It is no great revelation that the Cabinet is split on Brexit but the most fundamental split is not one that the mainstream press spends much time analysing. The big divide is between those Cabinet members who want a Canada-style free trade agreement and those who want Norway-style access to the single market. A free trade agreement would mean some upheaval for business but would put Parliament and the British courts in charge. A single market access deal would change little in practical terms for business, but leave power with the European Court of Justice while single market rules and regulations would be made without UK input.
The Chancellor has cast himself in the role as defender of the City, arguing successfully that a minimum two year transition period should run from March 2019, which would give the UK single market access. This would enable the banking industry to retain current passporting arrangements and stop the exodus to the continent of the UK’s one million financial services jobs. While we all like to bash the bankers, sending them away would be bad for us – even if a quarter of the financial industry left due to Brexit, this would represent an economic contraction of 1.8% – a fairly material recession from the contraction of just one key industry.
Even if a quarter of the financial industry left due to Brexit, this would represent an economic contraction of 1.8%
Mr Hammond’s prime motivation is not love of banks and bankers, nor any offers they might make to him when he leaves the job, as his detractors might claim. He is motivated by the fear of being remembered as the Chancellor who let Britain slide back into fiscal ruin. The financial services sector contributes £66 billion to UK tax receipts, representing 11% of total tax take. Lower revenues from financial services would put an end to all hopes of bringing the budget back into balance – even at the top of the economic cycle (as we may well already be).
Yet to many politicians, the banks symbolise a failed version of capitalism: a capitalism which gave the banks the freedom to privatise their profits and nationalise their losses. Critics say that the financial services industry was allowed to grow unregulated, using its muscle to extract unfair profits from British business. Rather than bringing benefit to the real economy, they stand accused of extracting investment from the real economy.
The culture of greed in the banking sector meant that irresponsible lending practices were not only tolerated but incentivised. Relationship bankers were encouraged to take advantage of the asymmetric power that they had over their customers to win bonuses for themselves and their teams. Champagne corks would pop each and every time a customer produced the targeted profit, regardless of the consequences for customers. Bankers used often complex derivatives to “double down” on the profits, often at huge cost to their small business customers. Such instruments are now the basis of hundreds of lawsuits filed against the banks by exploited businesses.
The unrelenting focus on taking customers for all they could get spilled over into a number of clear cut cases of fraud. At HBOS in Reading alone, a scam perpetrated by six individuals between 2003 and 2007 cost small businesses a total of £1 billion, but it took until February this year for those individuals to be convicted. When Lloyds took over HBOS in 2009, they were alerted to the problems but still their official position remained that they had investigated the matter but found nothing untoward. The then Chairman of Lloyds did not look into complaints lodged with him, on the grounds that it would not be “appropriate” for him to respond. In short, Lloyds behaved as if they did not want to know. The bank did all it could to keep losses below £285 million, the level at which the Audit Committee would have to disclose the fraud.
There are literally hundreds more legal cases lodged by British businesses who were undermined by the underhand tactics of bankers such as the criminal manipulation of LIBOR, of repo rate abuse and of SLS abuse. Just this autumn, two Munroe property companies filed a claim against Lloyds for non-disclosure of contingent liabilities and LIBOR manipulation, said to be for more than £100m. The suggestion is that, while the bank’s customers thought they were performing well within terms, the bank viewed them as a bad credit risk by using an undisclosed set of internal measures. Another high profile case that Lloyds will seek to defend will be Noel Edmonds’ claim for £300 million in losses at the hands of HBOS Reading.
Many cases go unreported and never reach the public spotlight because banks prefer to settle the most controversial cases with their litigants, requiring them never to speak in public of the treatment they encountered. In August, RBS settled with Stuart Wall who is thought to have claimed in the region of £650 million in consequential and direct losses. The banks settle such cases, because they do not want legal precedents to be set and for the floodgates to open for yet more new claims.
Hiding behind their lawyers may be a strategy for short term survival but it offers businesses of today little comfort that the banks posses any more moral compass today that they did a decade ago. The irony is that while the banks have been actively marketing themselves on the idea that banking relationships should be based on trust (think of the current Lloyds Bank advert series with the black horse) the record shows too many instances of unfair enrichment for that claim to be credible. While they continue to try to limit the fallout by defending past practices, they will remain deeply mistrusted. Sadly, there are few signs that the banks themselves have the moral courage to draw a line under their past nor to clean up their act.
Because financial services are critical to the functioning of an economy, the government has traditionally sought to regulate and protect the big banks. But they still do not seem to have grasped that they are expected to exercise a wider responsibility to the real economy, in exchange for the protection they are granted.
Back at Westminster, politicians are now looking for ways of fixing that problem. The All Party Parliamentary Group on Fair Business Banking has been reconstituted; and a tough new Treasury Select Committee Chair has been elected, in the form of the former Cabinet Minister Nicky Morgan MP. She and her parliamentary colleagues will be looking for signs that the banks are willing to change banking culture. Some doubt that bankers’ behaviour yet matches up to the standards they claim to meet in their own codes of conduct.
The Prime Minister has recently talked about the unacceptable face of capitalism. She has launched a series of pragmatic interventions in failing markets – from the universities sector to the energy sector, where she has simply got fed up with the big energy companies’ perceived failure to offer value for money. She may yet see an assault on bad banking practice as a popular move.
Such an assault would not conflict at all with the new big Tory idea of “insurgent capitalism” propounded by her chief policy thinker on the backbenches, George Freeman MP. The evolving Conservative antidote to neo-Marxist Corbynism is the promotion of a new kind of buccaneering capitalism: one which would be recognised by property developers, trading companies and entrepreneurs; which makes space for innovation to create growth; but which also actively breaks up monopolies with more muscular competition policy, so no bank can be allowed to become too big to fail.
After Brexit, Parliament will have more scope to regulate the banking sector than it had under the European Treaties. Some say the banks deserve all they get. After all, it was their behaviour which fed the resentment which contributed to the “No” vote in the EU membership referendum last year. Others are more pragmatic, believing the success of the banks, as well as the entire financial services sector, is far too important to the economy to allow them to be chased out of town. Either way, a testing period is approaching for banks and bankers. They are going to need to be on their best behaviour.
