By Stephen Gilchrist
O brave new world that hath such people in’t! As Margaret Thatcher’s thrusting entrepreneurial Mirandas might have acclaimed of the City’s bankers in the 1980s. Big Bang introduced a new era of deregulation, and limitless opportunity to play Las Vegas with customer money. Today, Miranda has given way to Eric Idle, with bankers, politicians, and those who should know better calling upon us to ‘Always Look on the Bright Side of Life!’ In business merchant banks have given way to ‘investment banks’, long-term relationship banking has been replaced by short-term transactional banking, with shareholder returns and maximisation of profits being the be all and end all. And that’s how we have come to this- global financial collapse, fraud investigations into manipulation of the LIBOR, payments to Middle Eastern middle men in consideration for propping up one our best known banks, misleading selling of financial products and so on and so forth. Our banks, in short, have become a shapeless pudding combining an ethos of casinos and financial supermarkets.
Not only do banks seem incapable of regulating themselves, they seem incapable of being regulated. The FSA is due to be replaced shortly by the FCA (Financial Conduct Authority). Needless to say, and subject to a bit of tweaking, the FCA will be run by the same people as hitherto, and daresay in the same way. In this game of blackjack, the house always wins. Promised legislation to make Boards more accountable in civil and criminal law has yet to materialise, and probably never will. Meanwhile Barclays announced its half-year profits of £4.23bn in July, a 13% increase on the previous year, while also issuing an apology credited to chairman Marcus Agius. Agius said in the statement: ‘We are sorry for the issues that have emerged over recent weeks and recognise that we have disappointed our customers and shareholders. Other banks follow suit in the wake of mis-selling and money laundering investigations. In essence, bank profits have derived from a mix and match of honest and dishonest conduct.
Taking the LIBOR debacle, purely as an example, the FSA case (a civil, industry driven regulatory mechanism) in which Barclays were heavily fined, focused on breaches of the FSA’s Principles for Businesses by which all banks are bound, in particular:
• Principle 5 (proper standards of market conduct),
• Principle 3 (to take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems), and
• Principle 2 (a firm must conduct its business with due skill, care and diligence)
Barclays’ misconduct included:
• making submissions which formed part of the LIBOR and EURIBOR setting process that took into account requests from Barclays’ interest rate derivatives traders. These traders were motivated by profit and sought to benefit Barclays’ trading positions;
• seeking to influence the EURIBOR submissions of other banks contributing to the rate setting process; and
• reducing its LIBOR submissions during the financial crisis as a result of senior management’s concerns over negative media comment.
It is probably true that as Chancellor Osborne is reported to have said, the FSA did not have the power to bring criminal prosecutions. The Chancellor said he would look at strengthening the criminal sanctions available to the financial regulators and added the Financial Services Bill could be amended. Other commentators have warned that the SFO should be careful before having a pop at bankers over LIBOR as they remind us that the last time the SFO brought a case which alleged price-fixing (R v Goldshield), it misunderstood the law so badly that the case collapsed at the first hurdle and affected following cases. In Goldshield (200*) the court held that “An allegation of price fixing carried out in circumstances of secretive and deceptive behaviour was insufficient of itself to found a charge of conspiracy to defraud. It was necessary to isolate and charge specific aggravating elements which would elevate price fixing into an indictable conspiracy to defraud.”
In any event one is left with behavior that smells, is probably dishonest, and by which bankers and banks (and their shareholders) have profited. Under the Proceeds of Crime Act 2002 a defendant’s benefit from financial crime can only be assessed and recovered by way of a confiscation order after a criminal conviction. However it also possible, absent a criminal conviction, for SOCA (Serious organized Crime Agency) to apply to the court in civil recovery proceedings, where property is found by the Court to have been obtained by or through crime or is traceable to crime then the Court must forfeit it to the State. Remedies are:
- Freezing Orders – (by which assets cannot be moved without agreement by the Court);
- Civil Recovery Orders – (by which the Respondent must forfeit assets which are believed to be the proceeds of crime. No criminal conviction is needed);
- Tax assessments – (by which a person or company must settle a tax bill on their ‘income or profit’ from criminal activity, for which no tax has been paid).
Do not be surprised you have read nothing of the above in the media. It has not happened and is unlikely to happen, in the view of this commentator. Bankers and regulators live in their own bubble, protected from the ordinary pressures and threats of criminal justice by the politics of economics and the perception that at, all costs, chaos must not prevail. Politicians and regulators fear most – entirely without justification – a breakdown of public order if the economic edifice is seen to be breaking down. No one is above the law but the fear of the implications of bank failure and/or the prosecution of their high and mighty is often too great to contemplate.
This article was originally published in Finance Monthly and can be found here