The UK’s approach to financial crime has taken a turn for the better recently. The successful prosecutions in the LIBOR-rigging scandal are a signal that British authorities are coming close to their US peers in slapping down errant bankers. The trouble is, there is pressure to take the foot off the pedal.
Not only has the new boss of the City watchdog suggested that banks should be keeping their own houses in order, the threat of Brexit opens up the possibility that the UK will have to fight to maintain the primacy of London as a financial centre. If that effort leads to a softening of the controls on the banks and bankers, it would be a grave mistake.
London is currently listed as the top financial capital in the world. Its main strengths are stability and dynamism. Effective regulatory and enforcement regimes can promote trust and confidence from the public, which helps to underpin that financial stability.
Given the role of banks in the global financial crisis, it is a dangerous time to soften controls, even if the pressure from the industry is ever present. There is a clear risk that some bankers will return to prioritising profit at the expense of customers and ultimately, at the expense of the wider economy. That would suit no one in the capital and beyond over the long term.
Brexit though, has upset the apple cart. The US watchdog for monitoring financial stability, the US Office for Financial Research recently said that political and financial uncertainties caused by Brexit may last for months or even years. That leaves the financial industry in flux.
In effect, UK voters’ decision to leave the European Union gives a potential opportunity for countries such as France, Germany and Luxembourg to strengthen their positions as international financial centres. The most immediate concern is whether banks will be able to sell financial products and services from London to customers in Europe when Brexit takes place. Bullish noises from politicians may not be enough to convince banking executives that their strategic decision should be left to the whim of EU negotiators.
London will fight to stay competitive, but the focus should be a determination for regulators, politicians and investigators to maintain their improving proactive and robust styles. A race to the bottom on oversight would be potentially dangerous. It would leave the door open to fresh scandals; even a fresh crisis. It is hugely important that the new chancellor of the exchequer, Philip Hammond, leads a tough regulatory approach.
You see, an effective, efficient and enforced regulatory regime can be a competitive advantage. Australia and Canada both emerged better than the UK from the global financial crisis. One of the many reasons is that the regulators in Australia and Canada were more proactive and robust in monitoring and supervising their banks.
In the UK, the Bank of England’s report into the failure of the Financial Supervisory Authority (predecessor of the current watchdog, the Financial Conduct Authority) found that there were inadequate resources. This affected the authority’s ability to supervise banks such as HBOS. Simply put, you need sufficient resources (both human and financial) to enable the various authorities to perform their jobs effectively.
Taking the lead
The Financial Conduct Authority (FCA) is the regulator for the financial sector. It sets guidelines, monitors behaviour and can stop people from operating in the industry if they break its rules. Its remit is to protect consumers, and it did so with a budget of £479m in 2015-16 and £452m in 2014-15.
That is already more than the budgets of equivalent bodies in Germany and in the US. But while it is encouraging that the FCA is well funded relative to its peers, it is also a worry that policy makers might see this as fat that can be trimmed.
I believe the funding levels for the UK regulator should actually be boosted as it seeks to rubber-stamp Britain’s reputation in the face of threats to the financial sector, and a change to the law would do it.
Until 2012, regulators were able to use the fines collected from banks to fund their work. However, the then chancellor, George Osborne, changed the law to draw the fine revenues into the Treasury. Under Osborne’s control, armed forces charities and the emergency services received the fines, not the authorities which had imposed them.
Clearly, these charities and services perform very important roles in society but a boost to the budget for policing financial crime would help society in its own and important way, while helping London to maintain that competitive edge. Although fines against individuals by the FCA have declined in recent years, the new senior managers regime, designed to improve individual accountability, may reverse this trend.
As old investigations close – some with success – it is vital that there are the resources and support to start new investigations. The UK has the largest financial services sector in the European Union, at least for now: if it is to grow sustainably, to support a post-Brexit economy, then oversight and enforcement must be stronger than ever.