This Is Not The Time To Let Bank Management Off The Hook

The CEO of UBS yesterday joined other wolves in sheeps clothing big bank leaders in calling for freedom to make 'honest mistakes' (last year it was the crew at HSBC!). 

This is just a confidence trick. After all, the word "mistake" covers many different types of sin and bank culture doesn't seem to distinguish between honest and dishonest ones, as Andrew Hill of the FT has pointed out. He also cites a memo from JP Morgan's CEO as warning against descending into "a culture of back-stabbing and blame" - but from what I understand that's exactly the culture that already prevails, at least amongst rival managing directors. Emails disclosed in numerous scandals reveal that these are dog-eat-dog environments, full of perverse incentives, where everything from taking the credit for other people's efforts to fiddling records to incurring the odd regulatory fine are just speed bumps along the road to fees, profits and this year's bonus.

Ignorance of exactly what is going on at operational level is another aspect of this confidence trick. Recently, the CEO of government-owned RBS told John Snow of Channel 4 News that he "didn't know" whether there were other major scandals waiting to break. I guess it's a tricky question to answer, but it does highlight the conclusion from the Parliamentary Commission on Banking Standards that these banking groups appear to be beyond management control, enabling those at the top tend to avoid culpability. Remember, too, that many of the recent scandals, like currency market rigging, arose well after the start of the financial crisis. So nothing has really changed since the aptly nick-named 'noughties' (lest we forget Bobby "Dazzler" Diamond's immortal words in 2011!).

And to suggest that regulation might mean big banking groups will tend to take less risk in doing things that customers care about, like lending to small businesses or paying higher returns on savings, is poppycock. They aren't bothering to do this anyway. They just want the freedom to make more money for management, and possibly shareholders. They are simply not customer-led businesses.

For all these reasons, the bank CEOs should continue to be roundly ignored.

#LOBOs The Wolves That Stalk The High Streets

'Lobo' is Spanish for 'wolf'

Last night Dispatches updated us on the LOBO crisis that's savaging the UK's local government budgets. 

Not only have councils lost the estimated £500 million in instant profits pocketed by the banks who lured them off long term, low rate loans to 'more flexible' terms; but they're also left with higher interest bills that have resulted in more spending cuts or higher borrowing.

Everyone still involved seems to deny there's a problem, of course, but the data speaks volumes and some of the poachers-turned-gamekeeper have been willing to spill the beans. 

It's worth noting that the banks paid commissions to 'brokers' who brought in the business. Whether those commissions were or should have been disclosed is one issue; and whether the brokers also paid a cut to others is another. You'd think that Clive Betts MP (Lab), Chair of the Commons' Select Committee on Communities and Local Government, might include those items on his agenda - assuming he can get past the sad fact that allowing local governments to deal with the banking wolves in the first place was a Labour initiative.

It's also important to note that all of this only came to light through the tenacity of researchers armed with Freedom of Information requests, the results of which were handed to Dispatches. While hunting down any miscreants is an important step, requiring greater transparency on the sources and terms of local government borrowing in future might also help avoid another mauling. 

The Old Fake Collection Letter Scam

I've read with fascination the UK banks' attempts to justify their decades-old fake collection letter scam. The RBS letter is here. The HSBC letter is here. The Santander letter is here and the Barclays letter is here. Lloyds also admitted to using the same trick. Despite the attempted justifications, all the major banks have stopped the practice. But how much will it cost them, and what other scandalous conduct is lurking in their processes?

News of the banks' scam followed uproar over the admission by Wonga that it had used a similar practice four years ago (probably borrowed from the banks). Even the Student Loan Company had been in on the act. Wonga had confessed the issue to the Office of Fair Trading, and agreed to pay customers £50 each in compensation, presumably to avoid problems with its consumer credit licence during the transfer of consumer credit licensing responsibility to the more aggressive Financial Conduct Authority.

Basically, the banks and others played on the idea that debtors are more likely to pay up when a creditor hires someone else to recover their money. The letters from the CEOs of Barclays and Lloyds stated that their debtors tended to ignore chasing letters on bank letterhead (the banks seemed oblivious to the idea that everybody dreads a letter from the bank - especially ISA customers).

Of course, the banks were reluctant to actually pay anyone else to chase their debts. So, instead of hiring independent collections agencies and law firms, the banks simply created their own firms and called them something different to create the appearance that a genuinely independent third party had become asked to chase the debt. Whether they also charged the same recovery fees as independent firms remains the subject of investigation by the FCA.

The major banks also pretended to the authorities that they weren't responsible for collecting their own debts. When the Office of Fair Trading consulted with the industry on new debt collection guidance in 2002, the banks didn't respond under their own brand names, as creditors. The list of respondents in the Annex to the consultation response only included the banks' pet collection agencies and law firms.

But as the OFT's Debt Collection guidance made clear (in section 1.9), it's the creditor who is expected to "abide by the spirit as well as the letter" of the guidance, not just its collections agencies, and ignoring the guidance could affect the creditor's licence to lend in the first place. The guidance goes on to state:

"2.1 It is unfair to communicate, in whatever form, with consumers in an unclear, inaccurate or misleading manner.
2.3 Those contacting debtors must not be deceitful by misrepresenting their authority and/or the correct legal position.
2.5 Putting pressure on debtors or third parties is considered to be oppressive.
2.7 Dealings with debtors are not to be deceitful and/or unfair." 

The OFT's 2003 guidance was updated in 2011 and has since been enshrined in the FCA's new consumer credit rules. Hence, like Wonga, the banks have becone increasingly anxious to clean up their act.

The narrow question is whether the banks will need to compensate customers affected and, if so, how much. 

The bigger question is how many more examples of banks' systematic disregard for customers are lurking in their processes?

Why Bankers Make Poor Managers

If UK banks ran our restaurants, we'd all be spending a lot more time in our smallest rooms.

In the latest example, the Financial Conduct Authority found that only 2 of the 164 RBS and NatWest mortgage sales reviewed actually met the required sales standard. Even the banks’ own tests confirmed the problem that borrowers were at grave risk of being sold the wrong type of mortgage. Yet it took the banks nearly a year to stop fiddling and begin taking proper steps to resolve the issues. Worst of all, this took place in 2011 and 2012 - long after the events of 2008 had alerted everyone to just how poorly these banks were managed generally; and after numerous specific failings had been detected in their retail operatons. The same banks had just been fined for failing to screen customers and handle complaints appropriately - and had even failed to enable customers to pay bills or access money. 

Of course, RBS and NatWest are not alone, and the banks' problems are not confined to their retail operations. Most of the major banks are embroiled in scandals arising from lack of operational controls of one kind or another.

Over at heavily-embattled HSBC, the Chairman and Chief Executive have been whingeing about the 'cost of compliance', as if it's a dead weight they're forced to bolt-on to the side of their sales process, rather than a set of largely common-sense business rules that should be embedded in their operations. 

They don't seem to realise what a sad indictment it is on the level of management skill in the financial services industry that successive regulators since 1986 have felt obliged to spell-out in minute detail how to operate a financial services business at every level and in every scenario. As a result, no human could possibly lift a printed version of the FCA's 'Handbook'. 

The same charge can be made for failings in longer term strategy. The government had to force the banks to invest in faster payment processing capabilities, for example, and it took an extensive series of court battles before banks were finally shamed into 'voluntarily' reducing overdraft charges. The most recent indictment on the levels of skill, enthusiasm, initiative, vision and energy at the top of the UK's banks is that the government will have to regulate to make them refer rejected business funding applications to alternative lenders. 

That's right, UK bank executives aren't even up to negotiating simple lead-referral arrangements.

Which begs the question: what do UK bank executives actually do all day?

Why, they fight regulation, of course, and all the operational rigour it seeks to impose.

HSBC Still Doesn't Get It

You would not expect a conglomerate under heavy regulatory fire to use its latest results announcement to campaign against regulation. But that's HSBC for you.

Yesterday, the CEO complained that the group now spends $800m a year on 'compliance and risk programme', an increase of $200m, with more to come next year. In other words, even after years of scandals and massive fines, HSBC remains under-invested in compliance and risk controls.

Even more alarmingly, the Chairman says that such resources would otherwise be spent on customer-facing staff, who he says are becoming too risk-averse. But that's exactly what regulators, customers and taxpayers are afraid of - the biggest banking group in Europe spending an extra $200m a year selling toxic crap without adequate controls over an aggressive salesforce. 

Bizarrely, HSBC's Chairman is also pushing for the ring-fencing of the retail bank to be deferred at the very same time as a major Portuguese bank goes under.

Not a great attitude to regulation from the leadership of a bank that has 3 years to go under the deferred prosecution agreement it signed with US authorities for money laundering and sanction breaches - ending HSBC's involvement in $100bn worth of businesses. That's in addition to claims for market rigging, mis-selling PPI and interest rate swaps, not to mention it's starring role in the 'Magic of Madoff'. 

I can't imagine that Res Publica's Virtuous Banking report went down terribly well at HSBC HQ.

At any rate, with revenues already down 9% and pre-tax profits down 12%, in the year to June, you can expect a lot more bad news from these bozos. 

What's The Beef?

Isn't it fascinating how quickly the FSA reacted to the faintest whiff of horsemeat, yet it's namesake was prepared to leave dodgy banking products lying around the shelves for years? 

And what a remarkable difference in crisis management there is between the average high street food retailer and the finance shop next door!

Seems to me the Treasury's hoping most Brits will prefer the taste of a beaten favourite. 

Shock As Faith Dies: Change Curve Activated

The patient failed to respond.

Faith in our institutions finally died this week after a long illness. Doctors amputated a banker, began a saline drip for 28,000 small businesses, corrected errors in several prescriptions and tried another infusion of cheap money. Parliament even held a debate. But the patient failed to respond.

Reactions were mixed. Some were 'sorry, disappointed and angry', others cried. Some remain in denial.

In other words, nothing has actually changed. But it's a start.

Hopefully, we'll soon have a lot of little things going wrong.

Image from VirtuallyShocking.