Six European and American banks, including two based in Britain, have been hit by financial regulators with what, on the face of it, looks like a massive fine of £2.6 billion. Their crime was that traders working for them rigged the market in foreign exchange rates to the banks’ (and their own) advantage. So far, however, no individuals either running or working for the banks have been hauled before the courts, let alone sent to jail. This follows what looks like a familiar pattern of bankers managing to evade the consequences of their actions. Should we be going after them too?
Britain’s HSBC and Royal Bank of Scotland, together with the Swiss bank UBS, and three American banks, JP Morgan Chase, Citibank and Bank of America have been the subject of a thirteen-month investigation by the UK regulator, the Financial Conduct Authority, and two American regulators. The investigation centred on the working of the foreign exchange market, which dwarfs all others in size: $5.3 trillion is traded daily in it, 40% of which is carried on in London. Almost all of the trading is done via banks through their electronic trading systems.
The regulators discovered that between 2008 and 2013 small groups of individual traders in the banks were using private online chat rooms to communicate illicitly with each other in order to rig benchmark exchange rates in order to make money for their banks and, of course, themselves. Records of their chatroom conversations showed that they referred to themselves with titles such as ‘the three musketeers’, ‘the “A” team’ and ‘I team, 1 dream’. The discovery of these chatroom records undid them and led to the fines being imposed on the banks they worked for. In total, HSBC was fined $618m and RBS $634m. Possible action against Barclays has not yet been completed.
After the announcement of the fines on Wednesday, the FCA said: “At the heart of today’s action is our finding that the failings of these banks undermine confidence in the UK financial system and puts its integrity at risk.” The Chancellor, George Osborne, said: “Today we take tough action to clean up corruption by a few so that we have a financial system that works for everyone. It’s part of a long term plan that is fixing what is wrong in Britain’s banks and our economy.”
The banks concerned have wished to appear very contrite. JP Morgan Chase said what had come to light was ‘unacceptable’; UBS said it had taken ‘appropriate disciplinary action’; and RBS said six individuals were subject to a disciplinary process, and three of them had been suspended. Its chief executive, Ross McEwan, said: “We had people working at this bank who did not know the difference between right and wrong or, worse, didn’t care about the distinction.” Some people believe that goes for banks as a whole.
The size of the fines may look very large but were described as ‘small beer’ by Professor Mark Taylor of Warwick Business School, who pointed out that the profits of banks tended to be counted in billions. Some bank critics suggest the banks even factor in such likely fines to their own financial planning.
It’s the shareholders of the banks who will have to foot the bill. Some have argued that it is self-defeating to clobber bank shareholders with such fines even if they are not as big as they may look. Those who take this view make two points. First, they say, everyone agrees that it is vital that banks increase their stock of capital in order to make them more resilient should they find themselves faced with another banking crisis such as rocked not only the financial system but also the whole world economy back in 2008. So reducing their stock of capital through fines is senseless. And secondly, they argue that fining banks simply makes them less able to make the loans to businesses vital to getting the economy growing.
But not to fine the shareholders of banks found guilty of misdemeanours such as fixing foreign exchange rates would leave those who are ultimately responsible for the banks’ behaviour able to get away Scot free.
There is a further point made specifically about fining RBS. For RBS’s shareholders are for the most part the British taxpayers who came to the rescue of the bank at the height of the financial crisis in 2008. So it is we who are yet again paying for the failings – or, in this case, as Mr Osborne put it, the ‘corruption’ – of the bank. Many people will regard this as adding insult to injury, particularly as the corruption concerned was going on after the government had been forced to buy over 80% of the bank.
What is most striking, however, is that so far at least it is only the banks and their shareholders who have been made to carry the can. As Prof Taylor put it: “The interesting thing is that there are no individuals named as yet, and no individual prosecutions. This is still a possibility and it will be interesting to see how it pans out.”
The regulators have themselves referred to this possibility. Martin Wheatley, the boss of the FCA, said: “The individuals themselves will face the consequences.” The Serious Fraud Office is considering whether or not to bring criminal charges.
If this happens, though, it will be something of a first. In the case of the last rate-fixing scandal, concerning the rigging of the Libor interest rate, a benchmark interest for millions of transactions round the world, no one has gone to prison. And most spectacularly of all, the global financial crisis of 2008, which plunged the world economy into recession and which was triggered by grotesquely irresponsible behaviour by many banks, has ended up with not a single prosecution against anyone running a bank. Instead, taxpayers round the world had to pass the hat round to bail the banks out.
To many people this looks like evidence of a deeply flawed justice system in which very rich, very powerful bankers can cause catastrophic mayhem in the lives of millions as a result of irresponsibly pursuing their own financial interests and yet evade justice entirely, whereas the little man gets hit for the mildest of financial misdemeanours. What’s more such bankers seem to think they have a right to ‘move on’. Bob Diamond, then the boss of Barclays, famously remarked in 2011, when the world economy was still mired in recession: “There was a period of remorse and apology for banks and I think that period needs to be over.”
There is, though, a case for saying that individual bankers should not be held responsible. The argument goes that it’s the system itself, not the individual bankers, that is responsible for the excesses, the hubris, and the grotesque risk-taking which have become the hallmark of modern banking. No individual within the system can stand up against that culture and survive. Everyone in banking is in effect ‘just obeying orders’, the orders that the system implicitly requires everyone to follow and which takes no account of the difference between right and wrong. Making money is all that matters
It is this culture of banking which government regulators across the world are trying to do something about. The British government has brought in a crime of ‘reckless misconduct’ by bank bosses that could see them go to prison for up to seven years. But as yet there have been no prosecutions.
In the eighteenth century a British government famously had an admiral shot “in order to encourage the others”, as a French cynic put it. We don’t shoot our leaders these days, but should we be ready to lock up bankers or should they be left apparently immune to prosecution?
What’s your view?
