Drinking In The Last Chance Saloon - My Hopes and Fear for the Banking Commission's Recommendations!

The Banking Commission has undertaken a very thorough review of business practice in the financial sector, and its members are meeting this week to consider the final wording of the draft report which could be published very soon.

The Commission have had a very difficult role to play because they have been confronted by a supremely arrogant industry sector that believes it is impregnable and removed from criticism, and thus above reproach.

In a way, it is not difficult to understand how such a state of affairs was allowed to develop and then go unpunished.

The Financial Sector (the City) has been allowed to become 'Too Big To Fail - Too Big To Jail', with the end result that what has emerged is a monster which recognises no law, obeys no controls, and engages in routine feeding frenzies, during which it savages its clients, and engages in acts of wanton criminality which have far-reaching consequences.

When, at the end of one of its many exercises in wanton gluttony, it discovers that its fundamental financial structure is in danger of wholesale collapse, it then turns on the Government and the tax-payer, demanding that vast sums of tax-payers' money be fed into its maw, and, like the spoilt child it has been allowed to become, engages in a tantrum of demands to be allowed to continue to carry on in its own dysfunctional way, without any intrusive oversight, for fear it will take its structures and operations elsewhere.

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Confronted with these threats, and not being in the strongest position to defend against them, the Government has given in, allowing the banks to carry on in their own way. However, the Banking Commission is the outcome of these activities, and its findings are going to be vital to the development of the future of British banking.

Having spent a long time studying these phenomena, I have come to the realisation that the City has been allowed to become the sociopathic structure it now presents as a result of a series of complete failures to understand the criminogenic nature of those who work within its boundaries; the failure to appreciate the need for strict regulatory controls to manage these excesses; and the political arrogance of New Labour under Blair and Brown in the way in which they allowed the City to get out of control.

Taken together, these three factors have contributed to the creation of an organised criminal enterprise which has been allowed to engage in criminal practices which would shame a Mafia Godfather, but which, because of the role the City now plays in the maintenance of the financial upkeep of UK plc, no-one dare mention, no-one dare name.

The influence of the New Labour project on the development of City Regulation has not been widely examined, but I now realise that it played a far bigger role than I might have originally appreciated.

For my better education, I must thank Andrew Rawnsley for his seminal chapter 'Run on the Rock' in his book, 'The End of the Party'. Rawnsley exposes the sheer ineptitude of Blair, and particularly Gordon Brown, when it came to the whole question of City regulation, and he demonstrates forcefully, how their overweening arrogance, coupled with their ignorance of the beast with which they were called on to deal, set in train a chapter of accidents waiting to happen, which the City would exploit to their fullest capacity.

The seeds of destruction were sown in the Thatcher era when the political Right eulogised the ideological wisdom of unfettered markets. One of the New Labour mantras was that left-leaning politicians were to be encouraged to believe that paying full regard to Finance was the price that had to be paid for access to power, and as Rawnsley puts it, 'the instinct to be friendly to profit was encoded in the genes of New Labour.'

James Purnell put it thus; 'It was a founding principle of New Labour that we were going to be pro-business.'

Both Blair and Brown believed that lasting political power could not be won unless they purged New Labour of past associations with hostility to wealth creation. Peter Mandelson went further, making a speech in California in which he declared that New Labour was 'intensely relaxed about people getting filthy rich'.

When it came to financial regulation, neither Blair nor Brown had any real interest in the issue.

As Rawnsley puts it;

' Brown created a new architecture of regulation called the 'tripartite system' because it split responsibility between the Treasury, the Bank of England and the new FSA. Once this triangular arrangement was established, Blair paid it no further attention. More remarkably, neither did Brown, indeed, Brown displayed a total lack of interest in his own creation from very early on...'

Sir Steven Robson, a senior Civil Servant said of Brown; 'I don't think he was terribly interested in the regulation of financial services, really'.

This attitude inevitably shaped the behaviour of civil servants at the Treasury, which in turn, infected the behaviour patterns of the appartachiks in the FSA. 'They took little interest in financial regulation because their political master did not...'

Rawnsley posits; 'Brown had no desire and felt little necessity to pay attention to financial regulation. Ed Balls bragged that Britain had developed a system of increasingly light touch and risk-based regulation, so superior to its international competitors that it had made London a magnet for international business.'

Complacency at the Treasury and indifference at the Bank of England were compounded by flaws in the FSA, which took a box-ticking approach towards regulation, but insofar as the Government took any interest in the FSA, it was to push for weaker rather than stronger scrutiny of financial institutions.

Mervyn King would later observe that 'any regulator who told bankers to stop being so reckless during the bubble years would have been seen to be arguing against success'.

Labour’s embrace of the City climaxed with Gordon Brown's speech to the City of London in 2007, which began: 

‘Over the ten years that I have had the privilege of addressing you as Chancellor, I have been able year by year to record how the City of London has risen by your efforts, ingenuity and creativity to become a new world leader…'

and which spoke of;

‘an era that history will record as the beginning of a new golden age for the City of London’.  

Within 12 months, the conduct of the bankers led to another crash in the British economy. 

No wonder the whole bloody edifice just collapsed like a pack of cards. At a time when the most invasive scrutiny was needed, the clowns in the FSA took their foot off the gas, because the Prime Minister was so bamboozled by the money being made by the financial sector, and the percentage of increase in GDP contribution that the spivs were making, that he could not for one minute believe it was being achieved by anything more than his own financial genius.

So, mixing a combination of greed, a propensity to take enormous risks, coupled with a regulatory regime of manifest incompetence, is it any wonder that the financial sector took full advantage of the opportunities made available to them?

So, what can the Banking Commission do to bring about a change for the better, one which will ensure that the City stays on course. The Daily Telegraph has reported that the Banking Commission report on standards in the City is to demand a radical overhaul of the punishment of bankers who have overseen failed institutions and open the door to new rules on multi-million-pound pay deals and competition in the sector.

The final report by the Commission on Banking Standards could be released as early as this week and will contain a series of recommendations on bank governance as well as changes to the "approvals regime", which registers senior bank executives.

The report is expected to say the regime has failed and needs to be replaced, as well as urging regulators to enforce current laws rather than recommending new criminal legislation for the banking industry.

This will be an important recommendation because it means that there is finally a recognition that the existing laws are capable of dealing with the levels of criminality which have been identified. It means that more time does not need to be wasted introducing new laws, but the most important factor is that the laws do need to be enforced. This was a significant failing by the FSA who became adept at finding 101 reasons why they should not enforce the criminal law in those areas which were within their competence.

This has been a continuing leitmotif of the regulatory regime for years, and the whole profile has to change. Regulators have to be made to understand that a concerted application of the criminal law to all persons engaged in the financial sector, will have a salutary effect upon compliance standards and public behaviour. If bankers know that breaking the criminal law means that they will face certain prosecution, they will think twice before engaging in such behaviour. It was only because the regulatory regime was so feeble and was just ignored by politicians that gave the banksters the green light to behave in the way they did!

A chapter on the approved persons framework is expected to say that the current process is a failure and needs to be reformed so that individuals involved in any future banking collapse can be barred from working in the financial services industry.

It was the disclosure that Lord Stevenson, the former chairman of HBOS, had remained an "approved person" for several years after the bank's collapse which persuaded the commission that the regime needed to be changed.

The commission's 10 members will meet to discuss the draft report ahead of its publication, which could come as early as Wednesday. Andrew Tyrie MP, the chairman, is expected to face tough questions over the report's contents as rival commissioners look to ensure their views are reflected.

There is a danger that individuals may seek to push for the inclusion of their own special project ambitions, and these will have to be carefully scrutinised to ensure they don't mean a watering down of reform. The City has its friends on the Commission as well as its critics. 

There has also been much behind-the-scenes lobbying of commissioners and an early chapter of the report is expected to discuss banks' "resistance" to reform. Among the main parts of the report is a section devoted to the banking industry's resistance to reform, as well as a segment on improving competition, particularly by encouraging alternative sources of finance. 

One of the longest chapters, at about 70 pages, is focused on the regulatory and supervisory approach in financial services and is expected to include a series of recommendations on how this can be made more effective.

The Banking Commission's long-awaited report is one of the most important documents to be devoted to cleansing the Augean stable that is the Square Mile and its multifarious criminogenic occupants. This is the last chance to get it right, let us hope that they do not duck the challenge!