October 8th, 2012
Despite a banking and financial crisis of near biblical proportions in 2007-09, which saw the collapse and state-funded rescue of many of Britain’s banks, the country’s regulators have singularly failed to get to the bottom of what happened. The way in which the Financial Services Authority has sought to close the book on the collapses of Royal Bank of Scotland and HBOS by scapegoating Johnny Cameron and Peter Cummings is symptomatic of the British disease. In an excellent piece in Tribune, Prem Sikka, professor of accountancy at the University of Essex, has examined the spinelessness of UK regulators in more detail as well as proposing a US-style solution. He opens the article by saying:-
Nearly five years on and despite vast bailouts, the regulators in Britain have shown little backbone or interest in cleaning-up predatory capitalism. Rather than taking responsibility, the United Kingdom is dragged along by others. Recent exposure of money laundering and Libor [rigging] are just the latest manifestations of a crisis which shows that this country lacks the structures and the political will to curb predatory capitalism.
Sikka then runs through the succession of recent scandals that have emerged since the crisis including money laundering for pariah states and drug barons by the likes of HSBC and Standard Chartered, and of course Libor rigging by Barclays. In each case it was US regulators, not British ones, that ensured the banks bore some accountability for their own actions. Sikka continued:-
The UK is a soft touch compared to the US where the Securities Exchange Commission and Department of Justice have shown some willingness to investigate, prosecute and fine corporations, although the scale and severity of this have been insufficient to curb predatory capitalism. In contrast, the UK regulatory impulse is to protect elites by sweeping things under dust-laden carpets.
Inter alia, Sikka then gave the example of the BCCI fraud. He writes:-
The Bank of Credit and Commerce International was the biggest banking fraud of the 20th century. The Bank of England, then the banking regulator, closed it in July 1991.
Some 1.4 million depositors lost around £7 billion of their savings. In the US, Senate hearings were held and the CIA published some of its reports on BCCI’s activities. A US Senate Committee report concluded that the Bank of England and BCCI auditors Price Waterhouse (now part of PricewaterhouseCoopers) were engaged in “a cover-up”.
It also released 99 per cent of a report, censored by the Bank of England, codenamed the Sandstorm Report, which described some of the frauds and named the wrongdoers and various movers and shakers. However, the Sandstorm Report has remained a state secret in the UK. Various parliamentary committees held hearings on the BCCI scandal, but none were given sight of the Sandstorm Report.
Last year, after some five-and-half years of legal battles against the Treasury and the Information Commissioner, I managed to secure the names of the wrongdoers and some related parties.
These included members of the Abu Dhabi royal family, prominent Middle East businessmen, the head of Saudi intelligence, prominent political advisors and even the biggest funder of al Qaida, then considered to be an organisation friendly to Western interests. Evidently, the British Government prioritised the appeasement of commercial interests over its citizens’ right to know, or even the desire to create effective banking regulation.
The UK lacks an effective regulatory system and a political culture to curb predatory capitalism. Its patchwork quilt of regulators includes the Financial Services Authority (and its successor bodies), the Bank of England, the Serious Fraud Office, Her Majesty’s Revenue and Customs, the London Stock Exchange, Office of Fair Trading, Financial Reporting Council and myriad private sector regulators. They are poorly equipped to call multinational corporations to account.
With an annual budget of £37 million, the SFO is incapable of mounting effective corporate prosecutions. In contrast, the US SEC has an annual budget of $1.3 billion.
Almost all of Britain’s watchdogs come from the private sector and are usually too sympathetic to the games played by corporations. After a stint as a regulator, they return to the private sector and know the hands that they must not bite. The UK’s patchwork system encourages duplication, buck passing and obfuscation. And it is hard to think of any timely intervention by any regulator.
Britain needs to replace the ineffective patchwork of regulators with its own equivalent of the SEC, which could be called the Business and Finance Commission. This would need to be controlled by a board representing a plurality of interests, including taxpayers, employees, customers and other stakeholders, so that elites could not easily sweep matters under the carpet.
The board should be required to meet in the open and its files should be publicly available so that we could all judge its efficiency and effectiveness. No document should be withheld from parliamentary inquiries into scandals.
All political parties need to recognise that additional financial and human resources are needed for swift investigation and prosecution of corporate misdemeanours. Without change, the UK will not have an effective regulatory system.
And I would add: without change the UK may not even have an economy.