The Regulatory Paradox: Now you see it, now you don’t
It is worth remembering that the British People, the Public Purse, the Taxpayer and nobody else; not the City, not ‘The Market’, not the Shareholders bailed-out the banking sector in the Credit Crunch. Private losses were transferred wholesale to the public sector on an eye-watering scale; Britain’s National Debt increased. The Government’s strategy for the British balance sheet has consisted of a very neat ideological dichotomy: privatise the assets and transfer the liabilities to the public sector.
This needs to be said because following the Credit Crunch the banks, repeating the vainglories of the Bourbon kings, with which they have so much in common in everything save style, have too often shown that they too ‘learn nothing and forget nothing’. The public is every day reminded by Parliament, Press and Bankers that we need the banks in London, more than they need us. The public is reminded that the City is the ‘Golden Goose’, even though the Credit Crunch proved it was actually a Turkey, and the City repays the public only by making every day Christmas, for the banks. ‘Too big to fail’ is not a headline, it is the blank cheque Parliament gave the banks that takes all the risk out of banking and passes it to the taxpayer; but you may be sure that if that cheque is cashed, the name that isn’t on the cheque will prove finally, to be your responsibility. The lender of last resort is you.
So let us see how well Parliament, Press and Bankers are looking after you. In 2010-11 when the politicians were looking for somewhere to hide from the wrath of electors, they certainly had your support and interests in mind. For a little while afterwards you might even have thought they cared.
Sir John Vickers headed the Independent Commission on Banking (ICB) set up in June, 1910 by the Coalition Government under David Cameron and George Osborne in the wake of the Financial Crash, with the task of devising a new system of banking regulation following the abject failure of the previous British framework for regulation, led by the FSA; which was discredited by the Credit Crunch. Vickers was well placed for this role as a recent Chief Economist with the Bank of England, although now Warden of All Souls College, Oxford.
Following the presentation of the ICB proposals to Government in September, 2011 Vickers made clear that the new regulatory system proposed was not an ‘a la carte’ menu from which the Government could select items to taste, but an integrated package of measures that must be implemented as a whole to be effective. Cameron and Osborne ignored the advice and in consequence produced a system of financial regulation that superficially looked like Vickers; that was ‘new’ but incorporated a number of exceptions. The system was not as the architect of the system had designed it, or advised on its implementation. Nevertheless the claims made for the new system by Government were extravagant.
On 1st January, 2011 the Treasury made the following official announcement:
“The Government today introduced a permanent levy on banks’ balance sheets as it believes that banks should make a full and fair contribution in respect of the potential risks they pose on the wider economy. Once fully in place the levy is expected to raise around £2½ billion of annual revenues. This is in line with the Budget estimate. The levy is intended to encourage banks to move to less risky funding profiles, and the £2½ billion is a fair contribution in respect of the risks the banking system poses to the wider economy, while ensuring that the industry remains competitive. The rate for 2011 will be 0.05 per cent, and it will rise to 0.075 per cent from 2012 onwards. The government has consulted on the design of the scheme so that it achieves two objectives: first, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy. Second, the final scheme design will encourage the banks to make greater use of more stable sources of funding, such as long-term debt and equity, working with the grain of our wider reform programme”.
The bank levy was based on banks’ balance sheets, where liabilities (excluding Tier 1 capital, certain deposits and other specified liabilities) were above £20 billion. The levy could not be set-off against corporation tax.
Let us now move forward in time to March, 2015. One of the City’s tripartite regulatory authorities under the new system, the Financial Conduct Authority (FCA), presented its plans for 2015-16. The FCA chairman John Griffith-Jones suggested that in banking, “poor culture and controls continue to concern us, notwithstanding the efforts being made by firms to improve both.” The CEO Martin Wheatley (a rigorous regulator described by City opponents of tough regulation as a “hardliner”), announced that the FCA was going to undertake a thorough and close review of banking culture, which was now under systematic scrutiny following the long series of scandals and heavy fines in the financial sector for behaviour that had continued on past the ‘Credit Crunch’, with effects that had led to investigations into the LIBOR and Forex markets. It was recognised that the problem of banking was fundamental; it was a matter of culture. This large and thorough investigation was going to be transformative for a failed culture: it was going to be transparent, the conclusions would be published and the results would lead to a fundamental change in banking culture in Britain for the benefit of customers, the public and the economy; matters that were at last now seen to be important issues for regulators.
On 24th March, 2015 George Osborne announced that the bank levy was expected to raise more than £3bn over the following twelve months, and the Levy was “here to stay”. It was understood that the Bank Levy fell heaviest on HSBC.
Such are the influences that raise the spirit of hope and progress in a sector in which there were few other redeeming features for the public, who after all had suffered the endless ‘mis-selling’ which had helped destroy public trust, but had no doubt generated bonuses for bankers; and following years of scandals, heavy fines and failure in banking, persisting long after the Crash. Well, you might think so.
It didn’t last long; just until the General Election. On 8th July, 2015 in the Summer Budget, the Chancellor George Osborne announced that the £3bn bank levy would gradually reduce over the next six years and stop in 2021, arguing that it would be “doing harm unless we change it”.
The Chancellor thus operates a permanent, production-line parody of the abrupt policy U-turn; which, following a series of Treasury and Budget gaffes from 2010 on (which would be funny if it wasn’t serious), we may now name ‘Osborne’s Law’. Osborne’s Law provides any Minister with the public illusion that he is a creator of change, progress and dynamic growth, but delivers a sleight-of-hand, fast-moving, policy revolving door which in the end always deposits everyone involved back precisely where they began. The clever bit, the only thing that actually works, is that nobody in London, especially the politicians who are under the unblinking gaze of the City, or the professionals in the media, ever notices the gaff; even when they are among the first to praise Osborne for the shrewdness of the original policy, or are the first to admire the prescient wisdom of his U-turn, or both; and the public, mystified by the speed of the manoeuvres and the accompanying spivvish Government rhetoric, remain permanently bemused or baffled.
Public disappointment was not long going to resist, well further disappointment. In July, 2015 Martin Wheatley left the FCA. I think we can now see where this might be going.
On 31st December, 2015 the FCA announced (or perhaps, given the carefully chosen timing, ‘snuck out’ may be a more appropriate term) that it was going to scrap its major review into banking culture; there would be no transparent investigation of banking practice and custom, nor a published report. The FCA would engage with the banks in private; according to a Business Insider report, working with the banks “individually” to address “remuneration, appraisal and promotion decisions”. It is worth remembering that at this time transcripts of practice that had reached the public domain had damaged the reputation of the sector and angered the City.
On 15th February, 2016 HSBC made an important announcement. Having some time before threatened to take its headquarters out of London and overseas because of the threats from over-regulation and an uncompetitive environment, Douglas Flint, HSBC Chairman announced that “”The UK is one of the most globally connected economies in the world with a fantastic regulatory system and legal system and immense experience in dealing with international affairs …. …. The government’s made very clear its commitment to ensuring that UK remains a leading international financial centre … We’ve ended up with the best of both worlds – a pivot to Asia led from London”. The Chairman added, “it was important that there was a change in the scope of the levy”. When apparently questioned on any discussion with government over the Bank Levy he said: “We had no negotiation with the government. The government was well aware of our view, and indeed the view of many other people who commented upon it, but there certainly was no pressure put, or negotiation”. He did endorse the view that London had an “internationally respected regulatory framework and legal system”.
On 15th February, 2016 – the same day – Sir John Vickers was reported by the ‘Daily Telegraph’ as disagreeing with the Bank of England over the strength and capitalisation of Bank balance sheets. Vickers was reported as arguing “in a series of articles and interviews across the BBC, the Financial Times and Vox “ to have claimed that “the Bank of England has failed to properly implement the plans he spelled out in a landmark report on banking regulation released in 2011”.
I leave the reader to draw his or her own conclusions.