique of financialisation which destroys the economy. As someone said, most financial activity is socially useless. It’s not government we need to shrink, it’s finance, most of which is pure gambling, and return to old fashioned banking. Why should bankers be able to make money merely by betting on the price movement of currencies, for example? Who does that benefit?

  6. bjsalba says:

    Fines should not be a cost of doing business. Fines need to be levied against the salaries, bonuses and even pension pots of the highly paid personnel and senior management staff in the departments which commit the offenses. That process should then go right up the management structure all the way to the CEO and board.

    Joint responsibility written into the contracts of all staff.

    1. Angry Weegie says:

      I agree with this response and with ColinD below. What’s missing from the regulation is the ability (interest?) to take action against the individuals who are complicit in the failure, whether directly or indirectly, except in a very few cases. While I agree that fines are simply absorbed by the companies, in any case, if there are losers from fines, it will be customers and shareholders who suffer, not the perpetrators.

      Proper investigation of the issues, then penalising the individuals responsible, through fines and imprisonment, is surely the best way to make sure that they act “correctly”.

      And let’s also ignore the “banking is global, so we can’t do anything unless the whole world agrees” brigade. I can’t see that argument being accepted as an excuse for other crimes.

  7. ColinD says:

    Imprisonment and punitive personal fines are the only deterrent. The big banks are all afflicted by the same ills and all are subject to corporate fines and, therefore, the element of individual corporate punishment is diluted. That is to say, there is no competitive disadvantage if they are all at it! Furthermore, any corporate financial impact will ultimately be felt by shareholders (pension funds, retail investors), ordinary bank staff (downward pressure on pay and benefits and increased pressure to mis-sell us products at the counter) and bank customers ( lower savings rates, higher mortgage rates, higher overdraft fees, etc etc). You know the drill.

  8. Kenny Smith says:

    I have to commend you on a fine article. You write in a way I wish I could. A comparison is the way Iceland dealt with their bankers. A country with half the population of Glasgow almost went off the cliff but they didn’t muck about. They jailed the responsible and the whole country companies + trade unions pulled together used their pension funds to pull themselves out the hole they were in. I could be wrong but last I heard they came out of recession before the UK but someone could put me right on that. This is the reason why austerity is such a jagged pill to swallow. For me if its a car plant or a shipyard that is threatened we are told tough shit its progress, dog eat dog and all that but when its the hoi polloi in a suit suddenly there is billions of public money to bail them out. Markets, I’m sick to death of hearing how the markets will react. I know that sounds like an irresponsible socialist that would take us back to the dark ages but when I hear threats to leave I just think back to the give a banker a lift to the airport campaign, I’d happily drop them off with a foot print on the back of their trousers. Let’s be clear I am not anti capitalist I want businesses to do well and for people to have long term well paid jobs but the sheer greed in the capitalist system that feathers Westminster is corrupt and morally bankrupt, the banks are somehow the visible but the untouchable bogey man. Fines are a week a months even a quarter profits hardly puts a dent in their overall worth.

  9. Alan says:

    The UK may come off badly compared to the US in terms of fines but none of that makes the US a paragon of virtue –for from it. The fines may be bigger and have a wider reach but few believe they have much effect, as you argue. See for example The Untouchables, Realities Behind Prosecuting Big Banks and Judge criticizes lack of prosecution against Wall Street executives for fraud. As someone writes in one of these pieces: too big to fail; too big to jail.

    The matter of fines seems straight out the Becker and Posner, neoliberal, Chicago Law and Economics playbook (see Foucault’s Biopolitics lectures for an early discussion) . Posner 1985 An Economic Theory of the Criminal Law:

    …the criminal law is designed primarily for the nonaffluent; the affluent are kept in line, for the most part, by tort law. This may seem to be a left-wing kind of suggestion (“criminal law keeps the lid on the lower classes”), but it is not. It is efficient to use different sanctions depending on an offender’s wealth.

    God bless him! It’s all about market efficiency. What a joke.

  10. Alan says:

    Wisdom from Adam Smith, 1776:

    But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed.

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