Want to fix banking regulation? Try a dose of greed

by Anthony Bonneville

It’s been a bad couple of weeks for bankers.

Barclays has been caught with its fingers in the proverbial till again. A new mis-selling scandal has been unveiled featuring all our favourite banking villains. And Nat West meanwhile fails to perform even the most basic of tasks one would expect from a bank.

The cry has gone up, “something must be done,” and in government, this means inquiries, reports, sage deliberations and, ultimately, nothing happening to the banks who, by an astonishing coincidence, are also substantial donors and lobbyists.

Meanwhile Joris Luyendijk’s excellent blogs in the Guardian continue to reveal the mentality of some people in financial services and the potentially toxic culture that they are immersed in and inevitably affected by.

One of the finest examples of this is the interview with a senior regulator, who advises,

“Banks are fundamentally amoral places. They are not immoral; morality simply has no part in the decision-making process. They talk about ‘reputational risk’, not about right and wrong decisions”

He’s not wrong. The resignation statement of Barclay’s chairman Marcus Agius (before he unresigned himself and took charge again following Bob Diamond’s exit) declares.

“We will establish a zero-tolerance policy for any actions that harm the reputation of the bank.”

Not even zero tolerance for actions that could harm the reputation of the bank. This form of words rather unfortunately leaves the door open to an interpretation that Barclays staff are being enjoined not to “do no wrong” but “don’t get caught”.

Bob Diamond followed suit yesterday with the type of heartfelt of mea culpa that restores public faith in bankers’ conscience and integrity,

“The external pressure placed on Barclays has reached a level that risks damaging the franchise”

Or maybe not.

Clearly then, it is a vain hope that the bad banks will keep their own house in order, so what is the solution?

More regulation is frequently called for, but the recent scandals that have emerged have been the result of banks flouting the rules that are already there.

So whether or not there needs to be more rules, it is absolutely essential to improve the policing of those that are already there.

Our regulator sums up the problem.

“On an investigation, the ratio of FSA regulators to internal compliance staff at a bank is 40 to 1, easily. You get fairly junior FSA staff facing panels of very senior officers and bank managers. The banks will always have more resources”

Insiders don’t disagree. Another of Luyendijk’s subjects, a derivatives trader states,

“The trouble is, regulators are idiots. I am sorry to put it so bluntly but you can’t expect it any other way. If an investment bank hires a graduate, two years later they will be making over £100,000. Meanwhile at the regulators you are getting £30,000. Why would a smart, aggressive, competitive 22-year-old decide to work for the Financial Services Authority?”

Whilst it is warming to think that there are people like our FSA regulator who are indeed prepared to limit their income even whilst working opposite vastly more richly-rewarded colleagues simply because it is the right thing to do, is it sensible to rely on altruism in this way?

The truth is that the forces of a vastly wealthy oligopoly motivated by breath-taking profits is arrayed against an under-manned, under-funded, under-appreciated FSA.

It’s time to level the playing field.

This week, Barclays were fined £59 million. Currently, this money is paid to the FSA to fund further regulatory activities, yes?

Er, not quite. From the FSA’s own website,

“When financial penalties are imposed on firms or individuals, the proceeds are used to reduce fees in the following financial year,”.

That’s right, as it stands, fines paid in are paid right back out to the banks the next year in the form of reductions in their fees. George Osborne stepped in on Monday to ensure the money didn’t find its way back to Barclays via the fees offset in this case, but this is a one-off.

So here’s a thought, what if the FSA fees remained fixed and 90% of any fines paid were given over and above that fee structure?  And what if the other 10% was distributed amongst the team who uncovered the wrongdoing?

Even if for a large team, £5.9 million is a powerful incentive and in a world in which a bottle of Bollinger is sufficient to move interest rates, it should be more than enough to attract the big swinging dicks the financial service sector seems so fond of.

Making the chance of this kind of “big win” available might attract more of the talent that would otherwise choose the other side of the fence, and if it doesn’t, is it really so bad to reward those people who choose to do the right thing?

Of course, people should always do the right thing and not require rewards for doing so. And yes, nurses do a great job and aren’t rewarded enough. And yes, I’d like to teach the world to sing in perfect harmony too.

But in the world we live in, where something must be done yet the gears of government groan with inertia, this change could provide the resources and the incentives to create a regulator that maybe, just maybe, has a chance of holding the bad banks to account.

Anthony Bonneville works in investment banking


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4 Responses to “Want to fix banking regulation? Try a dose of greed”

  1. Felix says:

    “but this is a one-off.”

    No it’s not. All fines since April 1st 2012 are set to go to the Treasury, according to Osborne’s statement to Parliament.

    ”These new arrangements will apply to fines received from the April 1, 2012 so it includes the Barclays’ penalty and from now on the multi-million pound fines paid by banks and others who break the rules will go to the benefit of the public not to other banks.”

    Labour Uncut stitching up the facts again just to suit a neat idea.

  2. aragon says:

    Have the same culture in the FSA as the banks !

    This is a stupid and dangerous suggestion. Greed is the problem, not the solution.

    The consequences of crime should be the same for banks as the rest of the public, that is jail, and the sanction should be applied vigorously.

    The rewards from the banks should be limited by taxation and structure, the banks are corrupt. Root and branch reform is required.

    Perhaps we should pay attention to Warren Buffet on derivatives.
    http://news.bbc.co.uk/1/hi/2817995.stm

    “But Mr Buffett argues that such highly complex financial instruments are time bombs and “financial weapons of mass destruction”"

    Financial Engineering = Fraud.

  3. Robin Thorpe says:

    This seems a very sensible suggestion, such a shame that change is always precipitated by calamity. I was dismayed to learn, as a result of this scandal, that fines are used to reduce the fees payable by corporations. OK so the fees are meant to cover the cost of the FSA and if they make fines this money is therefore spare, but surely increasing the number of staff or investing in new software would be a better use of a surplus then reducing the fees?

    I note also that you only compare the salary of a FSA operative to an investment banker. Graduates working in accountancy, retail banking and actuaries would not expect to earn £30,000 after 2 years, so the FSA do not compare all that badly with the majority of financial services. The excessive wages earned in the City of London are not representative of the financial services industry as a whole.

  4. In short the corrupt deals of the shadow banking world in which those who delved in most deeply profited in the Hundreds of millions and in order to back away from the precipitous of world economic depression it created the governments were forced to assume these corrupt made loans causing much of this economic chaos and in doing so payed the originators of the loans the elicit profits to the crooks at the tax payers expense to boot.

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