The Business of Banking

In 1997, Chancellor Gordon Brown, within 4 days of the Labour party’s landslide victory, made the Bank of England independent from central government. At the time, this was a step roundly applauded by business and politicians. Regulation of the banks was divested to the Financial Services Authority that monitored the activities of the City of London.

 

Low interest rates combined with the FSA’s light touch towards regulation set the market free, and gave the banks licence to make money.  And why not? After all, in 1998, Peter Mandelson – then New Labour Business Secretary – suggested that he felt “intensely relaxed about people getting filthy rich”.

It is well known that the banking crisis was triggered by the collapse of the sub-prime mortgage market in the USA in 2007.  The ripples were felt in Europe and, in the UK, the first visible casualty was Northern Rock which went into public ownership in early 2008.  In 2008 and 2009, the UK government bailed out RBS, Lloyds TSB/HBOS to the tune of £37 billion in return for part ownership by the public.

But alongside the financial disaster brought about by the lightly regulated excesses of the many of the world’s lenders, the banking sector had several other major controversies to deal with, all of which went to the heart of the banks’ relationship with the customer on the high street.  These demonstrated that, when it came to financial services and products, banks were prepared to exploit the financial naivety of many of its customers, and were quite content to impose charges and services that were lacking in transparency, clarity or – quite simply – plain English.

The level of confidence in our banks can best be demonstrated by a paragraph in the message of the CEO of RBS, Ross McEwan:  “We have a long way to go to be the bank that our customers deserve. We get too many of the basics wrong. We are still too complicated to deal with. And we still have to spend too much time dealing with the legacy of past failures.” The past failures of one the world’s largest banks are too lengthy to list here. Suffice it to say that, under the stewardship of Sir Fred Goodwin (who resigned with a very generous pension in 2008), the bank in 2009 posted the largest loss in UK corporate history - £24 billion.

Credit cards

By 2003, 1300 different credit cards were available in the market. They were easy to get, and offered attractive rates for balance transfers, rewards purchases but with hidden, vicious, stings.  The sheer availability of seemingly cheap credit caused huge numbers of people to obtain multiple cards which, in the final analysis, they simply could not afford. In October 2003 a Treasury Select Committee accused major banks of bare-faced cynicism in relation to their credit card rates, enticing offers, credit card cheques, and default charges At that committee Matt Barrett, Chief Executive of Barclays, said that a Barclaycard was “too expensive... I do not borrow on credit cards. I have four young children. I give them advice not to pile up debts on their credit cards."  On his £1.7 million annual salary, he probably didn’t need to.  The House of Lords accused credit card providers of “taking advantage of naïve customers” and of being “misleading and confusing”. Consumer debt stood at £166 million and described as “grave”. In January 2015, it is still at £169 billion.

The PPI scandal

Since the turn of the century, the insouciant attitude of our financial institutions has been thrown into even sharper focus by their mis-selling of Payment Protection Insurance.  The story of the PPI scandal is well known but, in short, banks were aggressively selling expensive insurance on loans, credit card debts and mortgages representing that the protection would cover repayment in the event of illness or unemployment.  In millions of cases, however, the PPI was not properly explained, not explained at all, not questioned as to its suitability for a particular applicant or the applicant was told that it was essential to have PPI in order to obtain the credit/loan that was sought.  HSBC, Barclays, Lloyds, RBS, Santander and Nationwide – amongst others – have had to set aside billions to satisfy fines, claims for mis-sold PPI.  In 2012 there were 12,000 claims per week. According to the Chief Financial Ombudsman there are still 4000 new claims per week.

Lloyds Bank (still 24% state owned following its bail-out in 2009) further broke the rules in 2014 by delaying compensation payments to claimants.  It was hit with a further fine.  Its total fines currently stand at £11.3 billion   And what of Royal Bank of Scotland in all this? Its role in the mis-selling of PPI was far from negligible, having hitherto set aside £3.3 billion to settle claims.

LIBOR rate rigging

As if PPI wasn’t enough, the LIBOR scandal turned its spotlight firmly on Barclays Bank.  The London Inter-Bank Offered Rate (a rate fixed daily to determine the costs of trillions of dollars of loans, mortgages, and other products) was rigged by Barclays to make profit and to present a picture of stability in the bank during the banking crisis.  In June 2012 Barclays Bank was fined a staggering £59.5 million for numerous instances of misconduct from 2005 to 2009.  The Chief Executive of the Bank, Bob Diamond (described by Lord Mandelson as “the unacceptable face of banking” even before LIBOR) resigned in July 2012.  At Bob Diamond’s questioning by the Treasury Select Committee, John Mann MP described Barclays as “a thieving, rotten bank”, and that Bob Diamond’s annual bonus was the same amount that the homeless charity, Shelter, needed to survive each year.

Barclays wasn’t alone. In 2014 Lloyds was fined £214 million in the US for its role in LIBOR for conduct described by Governor of the Bank of England, Mark Carney, as “highly reprehensible”.  The Chairman of Lloyds, Lord Blackwell, admitted “truly shocking conduct, undertaken when the bank was on a lifeline of public support.”

 

The good news, however, was that Lloyds was in a position to announce in February 2015 that it was awarding its chief executive a bonus package of pay and shares totalling £11 million

A number of other international banks did not escape heavy financial penalties resulting from the LIBOR investigation.  RBS was hit with a penalty of £324 million but that did not stop staff bonuses of £588 million being paid in 2013.

HSBC....

In February 2015 HSBC were exposed as having facilitated tax evasion by sheltering significant sums in its Swiss private bank on an enormous scale.  It is suspected that there are at least 6000 clients who were based in the UK and whose names were passed to HMRC.  In fact, the story goes back much further. In May 2006 Stephen Green (now Lord Green) was appointed as chairman of HSBC.  The IT whistleblower who removed the offending files escaped to France from Switzerland at the end of December 2009 and gave his data to the French authorities. A UK version of the list was made available to HMRC as early as June 2010.   At a sitting of Parliament’s Treasury Sub-Committee on 12th September 2011, the Permanent Secretary of HMRC said “I think the whole nation probably knows that our Department has a disc from the Swiss – from the Geneva branch of a major UK bank – with 6000 names, all ripe for investigation.” When asked when the disc was received, Hartnett replied “June last year, about that.”

The date is significant, because only 4 months later Stephen Green was appointed to the House of Lords and made a trade minister.  The government’s position is that “no government minister was made aware by HMRC officials that HSBC employees may have been involved in wrongdoing relating to its Swiss banking arm prior.. to the media reports in recent days.”

There has been only one UK prosecution in relation to tax dodging arising out of the HSBC Swiss accounts.

On 30th January 2013, HSBC announced the creation of its Financial System Vulnerabilities Committee.  One of its defined purposes was to ensure “....the highest behavioural and compliance standards across HSBC.”  One of its advisors was Mr Dave Hartnett, who had retired from HMRC only the previous year.

We’re all in this together.

As a result of the financial crisis, the coalition government embarked upon a programme of cuts that it has already made clear will have to continue for a further parliament. Despite the fines, the bail outs and the terrible scandals there remains a widespread perception that it was the banks who caused the crisis, but it is the blameless and those who have nothing who have borne the brunt of the banks’ misfeasance.  This perception will remain so long as chief executives of partly state owned banks can receive bonuses of £11 million, and it comes as little comfort (or understanding) to anyone else that some of that bonus is in shares.  Such a distinction is meaningless to most people.

It is a different kind of bank that is the real epitaph of this government’s programme of austerity – the foodbank.  The Trussell Trust launched its first foodbank in 2004 and, according to its website, in the year 2013-14 provided 3 days of emergency food to 913,138 people. That was close to a threefold increase on the previous year. Just short of one million people in this country rely on foodbanks for their basic nutrition....

What action will the parties take to prevent banking excesses and abuses taking place in the future?  Let us see what their manifestos say...

C.B. Shankar  2015