Sir David Walker agrees. UK banks misselling of swaps ‘despicable’
May 23rd, 2012
Baroness Hogg, chairman of the Financial Reporting Council, Peter Montagnon, senior investment adviser at the FRC and Sir David Walker, senior adviser, Morgan Stanley (who are in deep doo doo over their handling of the Facebook IPO) appeared before the Treasury Select Committee in the Thatcher Room earlier today.
I haven’t watched it all yet, but the tenor of the thing seemed too cosy. The three witnesses, with the possible exception of Walker, seemed almost nonchalant about critical issues such as how to rein in excessive executive pay; they displayed a collective failure to grasp the seriousness of the corporate governance crisis/vacuum that continues to dog the UK economy.
However, I liked what Walker said about ‘sustainability’ and the need for ‘diversity’ on corporate boards. In answer to a question from John Thurso about whether it’s sensible for companies to set themselves ‘return on capital’ targets, Walker said “creeping myopia” is a persistent problem in corporate life and that he would like every company to ingrain sustainability at the core of its thinking.
I would also like to congratulate Thurso on one question he asked Walker. Thurso said (starts at 10.24 a.m.):-
“I’m becoming increasingly aware of [the extent to which] the products sold by straightforward utility banks have come from, particularly with regard to businesses, their capital markets arms, and which may be wholly inappropriate to the actual needs of the business.
“One estimate is that the misselling of swaps is currently costing the country something in the order of £100 billion to £120bn. And I saw an email recently from one of our ‘Big Four’ banks, internal, where the manager said ‘How do you think the client feels to have his arms and legs ripped off?’.
“Now that to me is a despicable culture that is doing immense damage to United Kingdom commerce and comes from the decision at the top to go for an unrealistic return on equity for providing what should be a basic utility to [enable] business to grow.”
Walker agreed and identified two major failures. The first was that the FSA should never have allowed banks to sell complex derivatives and other investment banking products to small and medium-sized enterprises.
Secondly, Walker said the “joint product approach” — when a bank blackmails a company by threatening to pull the rug on it (withdraw its facilities) unless it agrees to take out a supplementary product such as a ‘hedge’ it neither wants nor needs — should be ‘blocked’. He blamed such practices not on the banks themselves but on ‘regulatory failure’ and ‘anti-competitive’ behaviour. Walker declined to agree with Thurso that it was ‘immoral’.
Walker also suggested that the senior management of banks that ‘missold’ swaps may have been “taken in” by line managers who misrepresented the products as things the clients genuinely wanted. Walker also said that commission-based selling had “corrupted” the UK’s entire life assurance and pensions industry over the past 20 years.
In the main, however, the trio of “corporate governance experts” came across as rather arrogant and complacent.
At the very least the MPs ought to have asked Sarah Hogg (whose hair was something to behold) why she believes it appropriate that ex-RBS director Sir Steve Robson, who was on the board of RBS at the time of its collapse, remains a director on the FRC’s board.
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