A Perfect Storm in British Banking

New British Regulatory Captain Martin Wheatley Steers the FSA Through Rough Waters

FSA boss Martin Wheatley could hardly have stepped into his new role at a more critical time.  The banking world was already experiencing seismic shifts, with the FSA in the midst of a massive re-organisation in preparation for the new regulatory structure decreed by the Vickers Report, but over the last few weeks the banking industry has been rocked by yet more scandal. 

Just a week after NatWest and RBS hit the headlines for all the wrong reasons, when their systems went belly-up following an IT update, two  even BIGGER stories have emerged concerning mis-selling and rate rigging. Mr Wheatley admits he has been shocked by some of the abuses he has encountered since taking up his new post, and described the events of the last few weeks as a ‘perfect storm’ for the entire British banking industry.

At the end of June the FSA announced that it had found ’serious failings’ in the sale of interest rate hedging products to some small and medium sized businesses.  British high street giants Barclays, HSBC, Lloyds and RBC have been ordered to compensate firms hit by this mis-selling, and to stop marketing complicated ‘interest rate structured collars’ to retail customers.

Poor sales practices identified by the FSA included:

• Poor disclosure of exit costs
• Failure to ascertain the customers’ understanding of risk
• Non advised sales straying into advice
• “Over-hedging” (i.e. where the amounts and/or duration did not match the underlying loans)
• Rewards and incentives being a driver of these practices

Just hours after this disclosure came the more damaging revelations of ‘LIBORgate’,  which involved the fiddling of LIBOR, (the London inter-bank offered rate).  Bank traders were found to have been routinely ‘fixing’ the rate at which banks lend money to each other.  Emails exchanged between the traders reveal the casual attitude with which they toyed with the figures. For example

                'Dude, I owe you big time' and  'I’m opening a bottle of Bollinger'.

What was apparently a laughing matter for some traders in fact had a huge impact on many businesses and private customers, because the fiddled rates were affecting the prices on billions of dollars-worth of financial transactions from derivatives to mortgages, not only in the UK but worldwide.

Political and media pressure following the disclosures has led to some shocks at Barclays Bank, where so far Marcus Agius has stood down as Chairman and Chief Executive Bob Diamond has resigned, but other banks are also under investigation. More details are still coming to light, and it is likely that more startling disclosures will emerge of the coming weeks and months. Last week the Serious Fraud Squad announced it was launching a criminal investigation into the matter.  Businesses and individual Barclays customers are hastening to move their accounts to other banks, and many are considering if they will be able to take legal action.  One way and another it is likely to cost Barclays and the entire industry millions of dollars in fines, compensation and lost business.

The British Government is to set up an independent review into the inter-bank lending rate. MP John Mann, who has been vocal in his support for tighter banking regulation, has reminded us that Barclays was founded back in 1690 on the Quaker principles of honesty, integrity and plain dealing.  Labour leader Ed Miliband is calling for a ‘root and branch’ reform of the banking industry to ‘to deliver real change for Britain… to rebuild our economy so it works for working people, and… restore trust in a sector of our economy worth billions of pounds and hundreds of thousands of jobs to our country.’

London Mayor Boris Johnson, always good for a memorable sound bite, offered this bit of balance to the argument, reminding us that, in spite of everything,  we still do actually need bankers:
"Bang 'em up. Slam 'em away. But we need the political establishment in this country to stop slagging off a sector that is utterly crucial to the British economy and the current system of global capitalism – and after four years of navel gazing since the crash, we have yet to come up with an alternative."
If  Mr Wheatley can sort that lot out, he will be more than earning his salary at the FSA.  Best of luck to him in his new post.