London Risks Losing Its Mantle As A World Leading Financial Centre

December 9, 2011United Kingdomby QFinance

UK’s Alarming Apathy Towards Its Banking Sector’s Criminality
UK’s Alarming Apathy Towards Its Banking Sector’s Criminality

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According to the Hansard transcript this is what followed:

Martin Wheatley: I think we have to be very careful about what we consider to be criminal actions. The challenge that we all have is we want good people in those roles, and so we want good people to take on the roles of directors, to take on the role of chief executives.

Jesse Norman: You are not suggesting that Messrs Goodwin, Stevenson, Crosby, and so on, were successful exemplars of good management in banking?

Martin Wheatley: I think we have to have the appropriate level of penalties for the appropriate level of offences. I think that is something we just have to think very carefully about.

Jesse Norman: But would you, in principle, support the idea of making certain actions into criminal offences in this area?

Martin Wheatley: When you say "in this area", the principle of making certain actions criminal offences, yes. I think we need to be very specific.

Jesse Norman: In the area of management of financial institutions?

Martin Wheatley: Reckless or willfully misleading, possibly. Genuine business mistakes – people make genuine business mistakes.

Jesse Norman: No, certainly not for that. For reckless mismanagement, that kind of category.

Martin Wheatley: Again, and maybe I could ask Margaret to comment as she has more experience of this, I think we just have to be quite cautious about where we push the criminal sanctions into.

Margaret Cole: Clearly where there is fraud, that is a clear issue. We also have a criminal offence of misstatements to the market, and that is already there. I think I would be extremely wary of introducing a criminal offence in connection with management or mismanagement of a financial institution. [She then talked about lifetime bans for 'incompetence' etc]

Jesse Norman: Your view is a significant toughening up but not extra criminalization?

Margaret Cole: That is my view, yes.

Hector Sants: [Said he endorsed tightening up of legislation around lifetime bans]

Lord Turner: I did want to add one point. The criminalization route...does not address the core of the problem...People make business misjudgments in balancing risk and return, but that in banks, we want them to make a different balance of risk and return from other sectors of the economy...the difficulty we have in banking is that, when you take some of those risk/return trade-offs...there [might be] a disaster for the economy as well...

We are more likely to make progress by thinking about whether we should simply face people who are the directors of banks...with a sense of automatic non-criminal sanction ..."You cannot have future employment in the financial services industry unless you positively prove to the regulator that you were the person who was putting up the red flags and trying to warn against the concerns.”

So it seems the FSA's thinking runs as follows.

"Since 'white collar' crime is so hard and so expensive to prosecute (and risks showing up our earlier failures), there is little point in us even trying. We would obtain better results by simply vetting candidates for senior banking and City of London roles more thoroughly, and then offering the sanction of banning them from ever working in finance again if they "mismanage" their institutions."

I'm afraid, however, that this is the wrong approach. Unless the crimes and misdemeanors that caused the UK's banking and financial crisis are rooted out and prosecuted, London risks losing its mantle as a world leading financial centre even more rapidly than now. This would represent a massive risk to the UK economy, as more financial business would seek to ebb away to properly regulated jurisdictions including Singapore.

Related: The UK Economy

Related: UK Finance

In conclusion, I would like to quote Hector Sants's answer to a question from George Mudie MP, concerning whether the FSA has any idea of what's really going on inside Britain’s leading banks, let alone inside the "shadow banking system." Sants replied:

“The short answer to your question is yes [we do now have full transparency from British banks, unlike in 2007-08], but nevertheless I should draw to the committee’s attention a couple of points. First of all, of course, it is possible for fraud –rogue trading – to occur within an institution, which will mean that its position turns out to be different to that which the institution has reported to us. But I believe we have full transparency of those positions. We also have the capability, which we did not have pre-2007, to make our own judgments on the quality of those positions, in the sense that we have hired 200 or so risk specialists. The FSA, as you know, had no risk specialist capability pre 2007; it was not set up to do that. And we now employ multiples of individuals on supervising individual banks compared with that period. So we do have full visibility."

Related: New UK Bank Rules: US Looks Even More Pathetic

Related: Financial Regulation: UK Activism vs Laissez-Faire US

Related: Bank Bonuses: UK Leads Regulatory Charge, Bankers Meow in AgreementThat's quite a brave claim for Hector Sants to make. And possibly one that will come back to haunt him.

By Ian Fraser

Ian Fraser, a journalist since 1988, is working on programmes about the banking and financial crisis for the BBC. He writes about business and finance for the Financial Times, the Sunday Times, the Independent on Sunday, the Daily Mail, and the Mail on Sunday. Since 2009, Fraser has been a visiting lecturer in financial journalism at the University of Stirling.

FSA's failure to tackle 'white collar' crime endangers the City of London is republished with permission from the QFinance Blog. Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.

See Also: UK Economy
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