Regulators are incapable of protecting the public from economic crime, writes accounting expert Prem Sikka.
Why is the UK so timid in tackling malpractices in the finance industry? After all, the industry has been a serial offender for almost fifty years. But other states are less lax.
This week, a court in Vietnam convicted 46 former bankers and businessmen of corruption and “deliberate violation of state regulations on economic management, causing serious consequences” to the public. 43 bankers received prison sentences ranging from two years of probation to 10 years in prison. The ring leaders got 10 and twenty years in prison.
In the last few years, the Icelandic regulators secured 96 years in prison for 36 bankers, for malpractices and abuses which crashed the industry and the economy.
Four bank executives have been jailed by Ireland for frauds exposed by the 2007-08 crash. According to data compiled by Channel 4, following the 2007-08 banking crash, US secured 324 convictions, and 222 of these were sentenced to prison.
Some countries have sought to cleanse the system by giving people an opportunity to speak up. The Australian government appointed a Royal Commission in December 2017 to take evidence about bribery, corruption, mis-selling, interest rate rigging, money laundering and other predatory practices in the finance industry. It has been holding public meetings since March 2018 – and corporate elites aren’t happy about that.
Despite the persistence of predatory practices, the UK has a not appointed a Royal Commission into malpractices engineered by the finance industry. There have been a number of parliamentary inquiries, but they do not give ordinary people a chance to express their anguish and put the innocent victims’ case to the public. There is no opportunity for people to directly highlight failures of the regulatory culture which is often too sympathetic to the industry, especially as regulators come from the same industry.
Prosecutions for malpractices can help to restore public confidence and tell the industry to mend its ways, but that remedy is in short supply in the UK. After the 2007-08 banking crash, some fines have been levied on banks. And on 20 June 2018, the Chancellor informed parliament that “in total, there have been five convictions and eight acquittals” for their role in the crash, though a number of cases and appeals are still pending.
On paper, there are laws to assist regulators. For example, fraud is a criminal offence under the Fraud Act 2006 and subject to a maximum prison sentence of ten years.
Under the Act, fraud can be committed by making false representations, by failing to disclose information, and by abuse of position. This provides plenty of scope for the police, the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA) and others for dealing with interest and foreign exchange rate rigging, mis-selling financial products and deliberately putting individuals and businesses into bankruptcy.
Just look at the buck-passing in relation to banking misdemeanours. The Tomlinson Report published in 2013, the 2016 report into RBS’ treatment of small business customers in its Global Restructuring Group (GRG) and the 2013 Project Lord Turnbull Report on frauds at HBOS provide evidence of systemic abuses. Thousands of innocent individuals and small businesses were deliberately placed into bankruptcy to boost bank profits and performance related pay. Some of the offending practices go back a decade or more. But there is wall of silence.
When asked to act, the Chancellor told parliament that: “This is a matter for the operationally independent Financial Conduct Authority (FCA). The FCA continues to conduct an ongoing investigation into Royal Bank of Scotland’s Global Restructuring Group, focusing on whether there is any basis for enforcement action”. He refused to say when HM Treasury became aware of the Turnbull Report on alleged frauds at HBOS and repeated the mantra that it is a matter for the FCA.
A few days later, the FCA told a parliamentary committee that its powers to discipline anyone for misconduct do not apply in the case of RBS’ global restructuring group. Its chief executive said: “I appreciate that many GRG customers will be frustrated by this decision, but we have explored all the options available to us before arriving at this conclusion”.
This sits uneasily with the scope of the Fraud Act 2006 and the FCA’s own actions. For example, the FCA barred a former director at Blackrock Asset Management from performing any function in relation to any regulated activities because “he deliberately and knowingly failed to purchase a valid ticket to cover his entire journey whilst travelling on the Southeastern train service”. Yet the same regulator claims to be powerless in dealing with giant banks.
The inescapable conclusion is that the UK laws, regulators and government are incapable of protecting people from economic crime. Such failures will neither restore public confidence nor deter finance industry operatives from engaging in dubious practices. It is time to redesign the UK’s regulatory architecture.
Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He tweets here.
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