When is a crime a crime? I am thinking here of the wrongs committed by players in the financial markets, banks, brokers, financial advisers and the like. Unlike financial crimes, violent crimes and property crimes allow clear definition and proof. If you have been assaulted, you may have a black eye. If you have been burgled, perhaps a window has been broken and your desk ransacked. It is obvious what has happened.
Financial crimes are not like that. Look at some recent examples. If a bank allows its facilities to be used for money laundering, then it is enabling criminal activity. It is a bit like receiving stolen goods. Rather than hiding the loot, the bank disguises it. But it is very hard for the outside observer to detect what is going on. The full extent of the crime will be discovered only if an insider blows a whistle or a regulator makes some astute enquiries. Yet it is a serious crime. Deutsche Bank was recently fined £163m for money laundering.
The big banks also succeeded in rigging one of the most important interest rates, the London Interbank Offered Rate, commonly referred to as Libor. This is an average interest rate calculated through submissions of interest rates by major banks across the world and is thus is a sort of international marker. Its presence increases the efficiency of financial markets.
What happened was that a group of Barclays bankers decided that they would rig the system by falsely inflating or deflating their rates so as to profit from trades they had made in preparation for this manoeuvre, or to give the impression that they were more creditworthy than they really were. In 2016 four bankers were jailed as a result.
They had engaged in fraud, which is a criminal deception intended to result in financial or personal gain. This is a form of stealing. To be more precise, the bankers concerned were acting like sophisticated pickpockets, taking money from somebody else’s pocket and putting it into their own, albeit the setting was international banking rather than, say, Oxford Circus in London, where notices warn against the activities of such criminals.
One of the most dangerous features of financial crime is that it may go unnoticed by the victim – if not forever, then for a long time. An example would be when financial advisers give unsuitable recommendations to their clients. If, for instance, you have been given bad advice about your pension arrangements, you may not realise that this has happened until you retire, or even perhaps not then. You just find that your pension isn’t very good and that your friends and neighbours of a similar age seem better off despite having had similar careers to your own.
A tragic case in point concerns British Steel workers. They had worked for the company when the government owned it. When it was privatised in 1988, a new pension scheme was set up. Later an Indian conglomerate, Tata, gained control of British Steel. Then in March 2017 Tata closed the British Steel pension scheme to future accruals.
Members could either go with a replacement scheme set up by the Pension Protection Fund or take their benefits as a cash lump sum and transfer into a private pension. It’s this last option that has sparked a growing pension scandal. For now, in a perfect illustration of what I mean by financial crime, police in south Wales are probing allegations that steelworkers at Port Talbot were victims of pension fraud.
What happened was that once it was known that British steelworkers might have cash lump sums available for investment in financial products, they found themselves besieged by independent financial advisers (IFAs). These are firms that are authorised to provide their clients with financial advice as well as to recommend suitable pensions and investment products in return for a fee. Some IFAs even turned up at the factory gates in search of business.
It is amazing, isn’t it, that our banks should lead us onto such treacherous ground?
It seems a number of the IFAs were intent on ripping off steelworkers by misleading and deceiving them. The aim was to get them to place their cash into funds with high charges (which would be shared with the IFA introducing the business). Apparently, they purported to be providing information rather than advice, a distinction that is unlikely to have been at all obvious. They weren’t terribly interested in what would be best for the workers on a case-by-case basis.
In October the Financial Conduct Authority (FCA) analysed the advice steelworkers had been given. It found that the suitability of the recommended product could only be established in 35 per cent of cases, with 24 per cent unsuitable and 40 per cent unclear.
What had the IFAs been doing in return for the fees from steelworkers seeking help? The FCA found that “some firms had ‘industrialised’ their … transfer business so that they were no longer focused on their clients’ individual circumstances and needs”. What the FCA means by “industrialising” their operations is adopting a one-size-fits-all approach to the steelworkers’ business rather than paying careful attention to individual circumstances.
An observer told the FCA that transfer plans that were recommended to steelworkers were sometimes given “a veneer of respectability, but which can consign a duped scheme member to a lifetime of poor outcomes based on high charges, poor performance and unsuitable advice”. One fund used by the IFA, Active Wealth, levied annual charges of over 2 per cent of the investment value. This would put “a high strain on investment performance”, commented one expert. Funnily enough, Active Wealth has recently halted its operations.
While some IFAs were ripping off steelworkers, a specialist subsidiary of a major bank, Royal Bank of Scotland (RBS), was taking unfair advantage of small businesses that were experiencing financial difficulties. I am referring here to a so-called business support unit called Global Restructuring Group, or GRG. The Treasury Committee of the House of Commons recently stated that it had had “longstanding concerns about the treatment of small businesses referred to GRG”.
The trouble is that RBS had given GRG conflicting objectives. On the one hand, GRG was charged with seeking to support distressed businesses and achieve successful turnarounds. As these firms are already RBS customers, that should have been sufficient reward in itself. Bad risks had been turned into conventional lending opportunities. On the other hand, however, RBS has also required that over and above making a bad debt good, GRG should handle these turnaround situations in such a way that extra profits were made for the group.
In an internal document, RBS put it this way: “GRG is a customer-facing business whose objective is to improve our position and the financial condition of the customer.” Note which objective comes first: improve our position.
The same document, which the Treasury Committee has seen, gives a series of instructions and recommendations to its restructuring staff. It is headed “Just Hit Budget!”, which implies that everything must be subordinated to that aim. It then goes on to give a series of tips. “Basket cases – time-consuming but remunerative”; “Deal or no deal, no way”; “Missed opportunities will mean missed bonuses”; and then finally this one: “Rope: sometimes you need to let customers hang themselves… they know what’s coming when they fail to deliver”.
The FCA doesn’t like this at all. It argues that a bank’s own commercial interests and the fair treatment of customers in a turnaround unit are potentially in conflict. The interests of customers and the bank can become misaligned when a customer is facing financial difficulties. The method by which the bank seeks to protect its interests on behalf of its shareholders may then differ from the customer’s preferred course of action. A bank will seek to minimise the loss to which it is exposed were the business ultimately to fail and be unable to repay the amount it owes.
The situation was made worse by the fact that the wider economic circumstances and the ongoing challenges for many banks meant that for large numbers of small company customers there was little if any prospect of obtaining alternative banking arrangements. The final protection available for customers – namely the threat or reality of taking business elsewhere – was not a manoeuvre available to many of GRG’s customers. In other words, they could be safely mistreated.
RBS now disowns the internal document headed “Just Hit Budget!” The chief executive, Ross McEwan, told the Treasury Committee that the language used was completely unacceptable and the bank does not condone it: “It does not reflect bank policy or guidance.”
Now see what the Treasury Committee discovered next. It asked RBS what proportion of the senior staff currently engaged in restructuring small companies had previously worked at GRG. The answer came back: 30 of the 32 senior managers, equivalent to 94 per cent. So, asked the impressive Nicky Morgan MP, chair of the committee, doesn’t this mean that the recent reorganisation of GRG was merely a rebranding exercise? Good point. You cannot really shame the banks. When caught out they will, if possible, merely say sorry and carry on.
In fact RBS’s behaviour was almost innocuous when compared with, say, the American bank, Wells Fargo, which is the world’s second largest bank by market capitalisation and the third largest bank in the US by assets. It was recently discovered that it created millions of fraudulent savings and checking accounts for its clients without their consent. Its clients began to notice the fraud after being charged unanticipated fees and receiving unexpected credit or debit cards or lines of credit.
Managers had been pressured by the senior executives to open as many accounts as possible. They saw them as salespeople with customers rather than bank managers with clients. As a result, Wells Fargo has agreed to a $142m (£103m) national class action settlement to cover fake accounts that were opened as far back as 2002.
Faced with this misbehaviour, financial regulators have been active. Research by New City Agenda, a financial services think tank, earlier this year found that Britain’s banks and building societies had incurred £33bn in misconduct costs between 2010 and 2014 – roughly equal to the sum they paid out in dividends to shareholders over the same period. The Bank of England estimated last year that misconduct costs had reduced banks’ pre-tax profits by 40 per cent on average between 2011 and 2015.
Finally Mark Carney, Governor of the Bank of England, recently described where this persistent bad behaviour by banks, evidently untamed by heavy fines, leaves us: “The incidence of financial sector misconduct has risen to a level that has the potential to create systemic risks by undermining trust in both financial institutions and markets.”
It is amazing, isn’t it, that our banks, trusted high street brands, should lead us onto this treacherous ground?