Banks are serial offenders and can't be controlled by shareholders. Vince Cable, the business secretary, has correctly identified the problem of corruption at banks,
but his policy prescription of asking shareholders to invigilate
abusive organisations and executives has not worked and will not work.
Contrary to Cable's claims, shareholders are traders and speculators
rather than owners. They barely hold shares for more than three months
and do not have a long-term interest in the business. They have been
utterly ineffective at curbing corrupt practices at banks, as evidenced
by the tide of scandals.
Banks are under the spotlight for the Libor scandal and mis-selling of loans to small businesses, but they are serial offenders. The mid-1970s secondary banking crash
highlighted fraudulent practices, which also engulfed the property and
the insurance sectors. The government bailed out the banks and in turn
had to resort to loans from the International Monetary Fund.
the 1980s the financial industry sold around 8.5m endowment policies for
repaying mortgage loans. These were not suitable for all borrowers.
Banking staff received commission for selling the policies. The risks
were often not explained to the borrowers. Banks made profits but eight
out of 10 policies failed to pay the promised returns and did not even
provide the amounts needed to redeem the mortgages. A 2004 UK Treasury committee report estimated that 60% of borrowers had been the victims of mis-selling, facing a shortfall of around £40bn.
This was followed by the pensions mis-selling scandal
where people were encouraged to abandon good employer-based pension
schemes and join a private one instead. The £13.5bn scandal affected
some 1.4 million people.
The late 1990s saw the precipice bonds scandal.
Some 250,000 retired people were lured to invest £5bn in investments
misleadingly described as low risk. Thousands of investors lost 80% of
The 21st century did not provide any respite from financial scandals. Payment protection insurance
is still being played out; some 3 million people were sold expensive
and unnecessary insurance and are battling for compensation which could
top £10bn. Now we have the Libor and small-company loan scandal.
In between the above, banks engaged in organised and aggressive tax avoidance, tax fraud, money laundering, corruption and feeding misleading stock market research to investors to drum up business and higher fees – just to mention a few of their misdeeds.
penalties, forced compensations and regulatory action have become part
of normal banking business and the costs are just passed on to
customers. It is hard of think of any instance when shareholders have
sought to curb rapacious behaviour of banks or their executives. They
have always been focused on short-term gains and cared little about the
social consequences of the quest for higher returns.
public sunlight are effective antidotes to institutionalised corruption
and should be applied here in large doses. If the government is serious
about changing the predatory culture of banks then it needs to change
the whole system of corporate governance. The market pressures for
higher returns should be checked by turning all banks into mutuals and
co-operatives. Employees, customers and borrowers have a long-term
interest in the business of banks and should be empowered to elect and
remunerate directors. Directors need to be made personally liable for
the cost of criminal practices. At the moment banks are fined, but
executives walk away with a stash of profit-related pay, with virtually
no penalties. All major banking contracts should be publicly available
so that we can all see the shady dealings.
The banking regulators
have frequently come from the finance industry and are too close to
banks. They act only after the stench of scandal has become too strong,
and frequently they have been part of what a US senate report described as a "cover-up".
This inertia should be checked through annual hearings by the Treasury
committee. All policy meetings of the banking regulators should be held
in the open, and information in the regulator's possession – including
background papers – should be made publicly available.
is not a magic bullet for eradicating institutionalised corruption, but
the beginning of reforms necessary to curb the worst excesses of an
industry that has damaged the lives of millions of people.
This article first appeared on Comment is Free