It’s been a wretched week for Britain’s banks. On Tuesday, Lloyds Banking Group announced it was setting aside an additional £900m for the mis-selling of payment protection insurance. On Thursday, Barclays made a £500m provision for the fine it can expect for rigging the foreign exchange market. The banking list of shame will no doubt be added to when Royal Bank of Scotland reports on Friday.
Patience with the banks is wearing thin. As Minouche Shafik, the deputy governor of the Bank of England, said in a speech earlier this week, it is no longer credible to put the wrongdoing down to a few bad apples. The language used by Shafik was instructive. She talked of “appalling cases of misconduct”, and of a long tail of “outrageous conduct cases”. Unless banks have a tin ear, they must surely have got the message: Threadneedle Street has had enough.
What was a bit strange about Shafik’s speech was her comment that she found some of the behaviour in the City “truly shocking”. There is no longer anything remotely shocking in the unearthing of financial malfeasance. It is only shocking in the way that the gambling going on in Rick’s night club in Casablanca was shocking to Captain Renault.
There are many explanations for why the rigging of markets and the rooking of customers happened. In the end, though, the simplest explanation is the best. It happened because the banks thought they could get away with it. The culture was one in which self-enrichment was seen as serving the greater good; regulation was so light-touch as to be non-existent; and the chances of being punished were slim.
It’s not just the banks, of course. Why did newspapers hack phones? Because they could get away with it. Why do multinational companies pay so little tax on their UK activities? Because they can. Public trust in business generally, not just the banks, has rarely been lower and it’s not hard to see why.
The question is what can be done to improve things. Despite the changes at the top of the banks, the idea that new management can effect the necessary culture change is no longer persuasive. Nor is the injection of competition – an oft-touted remedy – a panacea. There is little prospect of the stranglehold on investment banking by a handful of firms being broken.
There are other ways that would help restore faith in the financial system. The first is tougher regulation of the fixed income, currency and commodity markets where the wrongdoing has been unearthed. One of the first tasks for the next government will be to implement the findings of the Fair and Effective Market review currently being conducted by the Bank, the Treasury and the Financial Conduct Authority. This should pull no punches.
The second way is to use the tax system to target activities once described by Adair Turner as “socially useless”. A bank bonus tax, a higher top rate of income tax, and a Financial Transaction Tax are all options here.
Finally, there is the long arm of the law. If the authorities took the same zero-tolerance approach to Libor rigging as they do to benefit fraud, the behaviour of the City miscreants would rapidly improve.
