The role of Barclays bank in manipulating the London Interbank Offered Rate (LIBOR) continues to dominate international financial media.
The bank has already attracted fines from regulators in the UK and theUSA.
But further revelations are likely as US Senate Committees are
flexing their muscles, the UK parliament has launched an inquiry and the
UK’s Serious Fraud Office (SFO) has announced a criminal investigation.
The temptation will be to look for scapegoats and prevent consideration
of the systemic factors.
Barclays has a dark history. For example, in 2010, Barclays Bank paid
US$298m in fines for “knowingly and willfully” violating international sanctions by handling hundreds of millions of dollars in clandestine transactions with banks in Cuba, Iran, Libya, Sudan and Burma.
In February 2012, the UK government introduced retrospective legislation to halt two tax avoidance
schemes that would have enabled Barclays to avoid around £500 million
in corporate taxes. However, Barclays is not alone. Only last month,
the UK financial regulator reported that Barclays, HSBC, Lloyds and
Royal Bank of Scotland mis-sold loans and hedging products to small and medium sized businesses. The financial sector has been a serial offender.
Here are a few examples.
The UK experienced a secondary banking crash
in the mid-1970s. The crash revealed fraud and deceit at many banks.
The UK government bailed them out and in turn had to secure a loan from
the International Monetary Fund.
In the 1980s, the financial sector sold around 8.5 million endowment
policies, which were linked to repayment of mortgages. The products
were not suitable for everyone but were pushed just the same, and the
risks were not explained to the customers.
A 2004 parliamentary report
found that some 60% of the endowment policyholders have been the
victims of mis-selling and face a shortfall of around £40 billion. This
was followed-up by a pensions mis-selling scandal where 1.4 million people had been sold inappropriate pension schemes. The possible losses may have been £13.5 billion.
The 1990s saw the precipice bonds scandal.
Around 250,000 retired people been persuaded to invest £5 billion in
highly risky bonds, misleadingly sold as “low risk” products. Thousands
of investors lost 80% of their savings. Then came the Split Capital Investment Trusts scandal.
Once again financial products had been mis-sold and deceptively
described as low risk. Some 50,000 investors may have lost £770 million.
New millennium came with a new financial scandal – the payment protection insurance (PPI) scandal.
People taking out loans were forced to buy expensive insurance, which
generated around £5.4 billion in annual premiums for banks and provided
little protection for borrowers. This scandal is still being played out
and banks may be forced to pay £10 billion in compensation.
The above has been accompanied by money laundering, tax avoidance, tax evasion, fraudulent practices to inflate share prices and of course the banking crash, which has brought the global economy to its knees.
Whichever way you look at it, banks have been serial offenders and
continue to act with impunity. The entrepreneurial culture of making
private profits at almost any cost has had disastrous social
consequences. Fines and forced compensations have just become another
business cost and the usual predatory practices have continued.
There are two main drivers of the financial scandals. Firstly,
markets exert incessant pressures for ever rising profits and don’t care
much whether they come from normal trade, money laundering, tax
avoidance and other dodges. Secondly, the idea of assessing people’s
worth through wealth is deeply embedded in western societies.
Profit-related pay became the mantra from the 1970s onwards and has
been a key driver of the abuses. The typical tenure of a FTSE 350
companies CEO is around four years and declining. In this time, people
at the top need to collect as much personal loot as possible and have
little regard for any long-term consequences. The performance related
pay applies at the lower echelons as well and again encourages
short-termism and neglect of any social consequences.
In principle, regulators and politicians should be able to able to
check the abuses, but the UK political institutions are weak. There is
little competition amongst the political parties to devise socially
For the last 40 years, they have all offered various shades of
light-touch regulation and veneration of markets. There has been no
attempt to alleviate market pressures by forcing banks to operate as
cooperatives or mutuals. Corporate and wealthy elites fund political
parties and have organised effective regulation and accountability off
the political agenda.
The regulators of the financial sector come primarily from the same
industry and have sympathies for the narrow short-term interests of that
industry. After a stint as a regulator, they then return to the same
industry. The revolving-doors and ingrained conflicts of interest have
prevented effective regulation and accountability.
Reforming political institutions is a necessary condition of
controlling banking frauds, but a durable change is not on the horizon.