False Promise of Banking Reform is a Joke…At Our Expense

The UK awoke to ‘Jail the Bankers’ headlines this morning, on the publishing of the Banking Commission report ‘Changing Banking for Good’.  However, those of us watching closely throughout the five years since the taxpayer funded bailout experienced something of a déjà vu.  The report not only repeated, but in some cases actually watered down past recommendations.  The government continues making false promises of Banking Reform.  This is a joke, and it’s on us.

The Reports Key Findings and Recommendations

 

The Parliamentary Commission on Banking Standards was formed in July 2012, is chaired by Andrew Tyrie (Chair of the Treasury Select Committee) and members include MPs from Labour, the Conservatives and the Liberal Democrats, and Justin Welby – The Archbishop of Canterbury.

The 571 page report makes the following recommendations:

• A new Senior Persons Regime, replacing the Approved Persons Regime, to ensure that the most important responsibilities within banks are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their banks in these areas;
• A new licensing regime underpinned by Banking Standards Rules to ensure those who can do serious harm are subject to the full range of enforcement powers;
• A new criminal offence for Senior Persons of reckless misconduct in the management of a bank, carrying a custodial sentence;
• A new remuneration code better to align risks taken and rewards received in remuneration, with much more remuneration to be deferred and for much longer;
• A new power for the regulator to cancel all outstanding deferred remuneration, along with unvested pension rights and loss of office or change of control payments, for senior bank employees in the event of their banks needing taxpayer support, creating a major new incentive on bankers to avoid such risks.

All sounds quite laudable and common sense to those of us who remain, five years after the bailout, still awaiting some measure of accountability for those responsible.  However, this is just the latest in a string of commissions, reports and recommendations saying the same thing, signifying nothing.

2009 – The Turner Review

 

In January 2009, The Telegraph reported that the Financial Services Authority were ‘getting tough on banking regulation’.  Lord Turner, Chair of the FSA, promised in a lecture to business leaders that the FSA were going to tighten capital requirements, bring derivatives and other ‘special investment vehicles’ under greater regulation, and put an end to Banks that were ‘too big to fail’.  Turner promised more detail once his report was published later that year.

In March 2009, The Turner Review was published, receiving similar headlines to those we saw this morning.  The report found a culture of unacceptable risk-taking in the banking sector, a failure to properly regulate the industry and in the application of regulatory powers, a lack of accountability in senior management for the failures which led to the crisis, and specific issues with the special investment vehicles which ultimately broke the banking system while providing individual bankers and banks enormous bonuses.

The report recommended:

• That Banks should be required to hold at least 4% (p122) of the money they bet on the stock market as hard cash in their vaults, to ensure they were better placed to fund their own bailout in a crisis.
• An 86 page consultation paper on Banker Remuneration to ensure reckless behaviour would no longer be rewarded, including the long term deferment of significant bonuses.
• An enhanced Supervisory Programme which would see more frequent checks on banks and a greater level of reporting required from Banks on performance of derivatives products, bonuses and capital ratios.
• The report also criticized the rise of ‘Universal Banks’ (banks that have both a retail high street arm, but also an investment and trading arm) as leveraging their ‘too big to fail’ status (p95) to take big risks knowing they would be bailed out by the taxpayer.

Most of these changes were implemented with immediate effect, while others were scheduled throughout 2009 and early 2010.

However, on entering power in 2010, the Coalition government scrapped the FSA.  They replaced it with the FCA (The Financial Conduct Authority), a new Bank of England Financial Policy Committee and the Prudential Regulation Authority.  Essentially, they gave the Bank of England yet more power over the control of interest rates and oversight of the Banking Sector.  Strange, given the Bank of England had done no better job of foreseeing or preventing the Banking Crisis than anyone else. What it did allow was for Bankers to gain even more control over the rules governing Banks.  These changes were finally made in Law just last month, with the Financial Services Act.

2010 – The Vickers Report

The Independent Commission on Banking was set up in June 2010 with effectively the same remit as the Turner Review – to review and make recommendations on the structure of the UK Banking sector, except this time they were asked to suggest changes that would ‘increase competition and financial stability’.  The Commission was headed by Sir John Vickers, and published its report in early 2011.

The Vickers Report recommended:

• The ring-fencing of retail and ‘casino’ banking – and that the ring-fenced part of the bank should have a separate board and we legally and operational separate from the parent bank. This should be completed by 2019.
• Ring-fenced Banks should have a capital cushion of up to 20%, 17% of which should be equity (cash) and bonds, with an additional 3% requirement if the regulator felt the Bank was at particular risk and additional safeguards for the taxpayer were required.
• That it should be easier for consumers to switch retail banks
• The industry should be referred for a competition investigation in 2015.

In June 2011, the Coalition government responded to the Vickers Report.   It said at the time that it would heed the advice of Sir John Vickers who stated that the reports recommendations should not be treated as a menu that the government could pick and choose options from.  It was to be adopted in full, as written, or it would not be sufficient to do the job.  The government stated it would implement the recommendations within the current parliament.

It was hardly surprising that just a nine months later, the government was busy watering down the proposals.

2012 – Watering Down the Recommendations

This bring us to Parliamentary Commission on Banking Standards set up in July 2012 and its final report today.

The government has reduced the capital requirement to just 3%, lower than all previous recommendations in the litany of commissions and reports, and equal to requirements that already exist under Basel regulations.  This renders the requirement redundant.

The Banking Reform Bill, which is the legislation which would enshrine the changes in Law has been repeatedly slowed in its process through parliament, now being shunted into 2014.  In response to those who suggest this sluggishness is just part of the parliamentary process, it is worth noting that when the regulations governing the Workfare Scheme were found unlawful in the High Court, the Department of Work and Pensions redrafted the regulations and presented them before parliament that same afternoon.  It has been five years since the Bailout and no real progress on this matter of enormous economic, legal and social significance.

In fact, the only significant new recommendation in today’s report – that bankers should be jailed for the offence of reckless misconduct – has been immediately stepped bank from by Chancellor George Osborne.

In the meantime, the Banking sector continues under the same rules and regulation that failed to prevent the 2007 crash.  The same dodgy derivatives which leveraged debt to infinite ratios and led to the Bank Bailout are being packaged and sold at the same rate they were pre-crash.  The derivatives market was still growing and had reached $700trn of debt, 10 times the earning power of the earth, at the time of The Turner Review back in 2009.

It is not only in the UK that the government is refusing to tackle the Banking Sector.  In the US, which has yet to pass its own Financial Reform Bill, the very same banks which the Bill seeks to curtail are actively engaged in drafting the legislation.

This is Joke

According to the National Audit Office, The UK National Debt rose by £850bn as a result of the Bank Bailout. This is almost twice the nation’s total annual budget.  For this amount, the UK could have funded the entire NHS (£106.7bn a year) for eight years , our whole education system for twenty years (£42bn a year) or provided two hundred years of Job Seekers Allowance (£4.9bn a year).

Since that time the resulting economic hit taken by the public finances has been hijacked to promote an agenda of privatisation of public services, and an all-out assault on the welfare state.  It is the disabled people, the elderly, the unemployed, the sick and the young who are paying for the crisis – while the Bankers continue to receive mammoth bonuses and tax cuts.

These endless commissions, reports and recommendations simply kill time and provide the appearance of substantive change in the Banking Sector while it is business as usual for Bankers.  Furthermore, they propagate the myth that what the criminal behaviour that led to the Financial Crisis, the mass fraudulent mis-selling of Payment Protection Insurance and the manipulation of the LIBOR rate was unethical but not illegal.  Governments across the world continue to spread the lie that no rules were broken, that it is not possible to hold those past misdeed to account.  This is simply not true.

The reason this is so significant is that it suggests that whatever diluted, flaccid regulation eventually makes it into law – the regulators, the judiciary and the government are unlikely to make use of those powers anyway, as they have manifestly failed to do so to date. This is a joke. Sadly, the joke is on us.

Take Action

Move Your Money – move your money out of the big banks which caused the crisis and continue to exploit people and planet for their own profits.