Six ways the UK’s financial regulation system is a protection racket for the elite

Regulators and government keep covering for large corporations' failures. After yet another stitch up, accounting expert Prem Sikka is calling it out.

There’s no easy way of saying it: political corruption is endemic in the UK. Regulatory bodies and government departments resemble protection rackets with one aim: to protect elites and corporations from retribution – and prevent parliament from developing effective laws. We’ve just seen the latest example.

The Financial Conduct Authority (FCA), the UK’s banking regulator, has just refused to publish its 361-page report on misconduct at the state-controlled Royal Bank of Scotland (RBS).

The FCA investigation was prompted by the Tomlinson Report published in November 2013, which showed that instead to rescuing struggling businesses, banks made money by asset-stripping and destroying them. This was followed-up an investigation by the FCA and in November 2016 it published what purported to be a summary of its full report.

Subsequently, the BBC obtained a leaked version of the report. It referred to “inappropriate action” by RBS’s Global Restructuring Group (GRG) against struggling businesses. The group was supposed to nurse them back to health.

Instead, the inappropriate action experienced by 92% of the businesses included complex loans, higher interest rates, and unnecessary fees. Businesses could not easily return to good health. For the period 2013-2015, GRG handled 16,000 companies – and about 10% survived.

Many ended up in administration and liquidation, with their assets were sold cheaply. RBS has set aside around £400 million to deal with possible claims. The secret FCA report is not only an indictment of RBS, but also of other banks, accountants and lawyers who have long feasted on small businesses.

Now, after some arm-twisting, the FCA has agreed to permit a lawyer advising the House of Commons Treasury Committee to compare a summary of the report. This is not good enough.

People are entitled to see the full scale of the scandal, and remedial legislation cannot be drafted without sight of the whole report. Yet the regulator’s impulse is to shield RBS and its accomplices.

This protection racket is widespread. Here are six examples:

1. The Financial Reporting Council, the accounting and corporate governance watchdog, recently abandoned its investigation of the 2007 audit of HBOS, a bank that was bailed out by taxpayers. This was swiftly followed by the abandonment of an investigation into PricewaterhouseCoopers – who allegedly lapsed in reporting Barclays Bank’s compliance with rules on client assets.

2. Hearings by the Public Accounts Committee (PAC) showed that major corporations such as Google, Starbucks, Microsoft, Amazon and others used complex corporate structures to shift profits and avoid UK corporation tax. This was not followed by any government-led investigation, or even one test case. Former Chancellor George Osborne said that tax avoidance and evasion was ‘morally repugnant‘. Yet he did little to tackle it.

3. The information provided by a former employee showed that HSBC’s Swiss operations turned a blind eye to illegal activities of arms dealers, and helped wealthy people evade taxes. Only one individual from the list of some 3,600 potential UK tax evaders has been prosecuted. In January 2016, HMRC abandoned its criminal investigation.

4. In April 2016, a leak relating to Panama law firm Mossack Fonseca, known as the Panama Papers, revealed that thousands of UK companies, banks, accountants, lawyers and wealthy individuals are involved in organised tax avoidance and evasion. Last week, a Minister told parliament that so far there have been four arrests and no prosecutions. No doubt, it will all be quietly abandoned soon. Imagine what the government would do in eighteen months to allegations of major benefit fraud.

5. Shell companies provide secrecy to perpetrators of organised crime, sanction busting, tax avoidance, illicit arms trade and human trafficking. Italian Mafia formed companies in the UK and said that one of its directors was named “The Chicken Thief”, with the occupation “fraudster”. He was listed as resident at “The Street of 40 thieves” in the town of “Ali Babba”. Companies House accepted this information for years.

When asked to investigate, the Business Secretary told parliament  that “No action has been taken at this time against the promoters and officers of Magnolia Fundaction UK Ltd for filing inappropriate information in Italian at Companies House”.

6. The Companies Act 2006 contains strict rules about payment of dividends. In order to pay dividends companies must have sufficient distributable profits and auditors are required to check the calculations. Domino’s Pizza, Dunelm and stockbroker Hargreaves Lansdown have admitted to paying illegal dividends, with some violations going back to the year 2000.

The payment of illegal dividends can have severe consequences for employees, creditors, pension scheme members and creditors. When asked to investigate, the Business Secretary, ultimately responsible for enforcing company law, told parliament that “The Department is not responsible for carrying out checks on dividends paid by companies to ensure that they do not exceed their distributable reserves”. Then who is?

Government departments and regulators use the garbs of democracy and regulation to disarm people whilst running rackets to protect elites and big business.

The cost of this cartel is loss of confidence in our institutions of democracy, lower tax revenues, and cuts in healthcare, pensions, education and infrastructure spend. We can’t afford this racket.

Prem Sikka is Emeritus Professor of Accounting at the University of Essex, and is a Contributing Editor for Left Foot Forward

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