Juncker’s plans to create finance commissioner mean British banks may have to play by the rules
Anna Sonny, 1 August 2014
Earlier this week the Bank of England announced new measures to claw back bankers’ bonuses, the latest in a series of plans to clamp down on misconduct in the banking industry.
Bankers’ bonuses are currently paid out over three to five years and can be taken back during this time; the new rule means that bankers will face having their bonuses clawed back after they have already been paid. Other planned measures include paying bonuses out over a longer period of time and holding bankers directly to account by getting them to sign statements of their specific duties.
In response to these measures, Anthony Brown, chief executive of British Banker’s Association, said: ‘It is important that any new regulation does not put British banks at a disadvantage when it comes to attracting and retaining the best workers here and overseas.’
Yes Mr Brown, hopefully the regulation will deter any bankers who might be inclined to rig interest rates and lead the country to the point of economic collapse again from working in the British banking industry. It’s good to know we’re all on the same page.
It’s clear that tighter regulation is needed; a few years after the multi-million pound taxpayer bailouts of Royal Bank of Scotland and Lloyds Banking Group marked the peak of financial crisis in 2008 and 2009 in the UK, both banks have recently been in the spotlight for misconduct and outlandish bonuses; In 2013 RBS made a loss of £8.24bn but still managed to pay £588m, and Lloyds was fined £218m earlier this week over an interest fixing rate scandal.
Earlier this year the UK government came under fire from the Belgian Green MEP Philip Lamberts for allowing banks to sidestep EU laws to limit bankers’ bonuses. Under EU rules, bankers need to get approval from shareholders if they want to award bonuses worth more than basic pay. Many banks simply increased their bosses’ pay in order to circumvent the restrictions, without any intervention from the British government.
But Jean-Claude Juncker’s new plans to create a finance commissioner could mean that the UK may not be able to so easily sidestep EU regulation in the future. EU financial regulation is currently under the domain of the internal market commissioner, who is also responsible for the single market; but the plans are to separate these two components, strip the financial stability unit from the department for Economic and Financial Affairs, and combine them in order to create a standalone finance directorate. The intention is to focus the commission’s work more effectively so that neither is neglected.
With tighter regulations coming in at both national and EU levels, will the British banking industry finally have to play by the rules?
The fragility of the belief in laissez faire economics can be seen by the readiness of almost all of the supposedly big bad free marketeers to rush for the support of the State when things go wrong. As the Government almost invariably steps in when it is a bank going bust, being a banker is a one way bet: the bank makes money you get the vast remuneration: the bank fails the taxpayer steps in and you do not suffer any punishment such as summary dismissal, the removal of limited liability if you are a director or criminal proceedings, but are dismissed with a massive pay-off at worst and continue to be employed on the same outrageous remuneration terms as you were before the taxpayer had to bail out the banks.
There is existing law which could be applied to culpable bank directors but never is. Section 174 of the 2006 Companies Act details the duties of the directors as follows :
(1) A director of a company must exercise reasonable care, skill and
diligence.
(2) This means the care, skill and diligence that would be exercised by a
reasonably diligent person with—
(a) the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the functions carried out by the director
in relation to the company, and
(b) the general knowledge, skill and experience that the director has.
How can the directors of RBS, HBOS, Lloyds TSB and Northern Rock be said to have met these requirements? Lloyds TSB have even admitted that inadequate due diligence was done before the takeover of HBOS.
There is also the question of general competence. The alarming truth is that the executive directors of banks almost certainly did not understand the complex financial packages being devised by their investment arms which led to the crisis. On 10 February 2009 the recently removed executive directors of the RBS and the HBOS appeared before the Commons Treasury Select Committee: Sir Fred Goodwin (ex-RBS chief executive) and Sir Tom McKillop (ex-RBS Chairman),e Andy Hornby (ex-HBOS chief executive) and Lord Steveson of Conandsham (ex-HBOS Chairman).
During their examination by the committee, each of the four directors on show was asked to detail their formal banking qualifications. All four had to admit that they had none. I am generally an enemy of credentialitis, but in this case technical qualifications are necessary to ensure that the directors understand the very complex financial instruments being used and the exotic accounting practices employed by large corporations. If failure to understand such things does not amount to gross negligence what does?
The Companies Act allows shareholders, subject to the agreement of a court, to sue directors for negligence, default, breach of duty or breach of trust. No attempt has been made to removed their limited liability to allow this to happen. Nor, as far as I can discover, has any attempt has been made to get bank directors banned from holding directorships in the future. Why have the institutional shareholders not started such legal action to remove limited liability from directors so they can be sued? Why has no politician raised the possibility of banning ex-bank directors from being directors in the future? The only plausible reason is the tacit class interest encompassing politicians, bankers and large institutional investors, the last being the only non-governmental people generally with the financial muscle to fund actions to remove the limited liability of directors. There is a simple legal way to stop them enjoying the fruits of their ill-gotten gains: remove their limited liability and ban them from holding directorships for life.
As for criminal charges, I wonder if something could not be done under the laws relating to fraud. There must come a point where recklessness behaviour becomes fraud because the director knows they are taking chances which will most probably not come off. For the future we need a law of reckless endangerment which would make any director who endangered a bank or allied institution through their criminally reckless behaviour to be punished by the criminal law.
Read more at http://livinginamadhouse.wordpress.com/2010/10/22/laissez-faire-is-a-one-way-bet-for-banks/