Saturday 15 November 2014

Saturday, November 15, 2014 Posted by Jake 3 comments Labels: , , , , , , , , , , ,
Posted by Jake on Saturday, November 15, 2014 with 3 comments | Labels: , , , , , , , , , , ,

According to the Guardian newspaper between 2009 and 2013 banks paid £166 billion in fines and compensation for sins ranging from LIBOR fixing, to PPI mis-selling, to money laundering, to gold price fixing, et cetera. This figure doesn't include fines from 2014 onward including FOREX fixing et cetera.

According to the Office for National Statistics £136 billion was paid in bonuses to UK staff in the financial services sector between 2004 and 2013, when much of the dodgy dealing was being done.

Fines are paid by shareholders (for Lloyds and RBS that includes us taxpayers), but bonuses are paid to individual staff. Does the UK regulator require individual naughty bankers to hand back some of the bonuses they gained doing things that earned £166 billion in fines? We hope the next graph will make this clear:

After all the tough talk of 'clawing back' banker bonuses, what happened? The UK's financial watchdog the Prudential Regulation Authority (PRA) bravely decided clawback would only apply to bonus awards made from 1st January 2015! 

The PRA explained:

"many firms would not have the capacity to introduce such a requirement into existing employment contracts without employee consent and/or might be open to challenge for doing so. In order to ensure a consistent and even application of the clawback requirement across industry, the final rule requires the application of clawback only to awards made on or after 1 January 2015."

[Updated 23/6/2015: The PRA decided to give the bankers an extra year to fill their boots. Clawback applies only to awards from 1 January 2016: "The final provisions on clawback (of paid variable remuneration) and deferral (of unpaid variable remuneration) will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016"]

The PRA couldn't impose bonus clawbacks because the bankers didn't want to give the bonuses back.

The FCA's statement on "Tackling the root causes" of Forex rigging again shows its complete inability to tackle the root cause:

"The remediation programme will require firms to review their systems and controls and policies and procedures in relation to their spot FX business to ensure that they are of a sufficiently high standard to effectively manage the risks faced by the business."

In its analysis of 'root causes' the FCA does not mention bad bankers. Which sounds rather like advice for a failing school. It is right that schools must seek "systems and controls and policies and procedures" to understand and help the most wayward children rather than simply punish them with lines and detentions. Bankers are not children. The most wayward bankers do need lines (i.e. writing cheques to return their bonuses) and lengthy detentions (i.e. jail time).

If the UK authorities still think new "systems and controls and policies and procedures" will prevent the bankers behaving badly, they are wilfully mistaken.

The FCA's press release on its record £1.1 billion fines for FOREX rigging, imposed in November 2014, stated the punishment was for misbehaviour between 1 January 2008 and 15th October 2013:
"Between 1 January 2008 and 15 October 2013, ineffective controls at the Banks allowed G10 spot FX traders to put their Banks’ interests ahead of those of their clients, other market participants and the wider UK financial system. The Banks failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct."

You will have noticed this particular period started AFTER the great banking crash, and continued for a year AFTER banks had been caught out with their LIBOR rigging shenanigans. Evidently there were no lessons learned, and no new systems, controls, policies nor procedures that made any difference.

The attitude of the excessively paid with respect to regulations and controls can be seen in this exchange about tax avoidance schemes between a tax consultant and MPs in a parliamentary committee:

Q103 Ian Swales [MP]: How many of the schemes you have marketed are now illegal?

Aiden James [tax consultant]: Most of them.

Ian Swales: Most of them?

Aiden James: All of them, I suspect.

Q104 Ian Swales: All the schemes you have marketed are now illegal, so you are now looking for the next loophole-is that a fair description of your business?

Aiden James: That is how it works, yes.


Q110 Stephen Barclay [MP]: The model, if I am understanding correctly, Mr James, is that most of the schemes that you introduce get closed down within a relatively short period of time.

Aiden James: Yes.
Q111 Stephen Barclay: So then you aggressively target a client base and get as many as you can through in a short period of time on the basis that HMRC cannot pass retrospective legislation. Therefore, your clients will get a tax window where they can reduce their tax until HMRC wake up and close that scheme down, by which time you have moved the game on to the next scheme. Is that a fair summation?

Aiden James: I would agree with all that you said apart from "aggressively market". 

So long as people are offered massive rewards with no real personal risk they will without a shadow of a doubt find a way to beat the "systems and controls and policies and procedures".

The solution:
  • Reduce the reward: eliminate bumper pay.
  • Increase the risk: go to jail.
The reality: George Osborne spent yet more taxpayer money paying for lawyers to fight the EU cap on, you guessed it, banker bonuses!


  1. What Parliament's Treasury Committee thinks are the problems of the banking industry:

    "The PCBS recognised the crucial role that banks play in the economy, but concluded that the malaise in the banking industry was both deep-seated and the result of a combination of separate causes:
    • Bankers, regulators and politicians had failed to learn the lessons of past failures born of hubristic expansion and unsustainable asset price bubbles;
    • The implicit taxpayer guarantee that made banks too important to fail and too complex to resolve, and which, among other harmful effects, gave them incentives to take excessive risks;
    • Banks had become too big and too complex to be managed effectively. This made it more likely that a bank’s standards would be low, but also gave banks’ leaders a convenient excuse of ignorance when scandals were discovered. Complexity therefore undermined the personal responsibility of senior executives;
    • Senior bankers continued to be paid more than could be justified by their performance, and incentives were preoccupied with short term leveraged growth with inadequate consideration of long term risk;
    • Banking culture often lacked a sense of duty to the customer or of collective responsibility for the reputation of the industry;
    • Banks’ internal compliance systems were ineffective;
    • Regulation of the banking industry was misconceived and poorly targeted, and too narrowly rule-based rather than judgement-based;
    • Retail banking, owing to high market concentration and substantial barriers to entry, lacked competitive pressures. This, combined with the information disparity between banks and consumers, meant that banks had weak incentives to reduce prices and improve customer service;
    • Institutional shareholders had incentives to encourage banks to pursue high risk strategies in pursuit of short-term returns; and
    • Distorted incentives in banking gave large rewards for short-term success, incentivising risk on the balance sheet."

  2. The PRA decided to give the bankers an extra year to fill their boots. Clawback applies only to awards from 1 January 2016, instead of their earlier intention to start from 1 January 2015:

    "The final provisions on clawback (of paid variable remuneration) and deferral (of unpaid variable remuneration) will apply to variable remuneration awarded for performance periods beginning on or after 1 January 2016"

  3. Ignoring of course the extensive evidence that paying bonuses for this type of work actually makes the people involved make worse decisions and is counterproductive


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