Last week senior bankers breathed with relief and opened the champagne. The Lords, by just 2 votes, gave in to the Tory Government and failed to uphold the tough rule known as the “reversal of the burden of proof” for failures by senior bankers which was passed into legislation in 2013 and is now cancelled.
I was a member of the Parliamentary Commission on Banking Standards which recommended the rule. It was the most potent weapon we could give the regulators to prevent future banking scandals by making sure that senior bankers would be held to account for their management of the banks. Instead of hapless regulators trying to chase senior bankers in a “catch-us-if-you-can” set up brilliantly managed by teams of bank lawyers, senior bankers would have had to show that they had acted responsibly. The rule would make sure senior bankers are held to account, this would not lead to cases of guilty until proven innocent as the regulators would still have to prove an offence took place. The rule would have gone into effect in March 2016. But with the Coalition ended George Osborne and the Tory Government couldn’t wait to scupper it.
Ordinary people, especially the many hurt by the banking crisis and the recession it helped to trigger, have been justly furious that despite all the misbehaviour by banks the UK regulators have been unable to pursue anyone in senior management – not one. The scandals have ranged from sheer mismanagement, to miss-selling PPI and interest rate swaps, manipulation of the LIBOR benchmark and money laundering – much of it on an industrial scale. Senior managers enjoyed huge bonuses off the back of the false profits these schemes generated.
The “reversal of the burden of proof” (for what is a civil not a criminal offence) would have made the regulators effective enforcers. It is a well-established concept used in quite a number of other areas of British law when it is deemed necessary for justice – indeed even the smallest engineering firm faces it on issues of health and safety as was made clear in the Lords debate. Perhaps even more important than delivering justice, this strong power for the regulator would have changed the culture of banks. It would have had the effect of compelling CEOs and other senior managers to drive ethical behaviour right through their organisations despite the profitable rewards available for misbehaviour.
The tough rule fell by only two votes. The Labour turnout for this vote was pathetic despite all their speeches in favour. The Conservative Government has not done right by the people of this country by deliberately giving way to the pleading of the banks and removing a key power to avert future banking and financial crises.
* Susan Kramer is the Lib Dem spokesperson for Economics. She is a member of the House of Lords and former MP for Richmond Park.
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14 Comments
And how do we hold Lords to account? Anyway, the problem with financial services regulation is where do you draw the line between miss-selling and fair business? I’ve been regulated by the FCA at three different firms (or the FSA as it used to be known) and also provided compliance advice to another business on a self-employed business.
I know the thought process and the nature of a lot of this dispute. Some of it is clearly miss-selling, but the fear is that the regulator will force everyone to give “perfect advice” and the equivalent of going into a BMW showroom and making the sales people say “but have you seen this from Mercedes? Or Honda?
If people want free bank accounts then the banking industry needs to remain partly sales based. At the moment it seems some people want high fee quality services without paying many fees.
Meanwhile, in the real world,
1. Tendring Council (Tory controlled) in Essex is charging £ 26 every time an old and vulnerable person falls down and needs assistance to get up again. How could we ever have been in Coalition with a party with that sort of mindset as a result of the financial crisis caused by the bankers (insert a w at the beginning if you see fit).
2. East Lothian Food Bank distributed ovber £ 100,000 worth of food in the last calendar year. The (ex-Sir) Fred of RBS fame is I believe still drawing a handsome pension running into six figures.
Eddie, It’s not really holding the Lords to account, it is holding the Conservatives in the Commons to account once the coalition was over, and the answer is there is no way to do it. This was a fundamental failing of those who have expressed the view that what we got out of coalition in five years, was worth sacrificing so much of Liberal Democracy for.
Any of the laws that we got passed between 2010 and 2015 that the Conservatives don’t like can be undone by them at a moment’s notice. i.e. Anything that the Conservatives don’t consider beneficial to their direct interests. Thus increases in tax allowances could go, except they decided they would get more votes by claiming it as their own. Pupil Premium, already proposals to hack it about. Five Year parliaments, a millstone in time of crisis, watch it go. Equal marriage – just wait for some Daily Mail inspired moral outrage to come about and see how hard they fight to defend it.
Liberal Democracy depends not so much on laws passed, but on having good Lib Dems out there fighting to hold back the never ending tide of authoritarianism and the protection of elites. The fact there are so many less of us now, is a clear indictment of the short termism of many in our party over that period.
Before putting all the blame on Labour our own attendance at this debate leaves much to be desired, 70, or 64%. At an education debate where a motion we supported fell after obtaining an equal number of votes only 74 turned up.
If we are going to make an impact it can only be done in the lords, and our own Lordships need to maximise their attendance when there is a debate on an issue we could influence.
I agree with Baroness Kramer that this rule should have been passed. The Commission on Banking Standards knew what they were doing. I read the Hansard record of the debate. It was quite confused. The rule was proposed for disciplinary cases, not criminal prosecutions, and meant that in order to get off the charge of responsibility for what the bank had done the banker had to establish a defence of having taken reasonable steps, eg by producing an email trail showing that the management of the bank had a reasonable system in place. This was not a particularly unusual proposal. Similar reasonable steps defences exist eg in food law. If a food supermarket boss has to show a reasonable system is in place to avoid responsibility for poisoning the rest of us, why is a banker different (apart from being more likely to have influential friends in Parliament)?
Susan Kramer – thanks for your leadership on the vital issue of holding bankers accountable. This is a battle lost but not the war and shouldn’t be the end of it.
Too much of the City has become ruthlessly extractive, using financial trickery and, yes, outright fraud to hoover up wealth. As that wealth is sucked out of companies and communities so jobs and opportunities for the vast majority steadily evaporate. For the real economy to function properly the City must first be remade into a service industry instead of a parasitic one.
Many people probably experience a MEGO (My Eyes Glaze Over) moment when the topic turns to banking but equally I think a great many understand at some level that things are badly adrift and that it’s a case of one law for us, another law (no law at all really) for them.
This leaves them angry and confused but without leadership they are powerless. That energy needs to be harnessed and that’s a great opportunity for Lib Dems provided they have the ambition and courage to make this cause their own. So please keep hammering away at this because sooner or later Osborne’s “recovery” is going to blow up big time leaving those with an alternative plan holding the ring – however much they were initially derided.
A lot of banking is actually transparent nowadays. Advisers have to state their fees and investment managers have to include the overall charges figure. This is to stop people saying “our charges are only 1%” and then investing in lots of their own funds to get this 1% up to about 1.25% or sometimes worse. Of course, they still invest into their own funds at times, but the increased costs of this are always stated.
Eddie, I’m afraid I have to disagree. Having worked in Internal Audit in banking for many years, it was clear to me that many things that are done in banking is deliberately very complex and opaque to confuse the regulators, the external auditors, the government and the public! … and my bank wasn’t a Merchant Bank!
Fair enough David, I’m just trying to get rid of this idea that it is a free for all and I was replying to Gordon’s comment saying there’s lots of trickery and even fraud. I’ve seen some trickery, but the regulators have power. Maybe not much in sending people to prison, but they like to impose big fines and then increase the regulatory costs for everyone.
Eddie – If I’m not mistaken you own experience is primarily advising and selling financial services to retail clients. That’s a very small part of a huge waterfront.
I suggest you read the recent speech by Robert Jenkins, a former member of the Bank of England’s financial policy committee, now a professor of finance at London Business School. He gives a “partial list” of 47 banking scandals that collectively makes it clear that fraud has become a core feature of the business models of some in the City.
There have been no prosecutions of senior people and few have lost their jobs, one of the exceptions being Martin Wheatley – the regulator to attempted to reign in some of the worst behaviour.
http://www.ianfraser.org/why-well-all-end-up-paying-for-the-feeble-response-to-the-banking-crisis/
Hi Gordon, yes that is correct, but it does give me a broad basic knowledge of many other services. We’ll have to keep the discussion going another time because clearly there is a sensible line to be struck somewhere. I personally live in fear of the regulator even though I’m not regulated at the moment. I know lots of firms, maybe 80%, who would be in trouble if the regulator took a purist approach to financial advice. I’ve taken this purist approach myself in the past and may again in the future, but not many employer’s hire for advisers who want to work in a text-book fashion.
Eddie – I think your “fear of the regulator” is typical of the experience of many working at the ‘retail’ level and not just in financial services (e.g. teachers vs. Ofsted). Many big players evidently live in a totally different world where laws and regulations are just window dressing to persuade the public that everything is under control when the evidence is clear that’s it’s actually a lawless free-for-all – a financial Wild West – as Robert Jenkins documents in the item linked in my last comment.
FWIW I agree with you that the “purist” (by which I take it you mean a bureaucratic, tick-box driven) approach to regulation is problematic (and that’s being polite!). At the ‘retail’ level it imposes huge costs – both direct compliance costs and indirect ones arising from the rigidities it creates. At the ‘City’ big player level it is easily sidestepped so it just doesn’t work to achieve its intended purpose even when there is no fraud as such.
Developing a better – i.e. more effective and workable approaches to regulation at all levels – should be a strategic imperative for the Lib Dems since NOT doing so is to tacitly accept that ‘might is right’ which is surely a most illiberal concept. Enforcing existing laws would be a good start both practically and politically. If Tim Farron started calling out fraud where it exists it would immediately make life very hard for those politically sheltering the fraudsters, a trail that would soon lead to the heart of government.
Hi Gordon, by purist I mean take all elements of product sales and commission out of the advice process. It’s an option I’m interested in, but I don’t think it should be made mandatory because many clients don’t want to pay fees and prefer to only pay if they like a product they see. I also like the way “commission” or “adviser facilitated fees” are proportionate to the wealth of the client. As far as I know fee discrimination via wealth is only possible via this option because again the regulator complains about transparency.
The regulator also seems to have an approach of making examples out of people. You won’t hear much and them wham! Someone will receive a massive fine an a ban that sends shudders throughout the industry. We saw this in banking too with Tom Hayes receiving a 14 year prison sentence.
So I suppose a long-list of gripes and whilst I agree the purist approach I talk about is the best way to give advice, it is also one of the most expensive and I don’t think it should be made mandatory.
The regulators should also be held equally accountable for failing to identify miss-selling PPI and interest rate swaps, manipulation of the LIBOR benchmark and money laundering.