Santander fined £12m for bad advice

Santander staff were not trained properly and didn't grasp customers' circumstances or the level or risk they were prepared to take

by Will Stone

Santander was fined £12.4 million yesterday for giving nearly 300,000 customers bad advice.

The Financial Conduct Authority (FCA) said it had uncovered "serious failings" in the investment advice the bank gave to about 295,000 people - most of them pensioners.

Santander staff were not trained properly and didn't grasp customers' circumstances or the level or risk they were prepared to take, the FCA said.

The bank also failed to make sure information was clear and didn't regularly check the suitability of investments.

The FCA said customers were at "significant risk" of receiving bad advice between January 2010 and December 2012.

Santander signed people up to nearly 350,000 investments worth £7 billion over that period.
The poor advice was exposed by a mystery shopper probe carried out by former regulator FSA at banks in 2012.

It caught Santander staff telling customers that their investments will "likely double" and that "in 10 years it will beat cash by 87 per cent" even though the term was for five years and returns were not guaranteed.

Customers were generally aged 60 or over and the average investment was £24,000.

Left Economics Advisory Panel co-ordinator Andrew Fisher welcomed the fine but said Santander bosses should face charges.

"In the wake of the bank crash and the scandals of PPI and Libor, this is yet another example of the corrupt UK banking culture which has ripped off people and small businesses.

"Scandalously it is clear that Santander encouraged staff to mislead financially naive and vulnerable elderly customers into buying inappropriate products."

Santander said it has since overhauled parts of its business.

It will contact affected customers and compensate those left out of pocket but the FCA said redress was likely to be minimal given that investment returns have been boosted by rising stock markets in recent years.

This article first appeared in the Morning Star

Democratise companies to rein in excessive banker bonuses

Prem Sikka

In times of austerity, one of few things that seems to be booming is the trade in wheelbarrows. At least, company directors at major corporations will need them to collect vast amounts of remuneration they continue to award themselves, with the help of ineffective remuneration committees.

The financial dealers on Wall Street have collected about US$26.7 billion in bonus payments, the equivalent of a year’s pay for the 1.1m workers on the minimum wage. The UK is not far behind. Bonuses in the City of London have increased by 49% compared to 2012, a higher figure than for Wall Street.

The chief executive of the crisis-ridden Cooperative Bank, Euan Sutherland, was to receive a remuneration package of £3.5 million, but has since resigned. The state-owned Royal Bank of Scotland declared a loss of about £8 billion, but has given 11 directors a bonus package worth about £18.25m between them. At Barclays and Lloyds Bank, the chief executives could be collecting more than £7m each. Of course, wheelbarrows come in handy at other corporate boardrooms too. Despite the costs arising from the Deepwater Horizon disaster, the pay packet of the BP chief executive has tripled to US$8.7m (£5.2m).

The corporate boardrooms are addicted to bonuses, but are the bonuses justified? The claims for bonuses and excessive rewards presuppose that executives exert superhuman efforts to generate wealth. The anatomy of corporate decisions does not really support that. When a new executive arrives at an organisation, for some time s/he is likely to be managing and living off products, services and strategies already in place. So the claims of distinctive contribution are hard to sustain.

Now suppose an executive decides to launch a new product or a project; this will always take some time to develop, plan and launch. The same applies if the mission is to rescue an ailing business. The success or failure of the new projects will not be known for many months or years. Meanwhile, the company will probably incur upfront costs, with no guarantee that the outlays will be recouped. Even after the initial celebrations, the product/service may turn out to be a failure and become a costly burden, as evidenced by payment protection insurance and other financial scandals.

Even if new ventures are successful, the success will depend on the involvement of other employees. It is hard to relate the success of anything to the efforts of few superstar executives. If the success cannot easily be related to the input of one person then the idea of performance-related pay becomes highly problematic. This suggests that higher rewards are claimed simply because some individuals or groups have sufficient power and control to give themselves disproportionate rewards.

So the question then is how to control the institutionalised fat-cattery. The UK government’s preferred solution is to empower shareholders by giving them a binding vote on executive remuneration. Such a step assumes that shareholders are owners of companies and bear most of the risks, and will somehow act in the interests of broader society. The evidence for this is not persuasive.

Shareholders in UK banks have average shareholding duration of about three months. Their position is no different from that of a speculator or a trader seeking short-term gains. They don’t have strong incentives to constrain directors. The UK Parliamentary Commission on Banking Standards looked at the operations of HBOS and concluded that shareholders did not exert “the effective pressure that might have acted as a constraint upon the flawed strategy of the bank”.

The commission also noted that “shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism”. Shareholders often profit from harmful practices without any personal responsibility. A company can be mandated to sell harmful products, for example, cigarettes. Shareholders can share the resulting profits, but are not personally liable for because they are shielded by the doctrine of limited liability. Thus shareholder irresponsibility is written into the system and they don’t have strong incentives to consider the social good.

Besides, shareholders don’t provide most of the risk capital either. At major UK banks, shareholders only provide between 4.22% and 7.24% of total capital. The rest is provided by savers and creditors. Therefore, it is hard to make a good case for shareholder supremacy.

The proper approach is to empower the public. In the case of banks; employees, savers and borrowers are a good proxy for the public at large. They should appoint directors and vote on their remuneration. Elsewhere, employees, consumers and suppliers could be mobilised to invigilate directors as they all have a long-term interest in the welfare of the company. In a democratised company, directors are unlikely to get high remuneration without paying attention to the interests of employees and other stakeholders.

• This article first appeared on The Conversation website

The Banking Reform Act is rearranging the deck chairs on the neoliberal Titanic

 
Prem Sikka

A new report from the Centre for Labour and Social Studies highlights the failure of the Banking Reform Act to deal with any of the problems at the core of the 2007/8 collapse. Here, its author explains what's really going on.

Some six years after the banking crash, the UK has wheeled out its answer – the Banking Reform Act. Some deckchairs have been rearranged, but little attention has been paid to the key drivers of the crisis.

The biggest financial crisis has coincided with the rise of neoliberalism, which emphasised faith in free markets and light-touch regulation. The notion of competition is a key concept and is applied to every sector of society, including corporations, regions, government departments, hospitals, and universities because this somehow secures efficient allocation of resources and opens the door to wealth and riches. Neoliberalism provides everyday understandings of what it means to be successful. It reconstructs individuals as competitive beings engaged in the endless pursuit of private wealth and consumption. In common with other sectors of society, individuals are expected to have strategies for meeting performance targets and be rewarded accordingly. Thus, performance related pay for executives has become endemic. A necessary condition for the operation of markets and pursuit of self-interest is that all individuals, including business enterprises, need to be constrained by social norms and regulatory structures. But this has not been high on the neoliberal agenda because the state is bad and inefficient and has to be rolled-back, and the self-correcting markets would restore some mythical equilibrium. Well, it has not turned out that way.

The fault lines of neoliberalism have long been evident. The mid-1970s secondary banking crash highlighted empires built on fraud. The state dutifully bailed out banks, property and insurance companies. In 1984, Johnson Matthey Bank collapsed under the weight of fraud and the Bank of England organised a rescue. In 1995, Barings Bank collapsed due to fraud. The twentieth century’s biggest banking frauds took place at the Bank of Credit and Commerce International (BCCI). In July 1991, the Bank of England closed BCCI. Some 1.4 million depositors lost some part of their savings. In an environment of weak regulation, banks continued to pick customers’ pockets by selling useless, pensions, mortgages and saving schemes.

Neoliberalism, remained the key philosophy for governments. The 2008 banking crash showed that banks made vast amount of money from running illegal cartels, money laundering, insider trading, tax dodges, manipulation of interest rates, selling abusive products, misleading investors and consumers. Markets celebrated higher corporate profits and did not ask any questions about the quality of profits, or the social consequences of banking practices. Bank executives collected vast sums of money from performance related contracts.

Markets did not come forward to rescue banks. It was the state, which has been restructured rather than rolled-back, which bailed out banks. Under the weight of neoliberal ideologies it is now less concerned about the redistribution of income and wealth, labour rights, or the provision of decent healthcare, education, pensions and social infrastructure. It has shunned any attempt to democratise corporations or enhance their public accountability. Its major purpose is now to guarantee corporate profits and socialise losses, a kind of reverse socialism has been institutionalised.

The UK state has committed some £976 billion of loans and guarantees support distressed banks and also handed over another £375 billion under its quantitative easing programme. During the boom years of 2002 to 2007, the financial sector paid £203 billion in UK corporation tax, national insurance, VAT, payroll taxes, stamp duty and insurance taxes. Between 1991 and 2007, it created around 35,000 additional jobs. But it received vast stacks of money in return. Confidence in the banking sector is maintained through the provision of a taxpayer funded depositor protection scheme which safeguards savings of individuals of up to £85,000. Since March 2009, the state has maintained interest rates at 0.5%, considerably below the rate of inflation. This has robbed pensioners and savers of income and also eroded the real value of savings. The policy has enabled banks to borrow at ultra-cheap rates, lend at high rates, make profits and replenish their balance sheets. The customer base for banks has swelled as the government has persuaded pensioners and social security claimants to receive their payments through bank accounts rather than through the Post Office. The Private Finance Initiative has been a bonanza for banks and other corporations. In 2012, there were over 700 contracts with a capital value of £54.7 billion. The government is committed to repaying£301 billion over the next 25-30 years, a profit of nearly £247 billion.

The Banking Reform Act does not check fat-cattery or speculative practices. The sunlight of democracy and public accountability is an effective antidote to shady practices, but is missing from the Act as it does not connect with neoliberal values. The Act should have separated speculative banking from the rest. To prevent speculators from contaminating the economy, the privilege of limited liability should have been withdrawn from all gambling. Instead of banking elites regulating the banks for the benefit of the industry a Board of Stakeholders, representing a plurality of interests, should have been created to guide the regulator. This Board should not be dominated by the finance industry. In fact, only a minority should come from the industry, thus ensuring that other voices are heard and policies are made by consensus. Its meetings would be held in the open and its minutes and working papers would be publicly available.

Employees, savers and borrowers have long-term interests and should elect directors and vote on their remuneration. Instead, the government is obsessed with shareholders who are often the source of problems. The Parliamentary Commission on Banking Standardsconcluded that “shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism”. The typical shareholdingperiod in banks is about three months. Shareholders provide only a small amount of risk capital at banks. For example, at Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered, shareholders provide about 5%, 7%, 5%, 5.5% and 7.25% respectively of total capital. Shareholders are akin to traders and speculators and cannot invigilate bank directors.

In time, the missed opportunities for opening a new chapter in banking regulation will haunt the UK.

• This article first appeared on Open Democracy.

Posturing over the pound

The debate about what currency Scotland could, would or should have has sprung into life now that the SNP's white paper proposal for 'keeping the pound' has been rejected by all of the major Westminster parties, and the Liberal Democrats too.

This represents a new stage in the debate, with the stakes ramped up for both sides. But if we sweep aside the political posturing, the debate over the last few days has revealed - to this disinterested observer - some interesting truths:

1. The establishment is worried by the prospect of a 'Yes' vote

The unity among the leaderships of the Tories, Labour and Liberal Democrats (and UKIP incidentally) reinforced by the unusual decision to publish the advice of a senior civil servant is a clear indication that the establishment is concerned about the prospect of Scotland seceding from the union.

You might argue that this consensus is a reflection that currency union is a bad idea (especially for Scotland), but Sir Nicholas MacPherson's letter and the statements of the three parties (working together for a No vote under the Better Together banner) go further than criticising currency union and contain some ridiculous scaremongering. The 'no' side - ahead in all the polls - is obviously worried though.

And it has good reason. If Scotland votes to leave and is refused currency union, it could quite legitimately reject the UK debt (a possibility acknowledged in MacPherson's paper). However, even if Scotland took a share of the national debt (based on population size) it would have a debt to GDP ratio of 81%, compared with 104% for the rest of the UK (according to an NIESR paper).

The Treasury paper implicitly acknowledges these possibilities but implicitly says the UK would get its way because "an extensive wrangle about [Scotland's] share of the debt would increase uncertainty and hence its funding costs". What it doesn't say is that is true too for the remaining UK ... and that's why they're worried.

2. HM Treasury believes the Euro is still bad for the UK

It believes that economic union is problematic without political union - and that economic independence is incompatible with currency union. In this it is right: witness how a technocrat was imposed in Italy and government policy imposed in Greece (and elsewhere) under Eurozone orthodoxy.

3. The SNP is economically bankrupt

The SNP clearly lacks the confidence to argue for an independent currency under a central bank of Scotland. Instead it wants a more familiar and convenient currency union with the UK, knowing that it will inevitably mean that Scotland would not be economically independent.

At best Scotland might get one seat on the Monetary Policy Committee of the Bank of England (given size of economy or population), and the interests of the Scottish economy would be totally marginalised (it is arguable that is the case now since the Bank of England largely operates in the interests of the City of London's square mile, but then why vote for independence only to accept the situation of pre-independence?)

As such an 'independent' Scotland under the SNP's vision would leave Scotland as a crown dependency, similar to the Isle of Man or Jersey. Given that Salmond's economic vision has previously been to turn Scotland into a tax haven, maybe that's the aim. Scotland as an outpost of the City of London?

4. The UK banks are still fragile, and if they crash again the establishment will bail them out again

The Treasury paper states "Scotland's banking sector is far too big in relation to its national income, which means that there is a very real risk that the continuing UK would end up bearing most of the liquidity and solvency risk". So the Westminster consensus still believes if banks fail they should be bailed out exactly as before. They have learned nothing from the greatest crash in over a century - their neoliberal ideology remains unshaken. The SNP does not demur from this, nor suggest the Icelandic route.

Conclusion

These points do not make the case for either a yes or no vote in the referendum. What they point out is that however Scotland votes, it will be governed by people unable to govern in their economic interests.

What is also reveals is that the referendum debate is likely to step up, with more vitriol and posturing, that will make independence negotiations more difficult if Scotland does vote yes.

Barclays and the sack race 2

Last year Barclays bank made a large profit and celebrated by sacking thousands of staff (see Barclays and the sack race).

This year Barclays made even more profit - and so to celebrate will sack even more staff. Barclays adjusted pre-tax profits were £5.2 billion for 2013, that's £165 every second in profit. In a month that's £430 million.

The sack race

Barclays also announced that it will be sacking up to 12,000 people (including 7,000 in the UK). So assuming every employee to be sacked is on the average UK full-time wage of £26,500, Barclays could afford to keep every single one of them on for a year (including NI and pension contributions) from less than one month's profits.

As we said last year, no company should be able to make redundancies as long as it was profitable. After all, why should a company making profits be allowed to sack the workforce that produced those profits - simply to try to make higher profits for shareholders and to give ever larger bonuses to casino bankers?

Bonuses

But take a look at where the money is going. Before profits are calculated, Barclays will £2.38 billion in bonuses to its investment bankers - the socially useless parasites of late capitalism - a 10% increase on last year.

Instead of paying those bonuses (on top of above average wages) that £2.38 billion could pay for a golden goodbye of £200,000 to each of the 12,000 staff being sacked.

The Barclays model

But it won't. Barclays' the epitome of a nihilistic cannibal capitalism, that strips jobs, pay and dignity away from the many to give riches to the few. This is the gratuitous redistribution of wealth from poor to rich.

It also means customers will get worse service - those sacked staff will translate into few cashiers, fewer staff in call centres and possibly the closing of some high street branches.

• See also Ripped-Off UK looks for radical solutions

Hamstrung SFO not capable of holding bankers to account

Prem Sikka

Iceland has sent four former directors of its bank Kaupthing to prison for fraud. But the chances of similar legal action happening in the UK are low, where fraud investigators have a poor record.

The Serious Fraud Office (SFO) is the main agency for investigating and prosecuting major fraud. It was formed in 1988 after a spate of high-profile cases. A government-sponsored inquiry into share price rigging at Guinness in the 1980s concluded that too many executives at major corporations had a “cynical disregard of laws and regulations … cavalier misuse of company monies … contempt for truth and common honesty. All these in a part of the City which was thought respectable”.

But rather than changing corporate laws, amending personal liability of directors, or creating an effective enforcement agency, the government created the SFO.

Last week, the SFO’s case against businessman Victor Dahdaleh collapsed because at the last minute it could not provide evidence of alleged graft. This is not the only case the SFO has botched. It spent between £25-40m investigating price-fixing by pharmaceutical companies supplying the UK’s National Health Service (NHS), but the case collapsed because of errors in the interpretation of law.

Previously, the SFO was very slow in taking action against BAE Systems over allegations of corrupt practice. The SFO mislaid 32,000 documents relating to the case. It is currently facing a lawsuit for damages from the Tchenguiz brothers after dropping a three-year investigation into the collapse of Icelandic bank Kaupthing.

Bigger beasts

In 2012-13, the SFO brought 12 cases covering 20 individuals, eventually securing 14 convictions and recovering £11.4m from fraudsters. But it rarely went after the bigger beasts. Money laundering and sanctions busting by British banks did not appear on its radar. The SFO has hardly been visible in investigating and prosecuting the misdemeanours of bankers who brought the UK economy close to collapse.

In mitigation, it might be argued that the SFO’s failures are the outcome of the politics of government cuts. In 2008-09, the SFO had an investigations and prosecutions budget of £52m. Despite the banking crash, LIBOR rigging and other scandals, the UK government has drastically reduced SFO’s resources.

For 2013-14 its budget is £30m and will decline to £28.8 million for 2014-15. That is a cut of over 44% since the start of the global financial crisis.

Faced with a reduced budget and pay freezes, the SFO has been losing experienced staff and outsourcing a lot of its legal work, often paying very high fees. Such practices make it difficult to build in-house expertise and an institutional memory.

Other countries seem to assign higher priority to fraud investigation. The US equivalent, the Securities and Exchange Commission (SEC), has an annual budget of US$1.674 billion (about £1.1 billion). It is therefore in a far stronger position to take on the bigger beasts. The SEC has its shortcomings, but it is more likely to get a result than the SFO.

Ineffective patchwork

The SFO’s failures are indicative of Britain’s failure to build durable and effective institutional structures to fight financial crime. Rather than a single powerful and well resourced agency, there is an ineffective patchwork of institutions.

These include the Financial Conduct Authority (FCA), the Office of Fair Trading (OFT), The National Crime Agency (NCA) Her Majesty’s Revenue and Customs (HMRC), the Crown Prosecution Service, the London Stock Exchange and the Financial Reporting Council, to name just a few. The overlapping and often unclear boundaries result in duplication, waste, obfuscation, delays, poor accountability and outright failures.

Any effective fight against globalised financial crime needs to streamline its institutional structures. In the age of globalisation the UK cannot fight financial crime on a shoestring, with puny organisations. Large parts of the patchwork should be replaced by a UK equivalent of the SEC.

But a new organisation would not be able to combat wealthy elites or giant corporations without significant resources. This might be expensive, but it is an investment that would pay off.

• This article originally appeared on The Conversation website

Ripped-off UK looks for radical solutions

At the 2011 Budget, LEAP called for "a Windfall Tax on recession profiteers": UK banks, energy companies and supermarkets - to fund job creation and capital expenditure programmes (full report here).

John McDonnell MP, said in the 2011 Budget debate, "I think that a windfall tax on energy is appropriate. The current profits of British Gas average 24%, and Ofgem has reported an average profit margin of 38% per customer since last November. That is profiteering during a recession."

There are indications the British public agree - and may want to go further. A YouGov opinion poll commissioned by the Class thinktank found that 68% want the energy companies renationalised, while 35% believe the government should have the power to regulate grocery prices (rising to 44% among Labour voters - and 40% of UKIP voters!).

The poll coincided with Russell Brand's thought-provoking essay in which he wrote, "Profit is the most profane word we have". Indeed it is.

In the last few days Sainsbury's results showed like-for-like sales were up 1.4%, yet their profits were up 9.1% - which shows profit margins keep increasing.

And the energy companies are ripping off UK consumers with further price hikes - adding to inflationary pressures. The claim that this is a reflection of wholesale prices is refuted by this graph comparing causes of inflation between the UK and the Eurozone. The gross disparity between the Eurozone (where energy prices have fallen sharply) and the UK where prices have risen (and are bout to rise more sharply) clearly tells the story of the UK energy cartel ripping off consumers. No wonder 68% want energy renationalised.

Even John Major (the Prime Minister who privatised the railways, which 66% want renationalised) now supports a windfall tax on the energy companies.

And it's little better with the banks - as our European neighbours again show us up. The chart below shows the difference between the interest banks give to savers and the rates they charge borrowers. While UK banks have lower margins than US banks, they are far wider than Eurozone banks.

It would be interesting to work out the economic stimulus to consumers if UK banks reduced their margins to Eurozone levels (nearly half that of UK banks) ...

It is clear that rampant profiteering has, if anything, got worse since our March 2011 report - and it's no surprise that the public supports more radical solutions to address it. The vacuum remains the political movement to reflect those radical solutions ...

Osborne ‘slays Lloyds goose for quick buck’

Chancellor sells £3.2bn stake in profitable bank 

MINISTERS began reprivatising Lloyds yesterday, flogging off a £3.2 billion stake in the once failing bank.

Chancellor George Osborne hailed the sell-off as evidence that Britain was “turning the corner,” but economists raised concerns that the banking sector was merely returning to the light-touch approach central to the severity of the financial crisis in the first place.

Investors snapped up the stock at 75p a share – just above the 73.6p average the Treasury paid in the £20.5bn bailout the bank at the height of the financial crisis.

The taxpayer’s stake has been reduced from 38.7 per cent to 32.7 per cent, with no further sales for at least 90 days.

Mr Osborne said the sale eased the national debt by £586 million, based on a paper valuation of the shares on government books, though that figure is subject to Office for National Statistics approval.

The Tory Chancellor said: “This is another step in the long journey in putting right what went so badly wrong in the British economy.”

But left economists warned that the fire sale would be bad for Britain in the long term. Left Economics Advisory Panel co-ordinator Andrew Fisher said: “Lloyds was bailed out by the state, and propped up with public money.

“Now Lloyds has returned to profit, rather than maintaining a long-term income stream, it is being sold off for private profit.

“This is slaughtering a goose that lays golden eggs for a one-off fry-up, even leaving aside the government’s criminal failure to use its public stake in the banks to change banking culture or invest in the public interest.”

And the Socialist Economic Bulletin’s Michael Burke warned that the sell-off was “a return to the system we had before.”

“It’s a drive by the government to bail out the most failing aspects of the private sector – that of light-touch regulation in the financial sector, while imposing austerity cuts for the rest of society.

“They’re selling off one of our assets instead of using the profits for regeneration.”

This article first appeared in the Morning Star

 

MP calls for RBS sale 'at all costs'

by Luke James

A privatisation-mad Tory MP today demanded that profitable parts of the publicly owned RBS bank must be flogged at all costs.

Andrew Tyrie (pictured), who chairs Parliament's commission on banking standards, wants to let privateers cherry-pick parts of the bank and make the taxpayer shoulder bad debts.

Splitting RBS into good and bad banks was just one option given in a recent report by the cross-party commission.

But even austerity-obsessed Chancellor George Osborne is believed to be unenthusiastic about the prospect.

Mr Tyrie has now urged the Chancellor to examine the "future structure" of RBS as "a matter of urgency."

In a letter to the Financial Times laced with bankers' jargon, he argued: "Formal accounting conventions should not be allowed to get in the way of what is best for the economy."

Left Economics Advisory Panel co-ordinator Andrew Fisher said the misplaced debate centred on "what is the best way to privatise RBS."

He explained: "Tyrie argues the taxpayer will get more in the sell-off if the public first absorbs the toxic debts as a 'public bank.'

"Osborne worries that the public bad bank would worsen his deficit figures and that the toxic debts aren't too bad anyway."

But Mr Fisher said: "Labour should be calling for a publicly owned bank that can invest in new infrastructure to create jobs, reduce unemployment and operate in the public interest - something neither side of the Osborne-Tyrie pantomime cares about."

This article first appeared in the Morning Star

Lloyds bosses to speed up privatisation with 70% payout

by Luke James

Bosses of bailed-out Lloyds bank revealed today they will hand a massive 70 per cent of profits to shareholders in a bid to speed up privatisation plans.

Chief executive Antonio Horta-Osorio issued the invitation to asset-strip the part-publicly owned bank because private investors have so far only shown modest interest.

The government owns 40 per cent of Lloyds, acquired when it saved the bank from collapse in 2008 with £17 billion of public money.

Ministers are desperate to flog the stake - and so cut the public out of dividend payments - because of their privatisation obsession and have offered Mr Horta-Osorio a £2 million bonus to deliver the sale.

His plans to give away a staggering 70 per cent of profits by 2016 would mean that Lloyds pays higher dividends to shareholders than any other bank.

Leading left-wing economist Andrew Fisher said it was a "slap in the face for the British public, who bailed out banks like Lloyds.

"It makes it clear that what many of us have said all along is true - we nationalised the debts, while the profits are privatised," said the Left Economics Advisory Panel co-ordinator.

"Lloyds's grotesque dividend and executive pay bonanza comes at the expense of its customers, the taxpayer and its own staff - at a time when over 3,000 job cuts have been announced."

This article first appeared in the Morning Star

Tory home loan bribes 'unwise'

 
by Richard Bagley

Tory Chancellor George Osborne revealed his latest desperate "big idea" for housing today that will see more of our cash used to bribe banks into lending to people who can scrape together a mortgage deposit.

He plans to gamble £12 billion on high-risk 95 per cent loans where the state will act as a guarantor.

That means we will pick up the tab for some of the loss in case of a default.

Mr Osborne claimed following talks with construction firms that the extension of the Help to Buy scheme was "about getting behind those who aspire to own a home."

It will cover houses priced up to £600,000 and will only help those wealthy enough to save a 5 per cent deposit.

With average house prices at around £150,000 in Scotland and Wales - rising to a whopping £454,000 in London - people in the two nations would need at least £7,500 in cash to qualify for the mortgages or over £22,000 in the English capital.

The government's obsession with fuelling the housing market even drew criticism from Bank of England chief Paul Tucker.

He described the scheme as "unwise" in the long term because of fears that it will help reinflate a housing bubble that has left hundreds of thousands packed into expensive private rented accommodation.

Construction union Ucatt general secretary Steve Murphy accused Mr Osborne of "fiddling round the edges of the housing crisis.

"If the government wants to begin to solve both issues then they need to be investing and building social housing which will get skilled workers back to work and will also provide homes for the millions of people who are currently in ina
dequate accommodation."

Left Economics Advisory Panel co-ordinator Andrew Fisher ridiculed the Chancellor's announcement.

"After three years of economic failure, Osborne's great new strategy for growth is a house price bubble," said Mr Fisher.

"The Help to Buy Scheme is an admission of political failure and of the continuing fragility of UK banks.

"This is nationalising the risk and privatising the profits again - a bank bailout by stealth."
He added: "The solution is not subsidies for the big construction companies instead of the banks, but for councils to borrow and build to meet local need."

This article appears in today's Morning Star

It's time to take over the banks!

Get along to an excellent meeting tonight at 7pm in Westminster to discuss the public ownership of the banks.

At TUC Congress last year, unions voted in favour of an FBU motion calling for the public ownership of the banks. At the meeting tonight, to be held in Committee Room 6 in the House of Commons, FBU general secretary Matt Wrack will discuss the campaign alongside LRC and LEAP chair John McDonnell MP.

The meeting will also hear from Michael Roberts who, alongside Mick Brooks, wrote the excellent FBU pamphlet 'It's time to take over the banks' (pdf).

The pamphlet makes the case for a publicly owned finance industry that provides a public service, giving financial support to industry and working people. Taking over the banks will enable planning, investment and the creation of millions of jobs. A publicly owned and democratically accountable banking system is essential to developing such a programme.

The meeting is open to all and free to attend, but allow 10-15 minutes to get through parliamentary security.

In a Comment is Free piece yesterday, PCS general secretary Mark Serwotka also made the public ownership of the banks one of his 10 steps to kickstart the UK economy. So far, the article has an 89% approval rating!

Barclays and the sack race

Yesterday, Barclays announced it had made profits of £246 million in 2012, or just over £700,000 per day (or £8.14 every second of every hour of every day of every week of the year).

This was however down on 2011's looting when the bank made profits of £5.9 billion.However, when adjusted to remove fines over Libor rigging, PPI mis-selling and other scandals that have ravaged the bank, then its 2012 profits (on an adjusted basis) were £7.05 billion (or £224 per second).

The bank also announced a bonus pool of £1.85 billion (down 11% from 2011). The fall in profits and in bonuses though still large, excessive and exploitative are not enough.

So despite announcing these untold riches to be shared between shareholders and directors and other high fliers, the bank also announced that 3,700 staff will be made redundant - split roughly evenly between the retail business and the investment bank.

When I met with Jean-Luc Melenchon, the French Left Party leader, at the end of last year, he told me that one of his one his policy proposals was that no company should be able to make redundancies as long as it was profitable. After all, why should a company making profits be allowed to sack the workforce that produced those profits - simply to try to make higher profits for shareholders?

In the case of Barclays, their 2012 bonus pool of £1.85bn  would be enough to give each sacked worker £500,000 - more than enough to cover their wages. Barclays unadjusted profit of £246m would pay for 3,700 staff on average salaries of £66,000.

Now you might argue that such rules would be inflexible, especially in the case of a company that is trying to restructure - in the case of Barclays to restructure away from investment banking, and closing its tax avoidance unit, under considerable public scrutiny.

However, while voluntary redundancies could still be requested, what Melenchon's proposals would mean is that even when restructuring a company should offer alternative posts with re-training if necessary.

In fact Melenchon's proposals could be part of a modern full employment strategy, and would be a good way of preventing rising unemployment - something the OBR predicts we will see this year.

UK banking reform bill won’t curb reckless risk-taking

Prem Sikka

Some four and-a-half years after the banking crisis that has resulted in massive public debt and a deep austerity program, the UK government has finally unveiled its Financial Services (Banking Reform) Bill . The Bill is going through parliament and is expected to become law by the end of the year.

The legislation will require UK banks to insulate everyday banking activities associated with savings, deposits and loans from more volatile investment or speculative activities, by introducing a ringfence around the deposits of individuals and businesses. Thus two subsidiaries under the same parent company are envisaged. This separation is advocated because investment banking indulged in excessive risk-taking and accelerated the banking crisis.

Bear Stearns, Lehman Brothers and Northern Rock are often held out as exemplars of this reckless risk-taking. Prior to its demise, Northern Rock had a leverage ratio (the relationship between total assets and shareholder funds) of 50 while Bear Stearns and Lehman had leverage ratios of 33 and 30 respectively, thus making them highly vulnerable to small declines in the value of their assets.

For five years before its collapse, Bear Stearns generated almost all of its income from speculative activities. About 80% of Lehman’s income came from speculative activities. Other banks also indulged in an orgy of speculation and, by December 2007, the global face value of derivatives stood at $1148 trillion, compared to a global GDP of only $65 trillion. No one can consistently pick winners and, when their financial fortunes turned, it set off a domino effect.

Many counter parties to complex financial instruments were in danger of defaulting on their obligations and thus threatened the collapse of whole system. The UK government bailed out the system with loans and guarantees of nearly £1 trillion.

Critics claim that ringfencing will increase administration costs and capital ratios, leading to reductions in the amount of credit in the economy and thus investment and jobs. The Bill is based on the premise that, in the next banking crisis, the government would rescue the retail side, but would probably let the investment side sink. This threat may discipline banks and spare taxpayers the expense of bailing out the entire system. The ultimate sanction is that if banks do not ringfence satisfactorily by 2019, then the regulator can formally split their operations.

The Bill sounds good, but is unlikely to be effective. It does not impose any personal costs for reckless risk-taking. Ringfencing is not the same thing as a legally enforced separation (two independent entities operating retail and investment banking). The Bill does not say what precisely is to be ringfenced as savings can be placed in many exotic securities.

Derivatives have been described by the US investment guru Warren Buffett as “financial weapons of mass destruction”, but the government has yielded to the banking lobby and will permit banks to locate “simple” derivative products — whatever “simple” means — within their retail banking operations.

What if funds flow from a ringfenced entity to non-ringfenced entity via a foreign subsidiary or affiliate in a place where there is no such separation? Would this be a breach of the ringfence? The Bill does not provide any examples of what a breach of ringfencing looks like, though the Treasury will have powers to prohibit unspecified types of transactions.

The lack of precision will fuel uncertainty and encourage banks to play creative games in deciding which side of the ringfence some assets and liabilities are to be shifted. The regulator is expected to negotiate the details with the banking industry.

Ringfencing will neither hermetically seal investment banking nor prevent its contagious effects from spreading. For its speculative activities, investment banks will continue to raise finance from retail banks, pension funds, insurance companies and others. They will still have the benefit of limited liability.

In the event of losses or a crash, investment banks will be able to dump their losses on to the providers of finance and thus infect the whole financial system, and will inevitably force governments to bail out the system again. The only remedy is to ensure that investment banking is accompanied by unlimited liability: investment banks are free to speculate as long as their owners can personally absorb the losses.

Investment banks may entice corporate executives to provide funds with promises of huge returns, which might boost their performance-related pay, but can land stakeholders with huge losses. Therefore, the Bill should have required that prior to transacting with investment banks, organisations should seek permission from their own stakeholders.

This would have prevented innocent bystanders from becoming the victims of speculators. Perhaps effective reforms will come after the next banking crash.

This article first appeared on the Australian site The Conversation

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. 

Still the unacceptable face of financial capitalism

Barclays Bank’s grim reputation for a predatory approach to business is undiminished, says Prem Sikka

The banks have got it made. They have ripped off people with exorbitant charges and measly returns on savings. They have picked people’s pockets with the mis-selling of payment protection insurance, endowment mortgages, personal pensions, precipice bonds and split capital investment trusts – to name just a few.

Banks have driven up the price of food and commodities through speculation, a major cause of commodity inflation. The state has guaranteed their profits through the Private Finance Initiative and the channelling of pensions and benefit payments through bank accounts. The taxpayer has bailed out banks through loans, subsidies and guarantees that add up to more than £1 trillion. Yet, in return, the banks cannot be relied on to pay democratically agreed taxes.

Barclays Bank is the latest example of the unacceptable entrepreneurial culture where bending the rules to avoid taxes and boost corporate profits is considered to be a skill. In 2009, Barclays paid £113 million in corporation tax to the United Kingdom – about 2.4 per cent of its £4.6 billion global annual profit.

Now the British Government has announced that Barclays tried to avoid £500 million of tax through two novel schemes. The first was designed to ensure that the profit arising to the bank from a buy-back of its own debt is not subject to corporation tax.

The second bit of alchemy was a scheme to convert non-taxable income into an amount carrying a repayable tax credit in an attempt to secure “repayment” from the Exchequer of tax that has not actually been paid. The £500 million that Barclays sought to avoid is equivalent to the cost of 100 new primary schools, or employing 16,000 nurses. Yet Barclays and its tax advisors were not bothered about the social consequences. The bank’s defence was that other corporations are also doing the same and it has not broken any laws.

Each year, Barclays publishes what it calls a Citizenship Report and claims that it is a socially responsible organisation. In 2008, soon after the banking crash, Barclays’ chief executive Bob Diamond publicly said that, in future, banks would be good citizens. In November 2010, major banks, including Barclays, signed the Government’s Code of Practice on Taxation and promised that “that banking groups, their subsidiaries, and their branches operating in the UK, will comply with the spirit, as well as the letter, of tax law” and “not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament”.

All the promises have been broken and show the folly of relying on voluntary codes. The Government will collect the £500 million in tax, but there are no penalties for violating the Code of Practice, which was lauded by Prime Minister David Cameron as a step towards “responsible capitalism”.

Barclays is no stranger to controversy. Last year, the World Development Movement estimated that Barclays generates a profit of around £340 million a year through food speculative activities, a major cause of hunger around the world. Barclays and 15 other banks are being investigated by the European Commission to ascertain whether they have colluded and/or may hold and abuse a dominant position in order to control the financial information relating to credit default swaps, which are complex financial instruments used to manage risks.

In April 2011, Liberal peer Lord Oakshott urged the government to investigate Barclays over the $12.3 billion (£7.4 billion) sale of toxic assets to a Cayman Islands company. The company was called Protium and was founded with a $12.6 billion loan from the bank. The deal had the potential to enable Barclays to avoid millions in taxes and a headline in the Daily Telegraph screamed ”Barclays’ Protium deal is all that’s wrong in the City”. Barclays is thought to have 174 subsidiaries and ventures registered in the Caymans, a place that does not levy any corporation tax and is known for lax regulation. The extent of speculative and tax avoidance activity routed through tax havens is not known.

Barclays and other multinational corporations indulge in tax avoidance for two main reasons. First, stock markets exert incessant pressures on corporations to report higher profits. Rather than competition, innovation, investment, better services to customers and communities, many companies find it easier to boost profits through tax avoidance. Second, this suits executives as their remuneration is linked to profits. Barclays’ chief executive Bob Diamond has been receiving mega-bucks in salary and bonuses, but there is silence on the extent to which they are financed by tax avoidance.

Tax avoidance enriches few and impoverishes many, but banks do not publish any meaningful information about their indulgence in tax avoidance. The annual accounts do not provide any indication of the profits boosted by tax avoidance schemes. Neither do they provide any information about the sales, profits, employees and taxes for each country of their operations.

Such information would show that subsidiaries in tax havens do little trading, have skeletal staff but somehow report huge profits, or that large amounts of revenues are generated in the Britain, but corporate taxes are avoided. This information would help to focus attention on the artificial shifting of profits, but successive governments have done nothing to create this transparency.

Organised tax avoidance affects us all. Democracy, responsibility and accountability should be mobilised to check it. All corporate tax returns and related correspondence should be publicly available so that we can all check corporate claims of social responsibility and good citizenship. The threat of public sunlight has the potential to check selfish impulses.

At the moment, there are no personal consequences for directors indulging in complex tax avoidance schemes or for accountants crafting complex avoidance schemes.

Many of the avoidance schemes have been declared to be abusive by the courts, but still there is no retribution against directors and accountants. The lack of penalties has created a gaming culture which drains the public purse. Legislation should be enacted to make directors and designers of abusive avoidance schemes personally liable for up to 10 times the amount of tax involved. The prospect of personal costs would provide some food for thought.

This article first appeared in Tribune

Tax 'em til the pips squeak

A letter from the Morning Star 16/02/12

There is a very simple way to deal with the bankers' "bonus culture" that nobody seems to be talking about. Tax it!

In the 1970s, for taxable incomes over £20,000 (equivalent to around £170,000 now) we had a tax rate of 83 per cent. On "investment" income (that is from gambling on the capital markets) it was 98 per cent.

If employers really think their executives are worth it, let them pay these obscene bonuses, but let us at least tax them so that the rest of us, upon whom their businesses depend, will get a cut in the form of more money for public services.

Of course, there is no way that this government will take such a step, but that does not mean we should not talk about it.

Of course, if we had a government that took such a measure there would be the usual cry that all these fantastic "experts" will migrate.

Good riddance, I say. Nobody is indispensible. There will be always be people who can grow into the jobs that need to be done, who will not demand bonuses for the jobs that they are already being paid to do.

Jerry Jones
London SW19

Update 17/02/12: YouGov poll shows how popular more redistributive tax would be:

• 62% feel that taxes on the wealthiest people in the UK should be increased ... only 5% feel they should decreased
• 68% say that George Osborne should not abolish the 50p rate of income tax for people earning over £150,000, 19% say he should abolish it
• 66% of Britons would support a new tax upon people with houses worth more than £2 million, while 19% are opposed to this 'Mansion Tax'