Among the many downright lies that have been told about the present series of financial scandals in the banking sector, including the PPI and interest rate swap derivatives scams, and particularly the LIBOR manipulation, is the one that asserts we do not have sufficient existing laws to deal with these episodes, and that new criminal legislation must be enacted.
In a speech, Martin Wheatley the new head of the FSA/FCA said of proposed LIBOR reforms;
"...As part of this process, my final recommendation is to amend the Financial Services and Markets Act to include, as an offence, the making of a false or misleading statement in order to manipulate Libor. This would enable the FSA to use criminal powers for the worst cases of attempted manipulation..."
Even this small quote marks Wheatley out as a financial crime apologist who wants criminal powers to be used only for the 'worst cases of attempted manipulation.' Quite how bad the criminal activity has to get before it falls within his definition is hard to determine, but he clearly believes that there is some kind of dubious distinction between different degrees of market manipulation, some which would attract criminal intervention, some which would not!
So, in response to a number of readers who have commented so positively on some of my recent blogs, I will try to explain why we have good laws already, all of which could be used to prosecute the banksters and organised criminals who have profited from the PPI crimes or the LIBOR manipulation scams, and the only reason why nothing is currently being done to prosecute these wrongdoers is because the Government cannot face the thought of having to admit to the rest of the world that the City of London is a vast criminal enterprise waiting to rip-off the unwary, the unknowing and those who are not on the inside track!
I will deal first with mis-selling of various products such as PPI or interest rate swaps.
When a customer approaches a bank for a loan, they are entering into an 'authoritarian' relationship. The bank hold the position of authority and is able to make or decline the loan on whatever terms it sees fit. The two parties are not on an equal footing, and the applicant is very much in the subordinate role.
In a case where the bank is considering the loan and in the process of so-doing suggests the purchase of a second product to guarantee the repayment of the loan in the event that anything untoward should befall the borrower, the bank is entering into some very tricky areas of law.
The person making the sale of such a product is under instructions from a manager to sell as many of these products as possible as they are a very good means of generating revenue for the bank, and they don't want to put obstacles in the way of closing those sales, so the temptation exists to keep unwelcome facts from the person being offered the product.
In most of the PPI and interest swap cases, the clients were either not told the truth about the need for such a product, or were not told the truth about the way in which the product would operate. They were not in a position to discuss these matters equitably because they were in a position where they were being told facts by an authoritarian figure, in circumstances where the applicant would expect to believe that the information being given to him was true and accurate.
In a huge number of cases, clients were told that the grant of the loan would be dependent upon their purchasing an insurance policy. This was not necessarily improper, the lender can impose conditions to ensure that the loan is repaid in full within the time limit, but then the person making the loan has a legal duty to ensure that the type of policy is fit for purpose and will really provide the kind of cover needed for those circumstances.
However, at the time of the scandal, banks were falling over themselves to lend money to loan applicants, so in a vast number of cases, taking out PPI insurance was not a pre-condition for the loan.
The fraudulently-sold PPIs were those that did not provide the full cover that was offered to the customer, and which the customer was deceived into believing he was getting. This was because the details did not apply to the individual customers’ circumstances. It was discovered that PPIs had been fraudulently sold when a high rate of unsuccessful claims were later made against the policies.
A report by the consumer watchdog 'Which?' as long ago as 2006 estimated that a third of the policies taken out in the previous five years were fraudulently mis-sold. Even in those days an astonishing two million people paid out for insurance that was useless. They would never have been able to claim on their policies because they were ineligible for the cover they had been persuaded to buy.
For example, policies had been sold to the self-employed or those on fixed-term contracts, while the insurance policy typically covered only those who lost their job with an employer.
Another bad practice that was rife at the time was that payment for cover could be made up-front, in a single premium that was added to the loan - thus increasing the amount of interest due. Even the insurance industry's own trade body, the British Insurance Brokers' Association, branded single-premium PPI policies "bad value", and as long ago as 2006 called for such policies to be outlawed.
But it became almost impossible to stop their sale because in so many cases, sales staff working for banks or financial companies received lucrative financial bonuses for successfully selling Payment Protection, Insurance to customers, the banks were making vast sums of money from policies which in so many cases they would not have to pay out on, and the encouragement to continue to push the sale of PPI insurance was very strong. Staff members were even threatened with the loss of their jobs if they did not keep up a sufficient level of sales targets.
So, the salespeople stood to make a financial gain for themselves while at the same time selling a product that would not pay out on a future claims, so the customer was being defrauded.
The law dealing with these kind of sales is contained now in the Fraud Act of 2006. It states;
(1)A person is guilty of fraud if he is in breach of any of the sections listed in subsection (2) (which provide for different ways of committing the offence).
(2)The sections are—
(a)section 2 (fraud by false representation),
(b)section 3 (fraud by failing to disclose information), and
(c)section 4 (fraud by abuse of position).
(3)A person who is guilty of fraud is liable—
(a)on summary conviction, to imprisonment for a term not exceeding 12 months or to a fine not exceeding the statutory maximum (or to both);
(b)on conviction on indictment, to imprisonment for a term not exceeding 10 years or to a fine (or to both).
2. Fraud by false representation
1. A person is in breach of this section if he-
a) dishonestly makes a false representation, and
b) intends by making the representation-
to make a gain for himself or another, or
to cause loss to another or to expose another to risk of loss.
2. A representation is false if-
a) it is untrue or misleading, and
b) the person making it knows that it is, or might be, untrue or misleading.
3 Representation means and representation as to fact or law, including a representation as to the state of mind of-
a) the person making the representation, or
b) any other person
4 A representation may be express or implied
3, Fraud by failing to disclose information
A person is in breach of this section if he-
a) dishonestly fails to disclose to another person information which he is under a legal duty to disclose, and
b) intends, by failing to disclose the information-
to make a gain for himself or another, or
to cause loss to another or to expose another to a risk of loss.
So where a salesman made a false representation about the value of the insurance product he would fall directly within section 2; if he failed to tell the customer the truth about the way the product would operate, he would bring himself within section 3.
I think it reasonably clear just by reading the legislation that all PPI cases could and should be easily prosecuted, and when Martin Wheatley publicly states that he considers misselling to be a very long way from fraud, he is demonstrating his complete ignorance of the law, a worrying trait in a senior regulator!
In the case of LIBOR manipulation, the evidence of crime is even more straightforward.
Even Martin Wheatley understands its real function which is to act as a vital reference point to which a vast financial industry has recourse to get transparent and accurate information about interest rates, a feature which they will use in turn to set other interest rates for a huge range of commercial purposes. In a speech he stated:
"...Libor is used in a vast number of financial transactions; with a value of at least $300 trillion. The deep entrenchment of Libor as a reference rate in financial markets, and the subsequent effect on those markets in the event of a disruption to the rate...even in the more liquid markets there is not enough daily data available to have a system in place that is entirely based on market transactions, particularly in times of stress...and we must remember that Libor is a creation of the market, invented by the market for the market..."
LIBOR is transparently a record which is required for an accounting purpose, and there is a perfect criminal offence already in existence to deal with those persons who manipulate it.
Under Section 17 of the Theft Act 1968, the offence of false accounting is defined;
1 Where a person dishonestly with a view to gain for himself or another or with intent to cause loss to another,-
a) destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose; or
b) in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive in a material particular.
He shall on conviction on indictment be liable to imprisonment for a term niot exceeding seven years.
2 For purposes of this section a person who makes or concurs in making an account or other document an entry which is or may be misleading, flase or deceptive in a material articular, ir who omits or concurs in omitting a material particular from an account or other document, is to be treated as falsifying the account or document.
Any person in any institution who connived in seeking to get false figures inserted into the calculation of LIBOR brings themselves directly within the ambit of S.17, because by so doing they are falsifying the information required for the calculation, and LIBOR is a record required for an accounting purpose, indeed, I cannot think of a better example of such an entity whose purpose is to simply provide information that others require for creating accounting information, ie interest rate setting.
As the document states any person who makes such a false entry or even only concurs in making it is guilty of the offence.
My friend Ian Fraser brought to my attention a powerful submission to the Parliamentary Commission on Banking Standards written by Michael Moran, and Karel Williams from the Centre for Research on Socio-Cultural Change (CRESC). When talking about the culture of ethical indeterminacy within Barclays Bank they report;
'...If this seems far-fetched and fanciful, consider the terms in which the Financial Services Authority (FSA) indicted Barclays for LIBOR manipulation. The staid FSA prose is startling because it reveals collusion by bank employees in one firm to benefit traders operating in another firm. Paragraph 8 of the FSA proceedings reports that:
“...Barclays acted inappropriately and breached Principle 5 on numerous occasions between January 2005 and July 2008 by making US dollar LIBOR and EURIBOR submissions which took into account requests made by its interest rate derivatives traders (‘Derivatives Traders’). At times these included requests made on behalf of derivatives traders at other banks. The Derivatives Traders were motivated by profit and sought to benefit Barclays’ trading positions...”
So here is a perfect illustration of conduct which is a criminal offence and which could be used today to bring criminal prosecutions against every individual who has played any dishonest part in fiddling the LIBOR figures.
The gain they have made is either a positive one for themselves in pure monetary terms, 'motivated by profit' but it would also cover the case where a derivatives trader is permitted to minimise his losses by submitting false figures to be used in the calculations.
So why we now need new legislation to cover the activities of those who have criminally manipulated the LIBOR market is beyond me. I suspect that the problem is that there are so many people involved in this single episode of organised crime that yet again, the British Government is looking for a series of ways to sweep the problem under the carpet so that yet again, they can cover up the fact that the London market is a den of thieves!
I have not bothered here to cover the details of the inchoate offences of conspiracy to defraud because we already have perfectly good direct criminal offences which could be charged, if those with the responsibility for regulating these markets had any moral courage or willingness to take on the big players.
The fact that they don't is a matter of scandal, but I have tried to show in previous blogs how pathetic the present regime is inside the FSA/FCA, and why we cannot expect anything to change.
One thing we do know is that the Parliamentary Commission into Banking Standards is just going to be a vast dead Albatross hung around our necks, and all those like us who want to see real change in the banking sector. I submitted a 22 page protocol of evidence to them and asked to be invited to come and give evidence on why we need to prosecute bankers more assiduously. I have discovered today that they haven't even included my paper within their written documentary record, so I doubt there will be any chance to defend my views in any interview.