This somewhat hurried blog refers primarily to a posting by Ian Fraser from last December; the best approach for those with time is to read that original post. Here I will just provide a few snippets from appearances in front of the UK Treasury Select Committee of a few regulators and former regulators, in a session about the government’s programme to scrap the Financial Services Authority and replace it with a Prudential Regulatory Authority and Financial Conduct Authority. Fraser:
“What disturbed me the most about the November 1 session was the regulators’ seeming nonchalance about criminality in the UK’s banking sector. At times, using the tortured and obfuscatory phraseology, the financial regulators almost seemed to want to pretend that criminality and fraud didn’t, or couldn’t exist in the domain they are supposed to police.”
And, more specifically:
The FSA executives told the MPs that they did not favor the drafting of any further criminal laws on the mismanagement of banks and financial institutions, beyond the existing powers to prosecute for fraud or deliberately mislead the market.
And according to the Hansard transcript of the session, the FSA’s Interim Managing Director Margaret Cole, when asked how many bankers were in prison for financial misconduct, said:
“None, because currently there isn’t a criminal offence that is pertinent to the behavior of bankers. Some may say it should be, but it is not a criminal offence to be incompetent.
. . . If there were to be a criminal offence relative to behavior of bankers and the running of banks, that would require new legislation.“
Just think about the implications of that. Fraser highlights another section:
My question for you, Mr Wheatley, is . . .would you support making certain actions into criminal offences? For example, reckless mismanagement of a financial institution.
Martin Wheatley: I think we have to be very careful about what we consider to be criminal actions.
He then goes into a lot of back-and-forth about this, and Fraser sums up the FSA’s ultimate position:
“Since ‘white collar’ crime is so hard and so expensive to prosecute (and risks showing up our earlier failures), there is little point in us even trying. We would obtain better results by simply vetting candidates for senior banking and City of London roles more thoroughly, and then offering the sanction of banning them from ever working in finance again if they “mismanage” their institutions.
And I came to that post by virtue of another one of Fraser’s, today, which asks how a flawed ideology — and the Big Four accountants — helped provide cover for an epidemic of financial crime. Which is also well worth reading. My short take-out from it:
The ‘Big Four’ accountancy firms Deloitte, Ernst & Young, KPMG and PWC, whose duties as auditors are supposed to be to the shareholders not to the management of a company, have been behind the creation of a “Gresham’s” dynamic. By this, I mean they have provided a cover for ‘white collar’ crime, in exchange for inflated audit fees (or what are increasingly being termed by the accountancy professor Prem Sikka and others as “bungs for silence”). If true this makes them dangerous institutions.