Mis-selling Britain in an Age of Irresponsibility
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.