August 1st, 2012 (minor revisions September 4th 2012)
The most prestigious names in the British banking and finance routinely engage in criminal activities on a scale that would make any Mafia family proud.
Whether it’s by facilitating international money-laundering; manipulating markets through Libor rigging; institutionalised insider dealing; misappropriating money from clients’ pension savings funds through hidden fees; ‘misselling’ inappropriate financial products to customers … an industry that could once lay some claim to integrity and decent values has become a byword for crime on an epic scale.
The recent revelations about Libor-rigging by Barclays, and about the blind eye that HSBC turned to money-laundering for despotic regimes, drug cartels, terrorists and organised criminal gangs over more than a decade, have lifted the veil of deceit and hypocrisy behind which these institutions have hidden for may years.
Many people have recently asked me to explain the concept of ‘misselling’ where it relates to banking activities. They have read about banks and other financial institutions being forced to repay billions of pounds to clients, savers and investors but are confused as to what has been going on. ‘…If there was nothing wrong with their actions…,’ they ask, ‘…why do they have to repay the money?’
Financial institutions make massive profits from ‘cross-selling’ financial products such as insurance policies, pension plans, loan protection, etc to their existing customers. They encourage financial intermediaries to introduce clients to them, as well as asking their own front office staff to sell these often useless products to their unsuspecting clients — whilst making it very clear to staff that their bonuses and even their jobs are dependent upon the number of these products they sell.
The employees are given very little training (to train employees is expensive since it takes them away from the sales-point for too long), yet are expected to sell complex financial contracts to clients, the vast majority of whom have very little expertise or understanding of what they are entering into.
What became known as the ‘great pensions swindle’ was driven by the introduction of more flexible pension rules by the government of Margaret Thatcher in 1986. Insurance companies launching personal pensions offered massive carrots, in the shape of generous front-loaded commission payments, to financial advisers and banks who sold the personal pensions to their clients. The advisers duped hundreds of thousands of ordinary people who had very safe and beneficial arrangements in occupational pension schemes into switching into unsuitable or risky pensions.
We have more recently seen a similar scandal with payment protection insurance, (PPI). Banks ‘missold’ largely redundant PPI policies to UK consumers in industrial quantities from about 1994 onwards. The ‘misselling’ was carried out not just by the banks themselves, but also by other providers and third-party brokers. But customers who realised they were being fleeced and complained they were stonewalled and passed from pillar to post for years. Following a seminal court case in April 2011, British banks were finally forced to accept the consequences of their actions and the total bill for compensation across the UK banking sector is now expected to be more than £10bn.
More recently, it has emerged that Britain’s high street banks systematically ‘missold’ wholly inappropriate complex derivatives known as ‘interest rate swap agreements‘ (IRSAs) predominately in 2005-07 to their small and medium-sized enterprise customers. The banks did this by omitting important information, lying about the true nature and implications of the swaps, and coercing clients to take them out (for example making it a condition of the loan). Already, tens of thousands of British businesses are struggling to meet their payments, verging on bankruptcy, or already bankrupt as a result after having been duped into taking out falsely presented swaps, including so called ‘caps’ and ‘collars’.
All these examples are straightforward criminal activities.
- If you induce a person to pay money or commit to paying money to you, and in the course of so doing, you lie to them about the product you are providing, and because of your lies, the other person agrees to the proposal, you have committed the criminal offence of fraud.
- If you lie to someone or even if you don’t properly explain important elements of a proposal and as a result they agree to allow you to obtain a financial benefit, you have committed a criminal fraud.
- If you take money from a client’s account without telling them or properly explaining the implications of what you are doing, you are committing a criminal fraud.
There are effectively three main ways by which any person can commit fraud. Under the Fraud Act 2006, they are
- Fraud by false representation
- Fraud by failing to disclose information
- Fraud by abuse of position
If a person misleads the benefits agencies as to the true state of their affairs when applying for social security, they commit the offence of fraud, and people are routinely imprisoned for such criminal offences. If a financial institution does the same thing, it is called ‘misselling’!
The financial institutions commit these offences routinely every day and in every way, and have been for years. The problem is that the incidence of such fraud is so immense there has been no politically acceptable way to describe these activities. If the British government had to openly admit that these activities were fraudulent, can you imagine the international implications for the British financial system and the financial sector?
That is why this meaningless, euphemistic and politically-correct form of words was first created — a concept entirely unknown to British criminal jurisprudence. It has the useful effect of disguising what is essentially criminal activity — and downplays the vast scale of criminal enterprise which is being perpetrated every day and under our noses, by people who we ought to be able to trust.
Money laundering is a crime in its own right, and laws have existed to outlaw it since 1994. There are also significant volumes of regulations relating to money laundering which banks and financial institutions are supposed to implement. Their breach too is covered by penal sanctions. Unfortunately, from 1994 to 2000, none of the UK’s regulatory agencies was prepared to take responsibility for policing these provisions, and the financial institutions chose to largely ignore them.
They may have paid lip-service to the regulations, but they wholly ignored the proper implementation of their requirements. Since 2000, The Financial Services Authority has been supposed to police financial institutions compliance with the Money Laundering Regulations, but it has been slow to act, and despite issuing the occasional sternly-worded report demanding better compliance, the laws are generally still ignored.
Insider dealing is rife and examples of such trading by employees of investment banks and securities brokerages are regularly observed in the securities markets. The FSA has begun to take more action against such criminals in recent times, but again, their actions have tended to be too little and too late, and most City insiders know that the risk of being caught are extremely small.
Market manipulation such as the Libor rigging activities is also a criminal offence, and the tremors unleashed by the recent publicity regarding the part played by Barclays in this scandal, have already cause four high level resignations at the bank, and further revelations of what appears to be organised fraud on a vast scale are expected in coming months.
These actions are crimes in their own right and those who commit them are criminals. Yet a common feature of our system of criminal justice over the past several decades has been to downplay or overlook criminal behaviour committed by members of what once was called ‘the upper socio-economic group’. I prefer the more down to earth phrase, ‘the crimes of the powerful’, but whichever phrase you use, they refer to the same activities.
Criminal offences were being committed, are being committed, and they’re being committed for vast financial gain by persons and institutions that continue to seek to portray themselves as acting with the utmost honesty and integrity. However, we have now reached a tipping point. It is simply no longer possible for our government and law enforcement agencies to continue to pay lip service to investigating and prosecuting white collar criminals. Nor can the banks and financial institutions any longer get away with hiding behind threadbare euphemisms such as “misselling”.
Rowan Bosworth-Davies is a former Metropolitan Police fraud squad officer and a former head of investigations at City regulator Fimbra (one of the predecessor bodies of the Financial Services Authority) who now works as a specialist financial crime consultant. He blogs at Rowan’s Blog. The article was commissioned by the Sunday Herald but has not previously been run in its entirety.