Regulator: regulate!

As the tide drifts out, more and more people are seeing the detritus that came in on the previous decade’s wave of debt and easy credit. What is surprising, however, is that the mantra of ‘too big to fail’ has come to mean absolutely nothing in regulatory terms.

Policy has been focused on the big central banks pouring money into the retail banks and big financial institutions with the expectation that increased liquidity would mean better funding for small businesses. Instead, most of the banks used the cash to fix their debt-ridden balance sheets while ignoring the needs of those businesses.

A lot of the problems at some leading banks can be said to be historic, and can therefore be blamed on previous regimes, but to the average man and woman in the street, a lot of it is a continuing corporate culture, capped with arrogance and obstinacy.

There is no objective evidence that these banks are moving in the direction or speed that most of us would like to see. Yet, so far, the deafening silence from the regulator is embarrassing.

The most widespread excuse, and the one they believe has some kind of logical weight, is that if we in Britain do not compete on salaries and bonuses for the best and the brightest executives then they will up sticks and move to Frankfurt, Singapore, Hong Kong or somewhere else.

The simple answer is not to compromise on our public or corporate ethics. If these flawed individuals, who appear not to understand ethical behaviour, still want to move to an environment in which anything goes, then good riddance.

The truth is that there is no shortage of good talent, and no sooner have these people packed their bags than younger, brighter, more ethical men and women would be glad to step into their shoes.

To be fair to those bankers, corporate greed and bad behaviour is not restricted to them; it can also be found in the privatised utilities, public transport, local authorities, supermarkets and politicians. In almost every important institution with which ordinary people have to interact on a regular, if not daily, basis there are always legitimate grounds for complaint.

Equally, something is wrong when building societies are fined by the regulator for treating their members badly – just take a few seconds to think about that – and even the Co-op Bank found itself with a drug-abusing chairman in a dog collar, no less.

All this has fed the myth that ordinary businesses, in particular banks, cannot be profitable if they behave ethically towards their customers.In truth, corporate behaviour is framed in the boardroom and interpreted on the executive floor. It does not just emerge at the customer-facing end.

And good regulation should forensically trace the origin of this ethical decay: who issued the instruction? What was the justification for it? What were the expected outcomes? Until senior managers in these organisations, just like small mortgage brokers, are fined and banned from the industry, we will not see any changes in this behaviour.

This also goes for the corporations. Fine the corporation, and that cost will be passed on to taxpayers and customers. But remove 100 per cent of executives’ bonuses, then fine them for improper conduct and the various conditions under Principle One, and their actions will radically change.

It is naïve and juvenile to claim, as some people do, that although banks need to improve their game, tougher regulatory rules are unnecessary.

It is naïve and juvenile to claim that tougher regulatory rules are unnecessary

The fact is that retail banks are more than just profit-making businesses, they are in effect similar to utilities in that they perform a social service, and as such the state, through the agency of the central bank, must act as lender of last resort. For that guarantee, taxpayers have a right to demand a certain standard of service from retail banks.

Over the last few years we have seen leading banks setting aside tens of billions of pounds as provision against likely regulatory fines for mis-selling payment protection insurance, rigging foreign currency, alleged money laundering – both in this jurisdiction and the US – without a single one appearing in the courts of law (junior UBS dealers aside) to answer for their misdeeds.

This sends a message: to lowly customers who, realising they are up against the big battalions of the corporate world, retreat into their little boxes; to regulators, who often find that the legal and compliance heavyweights of the banks are more knowledgeable than their own enforcement officers; and politicians, who fear undermining the City.

The big high street banks know they are too big to fail and they behave like playground bullies: closing branches while ignoring the needs of customers, from about 17,000 in the early 1990s to about 7,000 today.

One only has to look at the new business models, often based on flawed research, such as the rush to digital and telephone banking, on the spurious grounds that cash is going out of fashion.

Finally, some people may question why the City regulator is keen to impose its Principle One conditions on errant individuals, yet is less keen to do so on the big corporates.

Big banks too can be reckless, lacking in integrity, dishonest and unfit to continue working in financial services – unless, of course, different rules apply if the name of the bank or major financial institutions is known globally.

Hal Austin is the editor of Financial Adviser