"A Fudge Too Far" - A Response to the Commission on Banking Standards Report.

The Report issued by the Commission on Banking Standards falls into the same trap as so many similar official submissions over the years. It is too wordy, it aims too far, and it misses the point.

The point is that they have completely failed to undertake any meaningful examination of the criminogenic culture which permeates the banking industry, and they have deliberately disregarded the possibility that what has been allowed to develop is an organised criminal enterprise within British Banking.

The question we all need to ask ourselves is that "as a result of this report and all the consideration that has gone into it, will it change anything in the culture of banking in the future?"

The answer, I submit, is a resounding 'no'!

The first intimation for me of this outcome was watching Sir Martin Jacomb, former deputy chairman of Barclays Bank, general all round jolly-good-chap and well-known City safe-pair-of-hands, talking on Newsnight last night, when all he could say of any substance was that everything contained in the report was yesterday's news, that was then, this is now!

This is a typical response from someone who has been so enmeshed in the fabric of the City for as long as Sir Martin has, and if that is all a man of his experience has to say about it, then we already know that the City Establishment has discounted the Report and its contents, and is already looking to the future, secure in the knowledge that their lobbying impact has drawn the teeth  of any proposals that were going to mean anything.

This is very worrying because it means that frankly, the Commission's report will be allowed to fester on departmental shelves, small sub-committees will spend months discussing its implications, and in the end, nothing will be done, as too much time will have been allowed to elapse since the publication, and things will have changed.

As I predicted a few days ago, the proposal to introduce a new criminal offense will have absolutely no effect at all, and I really don't know why they have bothered to even spend time debating the issue. I will address this point, later in this blog.

First, let us examine the issues which have concerned the vast majority of the ordinary people in this country.

We, the daily users of the banking sector have found ourselves prejudiced and financially damaged by the actions of those whom we have trusted to give us good financial advice, look after our savings or engage with our ordinary day-to-day banking requirements.

We have been defrauded if we bought PPI contracts, we were exposed to bank lending fraud when we sought to borrow money to expand a business or enhance a property, we were ripped off by bad service offerings, and we were forced to share the embarrassment and the hubris, as our banks failed, were charged with money laundering or engaged in criminal malpractice in the LIBOR markets.

We were further defrauded later of the taxes we had paid to build schools and hospitals, when the Government, which had wholly failed to regulate the banking sector, and constrain their reckless lending and spending, then decided to give them vast sums of public money to help keep them afloat.

As a result of their criminal excesses and their reckless profligacy, thousands of bank employees were paid salaries and bonuses at levels which would make Croesus envious, and when we, the tax-payers were forced to bail the bastards out, they continued to demand their million pound bonuses, ignoring the fact that we were keeping them in their jobs.

The culture of the banks in the latter years has been one of sheer greed, a lack of any normal moral scruples, the ambition to cheat, defraud and steal from their clients, to grab as 'big a piece of the client's wallet' as they could so do, and generally to act in a way that exposed their clients, their shareholders and their employees to shame, dislike and public  opprobrium.

Theirs was a culture of 'anomie', of normlessness; they were behaving like mercenaries in a criminogenic environment, and they were committing criminal offences. These offences were already catered for in statute.

The report admits at para 1174. "...A number of 'financial crimes' already exist relating to money laundering, insider dealing, market abuse, misleading statements and fraud or dishonesty. The Serious Fraud Office, for example, is able to investigate and prosecute investment fraud, corporate fraud and public sector fraud under the Fraud Act 2006, the Theft Act 1968, the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007. Individuals are prosecuted under these and other powers..."

The report admits ruefully; "...However, the types of offence which give rise to criminal sanctions at present tend mostly to involve individuals or small groups, and do not cover the apparent mismanagement and failure of control by senior bankers which has been at the heart of the recent concerns about standards and culture in banking..."

This is where the report gets it both right, in a way, but also so wrong! 

In any organisation, it is simply not possible that small groups of underlings can be engaged in widespread wholesale criminal, behaviour, but such conduct is completely unknown to senior members of staff and supervisors.

Where big money is being made, it is a fact that supervisors and executives, tend to look the other way, and hope to deny all knowledge of the wrongdoing if it is ultimately identified.

In other cases, such as the PPI scandals, the supervisors and the executives were consciously pushing for these criminal actions to be continued and enhanced.

One of my students who has worked for a major City bank talked openly in class about her experiences as a junior compliance officer during the LIBOR manipulations.

"...Everyone knew what was going on, down on the floor...It was the talk of the trading floors...you can't stop traders bragging and boasting...we all knew that some of the traders were working the LIBOR rates to their own advantage...No-one thought this was criminal..."

And there lies the conundrum. No one stopped to think that what was going on was criminal!

Does anyone seriously believe that this knowledge was not being discussed on the 5th floor over the pre-lunch gin and tonics?  Of course it was, but it was always deniable!

It is this ability to operate at arm's-length, and to deny knowledge of criminal culpability which makes it more difficult to prosecute senior managers of firms where criminality is discovered.

Regulators talk convincingly about the difficulties associated with collating evidence to prosecute such cases.

The report states;

"...The FSA pointed out the main obstacle to the successful use of criminal sanctions:

"...For a criminal case the evidential burden will be even higher. There is, therefore, a risk that a criminal offence of mismanagement however constructed would rarely be prosecuted and consequently lose its deterrent value through its lack of use.

Tracey McDermott added:

"...we invested a significant amount of time and resource into the investigations we did into the failed banks, but we were not able to establish the evidence necessary to take regulatory action, so even if there had been a criminal offence on the statute book, that would not have got us there [...] a note of caution has to be sounded that this will not be an easy offence to prove [...] If the evidence is not there, it will not be there for criminal cases in the same way as it won't be there for regulatory cases. You can debate whether we got that call right or wrong, but ultimately the evidential standard is higher in criminal cases rather than lower..."

This really identifies the root element of the problem. It is something I have tried repeatedly to point out to regulators and the Commission itself, which is that most regulators are woefully and hopelessly ill-equipped to conduct meaningful criminal investigations, because they have received no training nor do they have any skills as criminal investigators.

As I stated in my evidence to the Commission, evidence which was suppressed by its civil servants;

"... One of the greatest tragedies of the British regime of financial regulation, and one of its biggest failings, is that none of those who hold down senior roles within the upper reaches of the regulatory agencies, have ever once undertaken even the simplest form of criminal investigation. They have never even arrested so much as a shoplifter, and they do not           know how criminals will behave when they are being investigated; they do not know what evidence is needed to bring these persons before a court and to obtain a safe and proper conviction; they do not know how   to go about acquiring even the most basic evidence which can be used to convict a criminal; and perhaps most importantly of all, they do not understand how to conduct themselves when they are being required to investigate a pattern of behaviour which might prove to possess important criminal consequences. Put more simply, they simply do not understand the signs of crime, and they are therefore ill-equipped to deal with them even when they are staring them in the face!

"...Yet these are the very people we put in charge of our regulatory agencies, and we give them very complex investigatory powers. Members of the ‘Great and Good’, people who have held down no doubt important roles in academe or the law, (even the Serious Fraud Office has been seriously criticised for its administrative failings), banking or other areas of financial business, former civil servants or senior partners in leading firms of accountants (if ever there was a serious conflict of interests it is in appointments such as these), or people who are seconded from other regulatory environments, but who have no experience at all in dealing with criminals.

"...While they all possess undoubted skills and experience, the one thing they all have in common is a complete lack of any understanding of the function of the criminal temperament..."

None of these issues have been debated in the report, all that has been proposed is a new offence as follows;

"... The Commission has concluded that there is a strong case in principle for a new criminal offence of reckless misconduct in the management of a bank. While all concerned should be under no illusions about the difficulties of securing a conviction for such a new offence, the fact that recklessness in carrying out professional responsibilities carries a risk of a criminal conviction and a prison sentence would give pause for thought to the senior officers of UK banks. The Commission recommends that the offence be limited to individuals covered by the new Senior Persons Regime, so that those concerned could have no doubts about their potential criminal liability..."

However, the Commission feels that the circumstances under which this offence should be applied are limited and specific;

"... The Commission would expect this offence to be pursued in cases involving only the most serious of failings, such as where a bank failed with substantial costs to the taxpayer, lasting consequences for the financial system, or serious harm to customers..."

This is a proposal to give the headline writers something to write about, but it is never going to happen! In reality, we should expect such a recommendation to be debated at excruciating length, both publicly and in Parliament. The banking lobby will throw vast sums of money at opposing the proposal, and we should expect no Parliamentary timetable to be available to debate the proposal for a minimum of 2 years. Putting it simply, I do not believe it will ever happen, because by the time any meaningful window of opportunity has presented itself to put this on the Statute books, Parliament will have lost interest in the debate.

As far as I am concerned, the rest of the Report will do little to change anything very greatly. As I said, Sir Martin Jacomb is already discounting it, and that means the rest of the City is taking its cue from him.

The issues which impact the ordinary British bank user the most remain untouched. The banking lobby has proved its worth, and it has talked out or emasculated the impact of any meaningful changes which might have made a real difference. This report merely tinkers at the edges, and has done little to change the culture of greed and dysfunctional conduct which has so identified the banking sector in the past.

This is why I say this is a fudge too far. The Commission have tried, through the production of a worthy tome, to give the impression that they really mean business this time, whereas the banking sector knows that whatever business is being planned, it is business as usual!