A commentator called John Warren made this comment in the blog yesterday, in response to comment on HSBC:
I am not going to comment on the particular issue raised here, but [want instead to] make a general point about regulation and the law in the banking and financial sector in the UK; or rather less a point (in the spirit of not shirking something more robust, even if it has flaws) than to offer eight proposals for reform of the law and regulation of the UK financial sector (for I think we have all had enough — it seems to me that fines have turned transgression into a mere ‘cost of doing business' rather than a penalty):
1) Bring the criminal law into the centre of the financial regulatory framework.
2) Apply regulatory fines only for minor or non-repetitive offences. Apply the criminal law to major offences.
3) Do not under any circumstances allow free public funds to be used to pay fines. If necessary a structured loan should be set up with a rate of interest well above the miscreant institution's borrowing rate, with an exit for immediate repayment.
4) Establish a new statutory Fraud Act that actually works in the Financial Sector.
5) Use the criminal law rigorously where appropriate, and put people in jail.
6) Define a Bank. Define it clearly and narrowly (now that is tough!). Penalise transgression, but reward exemplary banking standards through the taxation system.
7) Prohibit the most volatile, dangerous forms of derivative (certain CDS activities, re-hypothecation etc.) and monitor new derivative developments very, very closely.
8) Fund the resources on a scale that entails serious regulation. ‘Open for business' in the UK too easily becomes open to transgression (the proof is the Crash, 2007-8, and its long aftermath of failure).
I am sure others will have much better proposals, but I have the advantage — for this moment — of having declared them.
I make clear this list would not be quite how I would have proposed reform, but my opinion is not the only one worth noting, and I think it very obvious that major banking reform is still needed when so much in our culture is changing but abuse in and by banks remains as apparently unchallengeable as ever.
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You don’t know what rehypothecation is, do you Richard?
Yes I do
How about it requires informed consent?
Informed consent from a bank. Now there is an oxymoron
Sounds like yet another obtuse technical term meant to legitimise a very speculative form banking practice to me Jane.
Like for instance a ‘Credit Default Swap’ or how about a ‘Collateralised Debt Obligation’ or ‘Mezzanine finance’?
In fact why don’t you just tell us what I means?
The opportunity to make the biggest single reform of the banks – the splitting of the so-called ‘ investment ‘ arm from the retail arm wasn’t taken by the Labour government , or subsequently so what has continued is the type of combined operation that that great old movie ‘ The Sting ‘ characterised – a storefront with a casino behind it. The retail side which is being automated to such an extent that there is no-one in a branch who has any autonomy whatsoever to decide anything for a customer is at the same time no more than a kind of smiley face showroom as more and more people switch to banking online. But the risk inherent in all the unregulated markets that the banks participate in remains in place and the calls for the splitting up of the banks as described above seem to have died away.
This is about incentives:
“it seems to me that fines have turned transgression into a mere ‘cost of doing business’ rather than a penalty”
Specifically: disincentives, both for the individuals overseeing the crime, and to the company itself.
You can hurt a company, if you have the will; and you can threaten a company effectively, ratthe them hard enough to change the corporate culture, if you are prepared to use the tools you’ve got to hand.
I’ve worked in a bank under a deferred prosecution agreement – two years’ profit gone in the ‘voluntary’ settlement, and the company’s entire capital base on the table if the regulator reopened the file.
Oh, and the banking license under review.
Believe me, I saw the management structures changing, then the working practices, then the attitudes.
But… Someone needs the will to actually do it. This is entirely lacking in our country and it’s sobering to look at all these fines imposed on British banks, and realise how little of it comes from British courts and British regulators.
I seem to remember Iceland had the required legislation.
Should we copy their model?
Re splitting retail and investment .
Look up Wiki.
The Glass—Steagall legislation describes four provisions of the U.S. Banking Act of 1933 separating commercial and investment banking.
I read John’s previous comment and I whole heartedly agree with him.
Nice one John.
You’ve got the job!
Can you start yesterday?
I recall when I started work (dealing with the City) the finance sector was all specialists. Retail banks, corporate banks, private banks, investment banks, brokers jobbers, building societies and so on. It was a lot easier to define and regulate what they did. Deregulation, Big Bang, greed and ambition have lead us to these unmanageable leviathans we have today. Unmanageable by their own leadership and by their regulators. Some parallels with the Carillion and Capitas
I suspect we’d not be having these discussions about definition if they were broken back down into their component parts.
As for dear old Captain Mainwaring, I watched close up during the 90s as the banks eliminated all their experienced branch managers and district and regional offices. I’ve no doubt that it contributed to their loss of any understanding of what was going on in the ‘real world’ as all decisions were being made in their City bunkers. They’ve also lost the ability to make good lending decisions – there’s no substitute for looking a potential borrower in the eye and kicking the tyres of a business.
It’s to the Bank of England’s credit that they still have their ‘agents’ around the country whose job it is to understand what is really going on, talking to local businesses, government and others. Their feedback acts as a counterbalance to the economics geeks with their spreadsheets and models.
I can recall when the Bank of England had an office in Glasgow, between George Square and Buchanan Street. I think Big Bang or the Thatcher reforms led it it being expunged, curiously along with most of the country’s energy, enterprise and independent spirit (a point simply overlooked by neo-liberal ideologists).
What we have in Britain is the precise opposite of what it is claimed was being created: a tightly centralised state. The ‘Henry VIII’ powers are simply the logical endgame of the Thatcher journey.
It’s still there – https://www.bankofengland.co.uk/about/people/agents
There was of course a less than helpful outbreak of energy and enterprise on the other side of the country in St Andrew’s Square… Just as over centralised as any institution in the City of London. And needing just the same reforms
This sounds like the best potted history of where modern banking went wrong to be honest Robin & John. I’ve not come across these accounts before. And I agree – it sounds like centralisation to me. The Shitty of London (sic) is not THE power centre by accident.
And Thatcher it seems was just the poster girl and guileless enabler.
It is history that needs to be explored more deeply and told.
I can quite believe how deregulation led a loss of business definition. George Soro’s ‘oil tanker analogy comes to mind where he says (in the film ‘Inside Job’) that said oil tanker is compartmentalised to stop the oil sloshing around and keep the vessel stable. Apparently the banking system was set up like this too.
After deregulation, the compartments were removed and the vessel (the finance sector in this case) became as unstable as it was before the Great Depression – this time more so as it is turbo charged by modern, digital I.T.
The thing is, what are the politicians going to do about it?
I hear from a relative in the finance sector that John McDonnell is talking to the banks this week – doing the rounds. I wonder what he is telling them? I’d love to be a fly on the wall.
It had better be good is all I’m going to say otherwise Labour won’t get my vote.
I wish John McDonnell was well advised
And I am not suggesting me
I do not wish to provide an ‘apologia’ for Scottish banking; it would not work, for obvious reasons; but perhaps I could provide some reflective history. Up to the 1980s, a high quality Scottish banking system, small, a little narrow, but robust and well respected for good reason, was sustained separately within the UK (single market)from the City, through a cleverly devised series of understandings and elaborate cross-holdings with City of London banks (in order to protect their markets and independence). All this was gutted and filleted by Big Bang.
Confronted by Big Bang, the only solutions for both RBS and BofS were to be prey to the City banking predators, or act rapidly and turn themselves into predators to survive. They decided to be predators and BofS selected Nat West to make an extraordinarily bold bid to acquire a bank that was far, far larger; and hence preserve an independent future. RBS responded by outbidding BofS for Nat West; inevitably, the loser, BofS fell in to the hands of Halifax (a building society) as easy meat following the failed bid; and the rest, as they say, is history. What a fall from grace was there, and the City finally, and greedily swallowed Scottish banking whole, which had resisted the temptations for centuries, and for good reason, and Scottish banking’s values were effectively swept away by neoliberal deregulation; a banking system which had been independent since before the Union. I simplify, but I think there is a lesson for us, and for Scotland from the history.
This comment is ‘off thread’, but I had nowhere I could respond to Mr Craig in the related thread “Why is HSBC a fit and proper person to hold a banking licence?”. Since that thread is closed I have taken the liberty of inserting it here. Richard, you may of course choose to excise it; that is your prerogative. See below.
“if you require authoritative sources to confirm the legal fiction of your “persona” simply pick up any legal text book on corporate law”.
But of course I did; I quoted Hannigan. A “legal fiction”? A legal fact, which you do not like, so it does not count. At another point you describe the Law Lords decision as “illogical tosh”. But it isn’t legal tosh; and it isn’t in your patronage to decide what is legal. There is the problem, and you really ought to take ownership of it, and frame a case that actually works for you.
Frankly it is difficult to understand what you are arguing because of your rhetorical style. I do not think I am alone in perceiving that. Unfortunately you are quicker to see the mote in others eye, than in your own. I have real difficulties with your approach, in spite of the fact that I do not doubt that wrongdoing is conducted by people, and it goes unchallenged too often. We could agree about that. But it is not enough.
Institutions exist. They have legal persona, and if your view persisted I believe two adverse consequences would flow; first, we would still not prosecute people diligently, and the institutions would survive, cultures probably intact, when at least some of the institutions should probably be expunged. It follows that I believe that you are too lenient on institutions. In your world we would never be rid of them, good or bad. Sometimes even large institutions require to ‘go to the wall’. Cultures are created in groups and thrive best in institutions. Culture is a many-headed hydra; cutting the occasional head is rarely enough. Too big to fail is also not good enough.
I followed your arguments carefully, and as best I may. They were difficult to follow, and contradictory (I offer this in illustration only of a tendency):
“We need no additional criminal or civil law nor do we need to define what a bank is any more than we need to define what an engineering company is.”
“This created what is considered by many as a legal fiction and the “corporate veil” between the company its operators and owners was established. So until this is reversed my contention is that regulation is never going to work as intended.”
There seem to me to be several things wrong here. First there is an implicit contradiction (between “no additional” and “reversal”), and if it isn’t a contradiction, that is only because the two propositions are very carelessly worded; which is of course, your trademark. Second, the law has transparently failed on “implementation”, and the law requires to be changed. Too few people (at least in the UK, even compared with the US) have been charged with offences following the Crash. This is a failure of law. I recommend reading the distinguished criminal and regulatory litigator David Corker who wrote the following four years ago; “It is clear that things in these markets [LIBOR market benchmarks] are not going to continue as before but the question is whether changing anything will actually change anything significant” (“Foul! Show Market Abuse the Red Card” Financial Monthly, July, 2014).
I believe little has really or effectively changed in the fundamentals of banking, even since before the Crash.The Fraud Act, 2006 has been a failure. How many people have been charged under the Fraud Act in the Banking or financial sector? How many have been found guilty? Third, we do indeed require a definition of banking. We also need wholesale restructuring. Without definition, but with the open-ended creativity produced by hiring mathematicians and non-bankers, banking has become innovative, but poorly understood by bankers, or even by regulators. The consequence is we end with your long, pointless descriptive but not limiting characteristics of activities. Following deregulation Banks have turned themselves into amorphous, non-specific, uncontrolled financial Leviathans that make up the banking rules as they go along (with the regulator as ex-post rationaliser of innovation), and are guaranteed bail-outs by Government because they are Leviathans; too big to fail.
“A bank does not make mistakes”. But of course it does. Certainly from the perspective of a customer affected by a mistake it is precisely the corporate body, and its resources, to which the customer would look for restitution.
Laws exist that could be used to prosecute bankers but they are not applied because politicians (who receive donations from bankers) refuse by all kinds of malign manipulation of regulators, to allow it to happen.
Tony Blair’s curtailment of the British Aerospace prosecution is the least subtle tip of the ice berg.
We can pontificate on laws and rules all we like but until we have honest politicians nothing will change.