The rate rigging scandal exposed at Barclays last week is the latest example which shows a culture change is needed to restore a sense of responsibility to banking.
The largest fines imposed on individuals so far by the Financial Services Authority (FSA) was to two Northern Rock executives. The fines were less than the bonus given to each individual in the previous year. So if the risk of getting caught is low, the fine is usually paid by the firm, and on the rare occasions an individual has to pay it is less than last year’s bonus, it is logical for discipline to break down.
Even the fines imposed on firms by the UK regulator are insufficiently large to make much impact on a firm’s culture. Barclays most recent fine of £59.5 million – itself a significant rise on the size of fines previously imposed by the FSA – contrasts with Mr Diamond’s personal profit of £26 million from the sale of BGI, a division of Barclays’. Mr Diamond’s deputy last year earned £14 million. Why would he fear a regulator who has never fined an individual even a tenth of that sum?
Values matter more than rules. You simply cannot write enough rules to cover every circumstance. The FSA Handbook already runs to over 6,000 pages and yet has proved insufficient.
Banks have talked about their values, but their actions show these are not what matters most to senior management. Those who delivered the highest profits were rewarded with promotion and large bonuses. Executives might have said that treating the customer fairly reflected their values. In practice what they communicated to staff was that more value was placed on short term profit at any price.
It is easy to suggest the cultural behaviour was an issue confined to investment banking. Yet the sale of complex derivative interest swaps to small family firms who did not understand them, or the long running mis-selling of Payment Protection Insurance to vulnerable consumers so desperate for a loan they would overpay for insurance, reflects a failure of values more than of rules.
For too long the regulatory debate has focussed on how light touch regulation should be – not how to enforce effectively. Values matter little unless they drive behaviour. This is where the regulator needs to focus.
Lord Turner in his report on RBS – where no individual fines were imposed against directors for the bank’s failure – identified a gap in the regulator’s powers making it difficult to prosecute individuals. Parliament needs to legislate quickly to close this gap. As Lord Turner was appointed to his post as Chairman of the FSA by Labour, and his report into RBS was agreed by the Coalition Government, cross party agreement should not be difficult to reach on this issue.
While the Serious Fraud Office look to see whether criminal sanctions apply to those who manipulated LIBOR rates, it will always remain easier to succeed in applying civil penalties given the lower burden of proof required. Rare prosecutions for criminal offences may occur but more widespread enforcement to change the culture of banking will come from civil penalties.
Bonuses have been used by banks to drive behaviour. It is time the regulator used the same trick. Individual fines will hit traders and executives in the spot that matters most to them – their pockets.
This article was first published by the Telegraph, here.