Labour’s public inquiry into banking and finance industry is a real chance to hold miscreants to account, says Prem Sikka.
The Shadow Chancellor has said the next Labour government would launch a public inquiry into Britain’s finance industry. It would inquire into and report misconduct in the finance industry, with the aim “to reveal and root out corruption” – something the Conservative government has so far failed to do.
This would require witnesses to give evidence under oath relevant to financial sector misconduct, leading to charges and reforms. It is needed so people can have confidence in loans, mortgages, debit/credit cards, insurances, pensions, securities trading and other financial services.
According to a 1996 government report, the City of London is rife with “cynical disregard of laws and regulations”, “cavalier misuse of company monies”, and “contempt for truth and common honesty”. Despite a plethora of weak laws and rearranging of regulatory deckchairs, little has changed since then.
The finance industry has continued to mis-sell a variety of financial products, such as mortgages, endowment mortgages, investment bonds, split-capital investment trusts, precipice bonds, interest rate swaps, self-invested personal pensions, payment protection insurance and pension transfer advice, to mention a few.
It has been involved in rogue trading, insider dealing and has rigged interest rates and foreign exchange rates. It has been engaged in tax avoidance/evasion and money laundering. Its reckless risk-taking was a major factor in the 2007-08 financial crash, resulting in costly bailouts and never-ending austerity.
Those presiding over this unhappy scene are rewarded with high executive pay and bonuses.
Economy as a whole loses
Yet these failures have imposed a huge cost on society. Resources (including graduate talent and government support) secured by the finance industry are denied to other productive sectors, and could be used to generate sustainable jobs and opportunities.
One report estimates that between 1995 and 2015, the UK financial services sector cost the economy around £4,500bn in lost economic output, including £2,700bn via to the misallocation of resources diverted from more productive (non-financial services) activities. The other £1,800bn arises from the 2008 banking crisis and its aftermath.
Regulators such as the Financial Conduct Authority (FCA) appear unable or unwilling to curb rapacious practices.
There are disturbing trends towards asset-stripping and putting innocent and financially sound bank customers into bankruptcy. The long-running saga of alleged frauds at the Royal Bank of Scotland (RBS) and its turnaround division Global Restructuring Group (GRG) shows no resolution.
The House of Commons Treasury Committee concluded: “The overarching priority at all levels of GRG was not the health and strength of customers, but the generation of income for RBS, through made-up fees, high interest rates, and the acquisition of equity and property”.
It added that: “The actions of GRG staff heaped untold misery on hard working business owners, recklessly destroying livelihoods in pursuit of profit.”
Regulatory response so far ineffective
The frauds at HBOS (part of Lloyds Banking Group) date back to 2003. Yet the regulatory response has been slow and ineffective. The Police and Crime Commissioner (PCC) for Thames Valley has secured six criminal convictions but lacks the resources to prosecute more people.
The PCC noted that the fraud of nearly £1bn “perpetrated by bankers within HBOS, with considerable collusion from other financial organisations and allied firms” resulted in a great number of companies being ruined, and the lives and livelihoods of their owners and those that worked with them being destroyed.
“They were pursued for their personal guarantees, and lost their houses and possessions as the bank and its lawyers pursued them for all they owned. Families were split up, marriages ruined, and suicides resulted,” the PCC noted.
It pointed to “a deep-seated culture of cover-up”, with the police commissioner corresponding with the Prime Minister’s office, Bank of England governor Mark Carney, Lloyds chairman Lord Blackwell, and FCA chief executive Andrew Bailey, among others.
“The replies he has received, often one-liners with denials and obfuscations, are themselves instructive,” the police commissioner, Andrew Stansfeld, has said. “I am convinced the cover-up goes right up to Cabinet level. And to the top of the City.”
The regulatory silence, in my view, continues to embolden miscreants. It has been alleged that some banks have forged signatures on court documents in property repossession cases.
The finance industry has shown itself incapable of ethical practice, with a stream of critical reports by parliamentary committees making little difference to the organisational culture of the finance industry.
Regulatory bodies are conflicted and do their bidding — rather than protecting people from corrupt practices.
Labour’s promised public inquiry is the only way forward to hold executives and companies to account, secure redress for victims and put the financial services sector on a responsible path.
Prem Sikka is professor of accounting and finance at the University of Sheffield and emeritus professor of accounting at the University of Essex.
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