Prof Prem Sikka: The Financial Service Bill doesn’t provide the tough regulation we need

We need tough laws to stop white collar crimes.

Prem Sikka is an accounting professor and a Labour member of the House of Lords

This week the Financial Services Bill was introduced in the UK House of Lords, after its rushed passage from the House of Commons. The 190 page Bill is a mishmash of random topics. This is the first financial sector Bill in the post-Brexit era and provides some clues about government intentions.

The UK needs to compete, not by providing feather-duster regulation, but through robust regulation that protects people from predatory practices and thus promotes confidence in the post-Brexit economy. However, there is little sign of it.

The finance industry has a built-in lobby in both houses of parliament. You only have to look at the registers of financial interests for members of the House of Commons and the House of Lords to note the closeness of many legislators to the finance industry. They defend and advance the interests of their paymasters.  

A few legislators have drawn attention to regulatory failures and the need for better laws. For example, the regulators have found it almost impossible to prosecute banks or senior bankers implicated in the 2007-08 banking crash or money laundering. 

Under the Criminal Finances Act 2017 corporations and their directors can be charged with the ‘failure to prevent’ tax evasion. Similar considerations apply to bribery under the Bribery Act 2010. However, the equivalent law does not apply to false accounting, money laundering and other crimes by the finance industry. 

The finance industry has engaged in insider trading, interest and foreign exchange rate rigging and the regulatory response is pitiful. In response to questions in parliament, the government informed me that from 2013 to 2019 it secured three suspended sentences and ten custodial sentences for the culprits.

During the Commons passage of the Bill, a number of Labour MPs argued that the finance industry should not enjoy special privileges. The industry’s in-built lobby opposed change. The Bill came to the Lords with the privileges of the finance industry intact.

The finance industry has got used to getting away with corrupt practices. It has mis-sold numerous financial products relating to pensions, endowment mortgages, precipice bonds, split capital investment trusts, payment protection insurance and much more. Millions of people have been fleeced to boost corporate profits, dividends and performance related executive pay. There are hardly any prosecutions. The responsibility for this rests with the Financial Conduct Authority (FCA), the finance industry’s ineffective regulator.

The Bill remains ambivalent towards financial crime and makes no attempt to address regulatory failures. For example, amidst allegations of fraud London Capital & Finance (LCF) entered administration in January 2019. The company had been authorised to trade by the FCA since 2016. Numerous danger signs flashed but the FCA did little. By the time of its administration, LCF raised in excess of £237 million from 11,625 Bondholders.

In December 2020, an independent report by Dame Elizabeth Gloster concluded that FCA’s supervision of LCF was “wholly deficient”; there were “significant gaps and weaknesses” in the FCA’s policies and practices. Its staff had “not been trained sufficiently to analyse a firm’s financial information to detect indicators of fraud or other serious irregularity”. 

LCF is not an isolated case. In December 2020, the FCA was also severely criticised in a report on the collapse of Connaught Income Fund. It concluded that the FCA’s “regulation of the relevant entities and individuals connected to the fund was not appropriate or effective”.

The long-running saga of frauds HBOS and exploitation of small businesses by RBS is further evidence of the FCA’s failure to act. Thousands of people are awaiting compensation. 

Criminal prosecutions for financial crime are rare, but are possible. In February 2017, Thames Valley Police and Crime Commissioner Anthony Stansfeld prosecuted six financiers, including an ex-HBOS banker, for a loans scam. They were jailed for a total of 47-and-half-years.

After being shamed for inaction, the FCA eventually fined Lloyds Bank/HBOS £45m over this case. The money went straight to the Treasury. Thames Valley Police force, which spent £7m on the HBOS prosecutions, didn’t see a penny. This is a positive disincentive for any police force to tackle corporate crimes.

Thames Valley’s Stansfield has encountered regulatory and political obstacles in prosecuting crime and has some important insights. He said: “I have seen at first hand corruption all around the world but always believed that the UK was a relatively clean country. Sadly, I have been disabused.” He added: “I am convinced the cover-up goes right up to Cabinet level. And to the top of the City”. 

Such a strong conclusion from a law enforcement officer should have resulted in parliamentary inquiries and revamp of laws. But nothing has changed. 

In the parliamentary debate, I called for an independent public inquiry into the finance industry and regulatory failures. Such as inquiry would enable victims to speak and draw attention to the hardships inflicted upon them.

It would help to root out corrupt practices and pave the way for socially responsive regulators. But the government was not moved. The Minister did not respond to my call. The Ministerial silence will embolden the finance industry to develop more rip-off practices and can’t provide the basis for a sustainable post-Brexit economy.

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