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.

5.00 avg. rating (97% score) - 4 votes
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Damien Phillips

Damien Phillips is a public affairs consultant with a background in think tanks, public policy and campaign management.

  • Nockian

    The state is the one creating barriers to competition. Exactly correct about modern justice – because it isn’t justice, the fines just get recycled (state/bank) which is why they aren’t awarded to those who have a right to recompense.

  • Nockian

    It wouldn’t be sufficient and also likely to be counter productive. It was once my own position so I understand why you say it.

  • Nockian

    Remove the link between state and banks. Put the banks back into the market place as laissez faire enterprises and have laws which treat bank fraud exactly the same as any other fraud. There should be no state regulation to deny the creation of new banks and banks can issue their own currency. This will mean that customers will have to be more aware that banks can go bust, but at least this won’t cause systemic breakdown and of course they may wish to use banks who don’t loan money as well as higher risk investment banks.

  • EppingBlogger

    Enfranchising consumers and businesses damaged by regulatory breaches or illegal activity would be much more powerful and ensure a better allocation of resources for those considered by the victims as more important. At present the aloof regulator decides which acrivities among those in breach of the rules should be dealt with and how much the fine will be. That does not show any responsivveness to the relative importance of breaches in the eyes of the victim.

    Let’s bring in this idea too in monopolies and market abuse issues. Let other businesses or consumers (and groups of consumers) seek civil redress for damage they have suffered from anti-competitive behaviour (such as predatory pricing, for instance) or collusion and artificial barriers to new competitors or alternative products. Why should the EU (of all institutions) decide the appropriate fine and which cases to deal with. There is a conflict of interest because the authorities decide who to let off, who to pursue, who to fine and how much. Worst of all, any penalties go to the instituition itself! Affected consumers and other businesses typically see none of the money, yet they suffered the losses.

  • Mike Thomas

    The FCA lives on the whim of government and is largely reactive to whatever cunning ‘eye-catching’ initiative comes next. The banks are chock full of regulators usually ex-FCA who know what to do to ‘comply’ with regulation. I would argue for better regulation not more or less. In terms of innovation, it thrives due the things that the FCA do right like the regulatory sandbox. The problem with something like regulation is that it is a moving feast by a legislature than cannot stop regulating. How do you get an industry performing well when the legislation keeps changing and I have (and you haven’t) mentioned PSD2 and GDPR yet either.

  • MrVeryAngry

    The regulator is the problem. Not the solution. Regulationism from the FSMA2000 on proto-nationalised the banks by regulation. It was epic mis-regulation that precipitated the failure.

  • MrVeryAngry

    Have a squillion upticks. It used to be only a thousand until the gold standard was abolished and inflation took hold…

  • A Regular

    I am not sure that I am in agreement. For sure, both PRA and FCA are large bureaucracies most organs of the state are but they are making progress. Banks have behaved badly in the past and as a consequence find themselves subject to more regulation. Virtually no Bankers were jailed after 2008 despite landing the taxpayer with a £80bn bill; the result, we now have a Senior Managers Regime which is designed to ensure that management are held responsible for failure in future. In terms of competition and diversity The Regulator is trying to encourage new banks by having a specialised dedicated unit and building pathways to a new Banking License that are less risky for investors (to encourage more). Having had no new banks for 150 years these last few years we have had 6-10 a year. The Regulator has to exercise caution as they do not wish to see numerous failures not least because currently account holders are protected by the Financial Services Compensation Scheme for the first £85k. All new Banks have to have assets set aside for an orderly wind down. There are alternatives like P2P which have had a big impact on both Private Equity (esp at the small cap end) and Banks. Additionally, banking will be affected more than most sectors by changes to technology – Governments and Regulators always struggle with new technology but in comparison to what I see overseas we are well ahead of the game i.e. The Regulator providing a ‘sandbox’ to incubate and encourage technological innovation.

  • Gordon Stewart

    How about abolishing the B of E then go to a gold standard,thats all thats required,

  • MrVeryAngry

    Reform the FCA? “…the FCA must become more strategic, flexible and imaginative.. Eh? The FCA is a bureaucracy. It just ain’t gonna do any of that. The FCA (and the Bank of England) are the main obstacles to reform. And the current FRB settlement is a fraud (I’m with Murray Rothbard on that).
    But all you say it true. We are ill served.
    Oh and BTW the PPI crisis was the direct result of regulatory failure. They told us (I own a retail FS business) to sell it. And I can prove that.

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