No curbs on predatory and calamitous capitalism

Britain’s financial regulators are still asleep and more scandals could follow, warns Prem Sikka

The banking crash exposed the “London loophole” – a phenomenon associated with feather-duster regulation and ideology where regulators do little to check predatory practices. Nearly five years on and despite vast bailouts, the regulators in Britain have shown little backbone or interest in cleaning-up predatory capitalism.

Rather than taking responsibility, the United Kingdom is dragged along by others. Recent exposure of money laundering and London Interbank Offered Rate (Libor) are just the latest manifestations of a crisis which shows that this country lacks the structures and the political will to curb predatory capitalism.

Any mention of effective regulation sends corporate elites into a cold sweat. They use their chequebooks to fund political parties and find jobs for former and potential ministers with the aim of stymying regulation.

They refer to the bogey of higher costs of regulation, even though the absence of effective regulation has resulted in an unprecedented economic crisis.

The elites forget that the state is the ultimate sponsor of capitalism, and has to coerce and cajole corporate beasts to curb their self-destructive tendencies. That lesson has been learned in the United States, supposedly the home of free markets, but not in Britain. Here are some recent examples.

In August 2012, the New York New York State Department of Financial Services claimed that, for 10 years, the Standard Chartered Bank schemed with the government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion. It collected millions of dollars in fees, but left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity.

The report added that the bank carefully planned its deception and was apparently aided by its consultant, Deloitte and Touche, which intentionally omitted critical information in its “independent report” to regulators. Standard Chartered has agreed to pay a fine of $340 million. Britain’s regulators have done nothing.
In July 2012, a 300-page report by the US Senate Permanent Subcommittee on Investigations said that HSBC circumvented banking rules designed to prevent financial dealings with Iran, North Korea and Burma. Its lax systems and controls also facilitated financial movements for drug cartels and terrorists. The bank is accused of failing to monitor some $60 trillion of transactions.

HSBC has paid $27.5 million in fines to Mexico and may be fined around $1 billion by the US regulators. The revelations should have resulted in probes in the UK, too, but there is no sign of much action, aside from a belated report into the Libor rate rigging scandal concluding that the system is broken and suggesting its complete overhaul, including criminal prosecutions for those who try to manipulate it – things most observers had concluded rather earlier.

In June 2012, the US regulators took the lead in exposing the Libor scandal. Barclays Bank paid a total fine of £290 million, including £59.5 million to the UK’s Financial Services Authority, to settle allegations of manipulating Libor and the Euro Interbank Offered Rate (Euribor) lending – the rates at which banks lend to each other in the wholesale money markets. Citigroup, Deutsche Bank, JP Morgan, UBS, HSBC and the Royal Bank of Scotland are also thought to be on the US regulators’ radar.

With its reputation irrevocably tarnished by the banking crash and its imminent replacement by the Prudential Regulation Authority and the Financial Conduct Authority, the FSA now claims to be looking at some banks, but so far there is no tangible evidence of this.

The UK is a soft touch compared to the US where the Securities Exchange Commission and Department of Justice have shown some willingness to investigate, prosecute and fine corporations, although the scale and severity of this have been insufficient to curb predatory capitalism.

In contrast, the UK regulatory impulse is to protect elites by sweeping things under dust-laden carpets. A couple of examples serve to illustrate these points.

Sani Abacha, the late Nigerian dictator is estimated to have looted between $3 billion and $5 billion of public money. Despite the extensive anti-money laundering legislation, most of the loot ended up in Western banks. Around $1.3 billion is estimated to have passed through 42 bank accounts in London. Unlike Switzerland and even Jersey, the British Government has neither named the banks nor repatriated the stolen money.

The Bank of Credit and Commerce International was the biggest banking fraud of the 20th century. The Bank of England, then the banking regulator, closed it in July 1991.

Some 1.4 million depositors lost around £7 billion of their savings. In the US, Senate hearings were held and the CIA published some of its reports on BCCI’s activities. A US Senate Committee report concluded that the Bank of England and BCCI auditors Price Waterhouse (now part of PricewaterhouseCoopers) were engaged in a cover-up”.

It also released 99 per cent of a report, censored by the Bank of England, codenamed the Sandstorm Report, which described some of the frauds and named the wrongdoers and various movers and shakers.
However, the Sandstorm Report has remained a state secret in the UK. Various parliamentary committees held hearings on the BCCI scandal, but none were given sight of the Sandstorm Report.

Last year, after some five-and-half years of legal battles against the Treasury and the Information Commissioner, I managed to secure the names of the wrongdoers and some related parties.

These included members of the Abu Dhabi royal family, prominent Middle East businessmen, the head of Saudi intelligence, prominent political advisors and even the biggest funder of al Qaida, then considered to be an organisation friendly to Western interests.

Evidently, the British Government prioritised the appeasement of commercial interests over its citizens’ right to know, or even the desire to create effective banking regulation.

The UK lacks an effective regulatory system and a political culture to curb predatory capitalism. Its patchwork quilt of regulators includes the Financial Services Authority (and its successor bodies), the Bank of England, the Serious Fraud Office, Her Majesty’s Revenue and Customs, the London Stock Exchange, Office of Fair Trading, Financial Reporting Council and myriad private sector regulators.

They are poorly equipped to call multinational corporations to account.

With an annual budget of £37 million, the SFO is incapable of mounting effective corporate prosecutions. In contrast, the US SEC has an annual budget of $1.3 billion.

Almost all of Britain’s watchdogs come from the private sector and are usually too sympathetic to the games played by corporations. After a stint as a regulator, they return to the private sector and know the hands that they must not bite.

The UK’s patchwork system encourages duplication, buck passing and obfuscation. And it is hard to think of any timely intervention by any regulator.

Britain needs to replace the ineffective patchwork of regulators with its own equivalent of the SEC, which could be called the Business and Finance Commission. This would need to be controlled by a board representing a plurality of interests, including taxpayers, employees, customers and other stakeholders, so that elites could not easily sweep matters under the carpet.

The board should be required to meet in the open and its files should be publicly available so that we could all judge its efficiency and effectiveness. No document should be withheld from parliamentary inquiries into scandals.

All political parties need to recognise that additional financial and human resources are needed for swift investigation and prosecution of corporate misdemeanours. Without change, the UK will not have an effective regulatory system.

This article first appeared in Tribune magazine

Durable change a long way off for scandal-ridden UK banking system

The role of Barclays bank in manipulating the London Interbank Offered Rate (LIBOR) continues to dominate international financial media.

The bank has already attracted fines from regulators in the UK and theUSA.
But further revelations are likely as US Senate Committees are flexing their muscles, the UK parliament has launched an inquiry and the UK’s Serious Fraud Office (SFO) has announced a criminal investigation. The temptation will be to look for scapegoats and prevent consideration of the systemic factors.

Barclays has a dark history. For example, in 2010, Barclays Bank paid US$298m in fines for “knowingly and willfully” violating international sanctions by handling hundreds of millions of dollars in clandestine transactions with banks in Cuba, Iran, Libya, Sudan and Burma.

In February 2012, the UK government introduced retrospective legislation to halt two tax avoidance schemes that would have enabled Barclays to avoid around £500 million in corporate taxes. However, Barclays is not alone. Only last month, the UK financial regulator reported that Barclays, HSBC, Lloyds and Royal Bank of Scotland mis-sold loans and hedging products to small and medium sized businesses. The financial sector has been a serial offender.

Here are a few examples.

The UK experienced a secondary banking crash in the mid-1970s. The crash revealed fraud and deceit at many banks. The UK government bailed them out and in turn had to secure a loan from the International Monetary Fund.

In the 1980s, the financial sector sold around 8.5 million endowment policies, which were linked to repayment of mortgages. The products were not suitable for everyone but were pushed just the same, and the risks were not explained to the customers.

A 2004 parliamentary report found that some 60% of the endowment policyholders have been the victims of mis-selling and face a shortfall of around £40 billion. This was followed-up by a pensions mis-selling scandal where 1.4 million people had been sold inappropriate pension schemes. The possible losses may have been £13.5 billion.

The 1990s saw the precipice bonds scandal. Around 250,000 retired people been persuaded to invest £5 billion in highly risky bonds, misleadingly sold as “low risk” products. Thousands of investors lost 80% of their savings. Then came the Split Capital Investment Trusts scandal. Once again financial products had been mis-sold and deceptively described as low risk. Some 50,000 investors may have lost £770 million.

New millennium came with a new financial scandal – the payment protection insurance (PPI) scandal. People taking out loans were forced to buy expensive insurance, which generated around £5.4 billion in annual premiums for banks and provided little protection for borrowers. This scandal is still being played out and banks may be forced to pay £10 billion in compensation.

The above has been accompanied by money laundering, tax avoidance, tax evasion, fraudulent practices to inflate share prices and of course the banking crash, which has brought the global economy to its knees.

Whichever way you look at it, banks have been serial offenders and continue to act with impunity. The entrepreneurial culture of making private profits at almost any cost has had disastrous social consequences. Fines and forced compensations have just become another business cost and the usual predatory practices have continued.

There are two main drivers of the financial scandals. Firstly, markets exert incessant pressures for ever rising profits and don’t care much whether they come from normal trade, money laundering, tax avoidance and other dodges. Secondly, the idea of assessing people’s worth through wealth is deeply embedded in western societies.

Profit-related pay became the mantra from the 1970s onwards and has been a key driver of the abuses. The typical tenure of a FTSE 350 companies CEO is around four years and declining. In this time, people at the top need to collect as much personal loot as possible and have little regard for any long-term consequences. The performance related pay applies at the lower echelons as well and again encourages short-termism and neglect of any social consequences.

In principle, regulators and politicians should be able to able to check the abuses, but the UK political institutions are weak. There is little competition amongst the political parties to devise socially responsible policies.

For the last 40 years, they have all offered various shades of light-touch regulation and veneration of markets. There has been no attempt to alleviate market pressures by forcing banks to operate as cooperatives or mutuals. Corporate and wealthy elites fund political parties and have organised effective regulation and accountability off the political agenda.

The regulators of the financial sector come primarily from the same industry and have sympathies for the narrow short-term interests of that industry. After a stint as a regulator, they then return to the same industry. The revolving-doors and ingrained conflicts of interest have prevented effective regulation and accountability.

Reforming political institutions is a necessary condition of controlling banking frauds, but a durable change is not on the horizon.

Banks are serially corrupt. But Vince Cable's shareholder plan won't work

Prem Sikka

Banks are serial offenders and can't be controlled by shareholders. Vince Cable, the business secretary, has correctly identified the problem of corruption at banks, but his policy prescription of asking shareholders to invigilate abusive organisations and executives has not worked and will not work. Contrary to Cable's claims, shareholders are traders and speculators rather than owners. They barely hold shares for more than three months and do not have a long-term interest in the business. They have been utterly ineffective at curbing corrupt practices at banks, as evidenced by the tide of scandals.

Banks are under the spotlight for the Libor scandal and mis-selling of loans to small businesses, but they are serial offenders. The mid-1970s secondary banking crash highlighted fraudulent practices, which also engulfed the property and the insurance sectors. The government bailed out the banks and in turn had to resort to loans from the International Monetary Fund.

In the 1980s the financial industry sold around 8.5m endowment policies for repaying mortgage loans. These were not suitable for all borrowers. Banking staff received commission for selling the policies. The risks were often not explained to the borrowers. Banks made profits but eight out of 10 policies failed to pay the promised returns and did not even provide the amounts needed to redeem the mortgages. A 2004 UK Treasury committee report estimated that 60% of borrowers had been the victims of mis-selling, facing a shortfall of around £40bn.

This was followed by the pensions mis-selling scandal where people were encouraged to abandon good employer-based pension schemes and join a private one instead. The £13.5bn scandal affected some 1.4 million people.

The late 1990s saw the precipice bonds scandal. Some 250,000 retired people were lured to invest £5bn in investments misleadingly described as low risk. Thousands of investors lost 80% of their savings.

The 21st century did not provide any respite from financial scandals. Payment protection insurance is still being played out; some 3 million people were sold expensive and unnecessary insurance and are battling for compensation which could top £10bn. Now we have the Libor and small-company loan scandal.

In between the above, banks engaged in organised and aggressive tax avoidance, tax fraud, money laundering, corruption and feeding misleading stock market research to investors to drum up business and higher fees – just to mention a few of their misdeeds.

Fines, penalties, forced compensations and regulatory action have become part of normal banking business and the costs are just passed on to customers. It is hard of think of any instance when shareholders have sought to curb rapacious behaviour of banks or their executives. They have always been focused on short-term gains and cared little about the social consequences of the quest for higher returns.

Democracy and public sunlight are effective antidotes to institutionalised corruption and should be applied here in large doses. If the government is serious about changing the predatory culture of banks then it needs to change the whole system of corporate governance. The market pressures for higher returns should be checked by turning all banks into mutuals and co-operatives. Employees, customers and borrowers have a long-term interest in the business of banks and should be empowered to elect and remunerate directors. Directors need to be made personally liable for the cost of criminal practices. At the moment banks are fined, but executives walk away with a stash of profit-related pay, with virtually no penalties. All major banking contracts should be publicly available so that we can all see the shady dealings.

The banking regulators have frequently come from the finance industry and are too close to banks. They act only after the stench of scandal has become too strong, and frequently they have been part of what a US senate report described as a "cover-up". This inertia should be checked through annual hearings by the Treasury committee. All policy meetings of the banking regulators should be held in the open, and information in the regulator's possession – including background papers – should be made publicly available.

The above is not a magic bullet for eradicating institutionalised corruption, but the beginning of reforms necessary to curb the worst excesses of an industry that has damaged the lives of millions of people.

This article first appeared on Comment is Free

Nude rambling, Barclays and moral hazard

In February this year, Leeds Magistrates Court fined Nigel Keer (pictured left) £315 for rambling through a popular beauty spot naked except for a backpack, boots and a baseball cap. (Read report here)

Why do I mention this case? And what on earth has it got to do with Barclays? (apart from an amusing link to 'moral hazard')

Well, the penalty handed down to Mr Keer for a minor public order offence (he provoked an onlooker to frown!) is tougher than the fine handed down to Barclays.


Barclays was handed a fine of £290 million on Wednesday for its role in conniving to fix the LIBOR rate (the interest rate used for inter-bank lending) as you may have seen (if not, a reasonable article here). 


So how is the £315 Mr Keer was fined more than the £290m Barclays fine ?


Well, the BBC's Paul Lewis tweeted this morning that Barclays fine was just ten days' profits for the banking behemoth.


So, assuming Mr Keer is an average earner, then his 10 day 'profit' (his disposable income after tax) is £205 - as the Telegraph reports that the average disposable income is £144 per week.


So there we have it, wandering scantily clad around the hills of the Leeds hinterland is worse than international banking fraud.