Has the FCA Gone Soft on the Banks?
14 Feb 2016

The decision by the FCA in December 2015 to ditch its major inquiry into bank culture beggars belief.

Announced in the quiet period between Christmas and New Year, when most commentators were eating the last of the turkey, it marked the moment when the UK government and its increasingly supine regulator, the FCA, abjectly surrendered to the will of the banking community.

While it is certainly the case that since 2008 banks have more regulatory hurdles to jump through, nothing effective has been done to address the culture and incentives that have led bankers to engage in a spectrum of appalling conduct including excessive risk taking, mis-selling, rate rigging, sanctions evasion, money laundering and the facilitation of crime.

What links all of these harmful practices is a deeply flawed industry culture – an issue that increased box ticking does not address.

The FCA’s decision to ditch its inquiry will set back years the task of addressing this critical issue. What led to the FCA’s decision was an uncritical genuflection to the merest hint dropped by the city that some of its number might seek to exploit arbitrage opportunities by relocating to friendlier climes; a form of corruption in which the FCA, created to act in the public interest, has instead advanced the commercial concerns of the banks that dominate the industry it is charged to regulate.

Good parents know well enough not to react to a toddler’s temper tantrums. It appears that the FCA and George Osborne are yet to learn that lesson.

Worryingly, nobody within the UK government seems to have calculated that if the cost of further bad bank behaviour is another taxpayer funded bailout and a trebling of the national debt, the UK’s economic interests might in fact be better served by encouraging sabre rattling banks to leave.

Akin to a patient with a contagious illness, banks have been released from quarantine without the FCA first having completed a thorough diagnosis despite them posing an ongoing threat to themselves and the public at large.

Which leads us to consider the causal factors that underpin the continuum of harmful bank conduct. How is excessive risk taking linked to rate rigging, sanctions evasion and the facilitation of bribery?

The answers relate to one over-riding truth, that despite (or perhaps because of) the systemic importance of banks, they and their senior officials continue to enjoy beneficial treatment in relation to authorisation, and crucially, enforcement both of which manifest in a culture of brass necked impudence.

Despite bringing the world to the edge of economic catastrophe in 2008 there is still no requirement for UK bank directors to be professionally qualified or even to have their technical competence and human factors suitability tested.

In the U.S. the position is even worse with a requirement that directors only have a basic understanding of the banking industry.

Thirty years ago amateurs running banks could do only limited damage but what the crisis taught us was that bank products, services and markets are now so complex and inter-connected that the inherent risks can only be fully comprehended and managed by directors who place greater importance by technical proficiency than they do by the old boys network.

Consider the contrast in standards imposed on bankers and other professionals including pilots, lawyers, accountants, doctors, nurses, teachers all of whom have to demonstrate a high degree of technical proficiency to practice.

To fix a boiler a heating engineer must be qualified and certified, but to run a bank capable of wreaking economic catastrophe a bank director needs only to be connected to the right people.

The FCA does authorise directors but the process does not involve a rigorous assessment of technical know how and in consequence some incompetent directors continue to have their feet under the boardroom table.

Since 2008, the absence of stringent technical competency requirements has led not to the emergence of a much needed meritocracy at the top of the banking industry but the perpetuation of a club.

Bank directors are a privileged caste and (more or less) a law unto themselves. They are ill equipped to engender the right attitudes and behaviours and in consequence they get the organisational behaviour they deserve.

When a bank is suspected by the FCA of having misbehaved and its conduct requires to be examined. the regulator requests the bank to ‘select’ from an approved list a firm of external auditors to conduct the enquiry. In what other walk of life does a person suspected of wrongdoing have the opportunity to choose who interrogates them? Why is this clear conflict of interest regarded as acceptable for banks but not to everybody else?

The situation is even more objectionable and surprising when one considers that many of the firms selected by banks to undertake the examinations, themselves derive enormous fees from the banking industry for audit and consultancy services.

It is difficult to conceive of a starker example of the divide between the treatment by the state of big business and ordinary citizens.

On the rare occasions when enforcement action is taken against banks who is it targeted at? Not the directors but the faceless corporations that pay the fines. Just as drug dealers and tax evaders take shelter behind anonymous shell companies, so bank directors are able to leave the ramparts exposed to attack as they scuttle deep inside their organisations beyond the reach of the law.

Prosecutions of mid or low ranking operatives such as the Libor rigger Tom Hayes divert attention from the conduct of the senior bank directors who were ultimately responsible for stewarding the environments in which the bent conduct took place.

The anatomy of bank scandals and the enforcement responses to them have not changed over the decades. We have learnt nothing. The parallels between the behaviours and prosecutions of the original rogue trader Nick Leeson and Tom Hayes are startling and yet nobody has stopped to ask why the very public prosecution of Leeson twenty years ago was not followed by an improvement in banker behaviour?

Satiated by the prosecution and lengthy sentence meted out to Tom Hayes we are making the same mistake again by not focusing more attention on the class of senior officers who have it in their gift to alter bank culture.

Prosecutions or regulatory action not against institutions or patsies but against directors, present an unparalleled opportunity to demonstrate just how serious the consequences are of harmful bank conduct and to encourage behavioural and cultural change.

The decision by the FCA to scrap its inquiry comes against the background of not one senior officer of a UK bank having been held accountable for any of the harmful behaviours listed in this article.

The ongoing impunity of bankers despite the enormous economic and societal harm they have wrought has caused many ordinary people to question, not unreasonably, whether the UK can justifiably claim to treat everyone equally before the law.

Imposing bigger capital ratio requirements on banks is the equivalent of putting more sprinklers in to a house full of arsonists.

What if the fire is even bigger next time? Isn’t it essential that we begin after so many failed responses to former crises, to examine why the bankers keep starting the fires in the first place? That essentially was what the FCA inquiry into bank culture was designed to do. It was on any measure a critical post crisis exercise. Now that it has been scrapped the countdown to the next banking scandal has started.

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