Our banking system needs radical reform
To tackle the widespread impropriety in our financial services industry, the UK must adopt a decentralised approach by empowering customers and civil courts to sue for breach of compliance with the regulatory codes, says Damien Phillips.
The Serious Fraud Office's recent case against Barclays and the revelation that the bank had failed to disclose key details of a deal with Qatari investors to stave off a bailout by UK taxpayers will have been unsurprising to anyone who has followed the slow motion car crash that is the UK's banking sector. The industry is now infamous for everything from interest rate swaps, the rigging of interbank lending, PPI miss-selling, "structured investments" miss-selling, fraud, cover up, and CEO excess.
Something is rotten in the state of Denmark, but the approach by regulators so far to fix it clearly hasn't worked and behind the headline scandals the hampering of British businesses continues unabated. The top-down approach by the Financial Conduct Authority has so far been woefully inadequate at protecting consumers and businesses in such a vast and complex sector. Financial services employs over 2.2 million people in the UK and no single organisation could hope to effectively monitor the myriad of transactions going on in it each day.
The FCA's mandate and approach to address specific egregious abuses has addressed some of the worst identified cases but has done little to curb the ongoing misconduct that continues to cost small and medium-sized enterprises. SMEs, who have often struggled to access credit in the first place due to tighter criteria from overly indebted financial institutions, have been repeatedly blindsided in their relationships with the major banks. Crucial agreements and lending terms have been suddenly changed without warning, often in breach of contract, putting SMEs on tight margins into the red as their lines of credit are cut. This sharp practice has caused job losses, halted critical development, stunted growth and, in many cases, led to outright bankruptcy.
The FCA framework provides scant protection at best to individual SMEs who suffer from the breach or disregard by banks of their regulatory obligations to their customers. Customers rely on banks behaving as they are obliged. Without a means of holding them accountable for the damages, banks are allowed to ignore such obligations in their own self-interest with impunity.
The examples of businesses put into dire straits in this way are endless. Noel Edmond's 'Unique' business collapsed as part of the HBOS Reading Fraud, costing millions of pounds and damaging his reputation. There are the litany of legal battles being fought by SMEs over losses incurred due to aggressive actions by banks to default customers and LIBOR manipulation, such as the property company 'Wingate Associates', the care homes operator 'Guardian Care Homes' and one of the largest storage companies in the UK, 'Rhino Enterprises'. And that's not to mention the hundreds of legal cases yet to be fought or settled that will be coming to court in the future.
To tackle the problem, the UK urgently needs to adopt a decentralised approach to enforcement by empowering customers and civil courts to sue for breach of compliance with the regulatory codes. Currently, consumers and businesses cannot invoke FCA codes of conduct in holding their bank to account. The banks are not bound by these codes in law in any of the civil contracts with their customers. Borrowers know broadly how banks are meant to act within the current regulations which are meant to protect them, but banks routinely break these obligations as there is no meaningful way for borrowers to sue them on this basis or to reclaim consequential damages. SME's must be able to rely on the judiciary to hold banks accountable for damage caused by wanton failure to operate within the governing regulatory framework that customers thought they were bound by. It cannot only be in the auspices of the overstretched FCA to be the sole authority on enforcement of its rules, particularly given the revolving door which often exists between regulators and the banks which they are meant to oversee. Enabling customers with the power to hold banks to account would be a crucial step in creating a more efficient system of consumer-led standards to emerge.
To drive up standards still further, consumers and businesses must be given more diverse banking choices, with the sector rejuvenated through greater competition. The fact that Metro Bank is the first new financial institution in the UK to get its own banking licence in over 150 years tells us a sorry tale of how difficult it is to take on the dominance of the leading banks under the current regulatory regime and the barriers to entry that new challengers must overcome. The Herculean efforts that David Fishwick, a successful local businessman in Burnley, went through to try to create "Bank of Dave" in 2011 (now Burnley Savings and Loans Ltd), exposed a cliquey, oligopolistic industry using onerous rules on capital requirements to keep out a new market entrant whose modest aim was simply to create "a tiny, tiny bank" that might better serve local consumers and help businesses to grow. 6 years on from opening and despite a large waiting list for new customers, Dave still doesn't have a full banking licence! This stifling of free enterprise and healthy competition would be entirely alien to the button maker John Taylor and the iron dealer Sampson Lloyd when they established Lloyds Bank in 1765 with a single branch in Birmingham.
Peer to peer lenders and other innovative financial service providers have been a bright spot in an otherwise sclerotic marketplace, as frustrated consumers and businesses have sought alternatives to better meet their needs. And yet the dead hand of the FCA has already begun to try to choke these emerging solutions, with heavy-handed rules and red tape imposed that were so draconian one peer-to-peer CEO wondered "whether our FCA is the worst regulator in the western world". No doubt these changes were urged by the threatened banks who, facing new-found competition, have disingenuously lobbied the regulator to clamp down on these plucky upstarts on the spurious grounds of "consumer protection". If this stranglehold on innovation continues, the only protection afforded will be for the inflated profit margins of the large incumbents and it will be consumers paying the price.
The banking sector is hugely important to the UK, but its success should not be at the expense of an economy held back by its bad practices. Now, the banks hold all the cards. For the sake of Britain's dynamic SMEs, the FCA must become more strategic, flexible and imaginative. Empowering customers through the rule of law and unleashing competition would lead to more responsible banking and far more equal relationships between banks and their customers. Do this, and the FCA would demonstrate it really means business.
