Regulation in Britain has become a latter day Potemkin village – an impressive facade behind which lurks absolutely no substance. The Libor (or Lie-bor as the wags have it) affair is a perfect illustration of everything that’s wrong with it.
On Question Time last night, in addition to the evasions and non-answers that are standard fare for politicians, Justine Greening for the Conservatives was attempting to sell the line that unfortunately the FSA had not been given powers by the last government to impose criminal sanctions (cue crocodile tears). Earlier in the evening Faisal Islam had been saying much the same on Channel 4 News but looking, to my mind, very uncomfortable as he said it. I suspect he had been fed this line by someone and could smell a large and particularly dirty rat but hadn’t yet had time to work out which cupboard it was hiding out in.
This has become pretty standard spin; ‘they’ (the last lot) got it wrong and of course ‘we’ will introduce new legislation but unfortunately in this particular case the horse has fled. From a practical point of view this has the advantage of letting everyone involved off scot free with perhaps just a minor wrist slap for appearances’ sake. The alternative – actually enforcing perfectly good existing legislation – would change the ground rules and that would never do in the brave new deregulated world.
So are we stuck with the FSA’s limited powers or are there alternatives? Perhaps I can suggest a couple.
Offences under the Theft Act 1968 included “obtaining pecuniary advantage by deception”. The Theft Act has since been replaced by the Fraud Act 2006 which lacks the resonant language but is equally clear. At section 2 it states that:
A person is in breach of this section if he—
(a) dishonestly makes a false representation, and
(b) intends, by making the representation
(i) to make a gain for himself or another, or
(ii) to cause loss to another or to expose another to a risk of loss.
It goes on to talk of fraud by abuse of position (even when the conduct concerned consisted of an omission rather than an act). Penalties include ample goal time for miscreants to consider the error of their ways.
Then there is competition law. The penalty for anti-competitive behaviour is a fine of up to 10% of the worldwide turnover of the firms concerned and criminal sanctions are also available. If it is proved that a small group of banks abused their position for competitive advantage I would have thought they would be very exposed.
Trillions of dollars of deals are tied in some way to Libor so even the smallest misrepresentation of its true rate is going to cost someone a fortune – and make someone else’s fortune. I imagine that that such mind-boggling sums would naturally tend to attract spivs and scammers although only the courts can say if that has actually happened in this case.
For Britain what is at stake goes far beyond the money involved – behaviour like this poses a dangerous reputational risk to our largest industry. Several recent financial scandals – most notably the AIG debacle – have tracked back to London, enabled by the regulatory race to the bottom which has been a feature of Conservative thinking in recent years; they have constructed a house of cards and mistaken it for something worthwhile; it is actually immensely fragile.
We need the banks but we need them to be good citizens. In the circumstances huge fines are not the answer – they would only make the banks even more fragile than they already are and would ultimately come out of the pockets of the public.
What can be done, however, is ensure that individuals – and I mean especially captains, not foot soldiers – who have broken the law are prosecuted. If a criminal standard of proof is impossible in some cases they should still be given lifetime bans from any involvement in financial services.
Politically the Conservatives too are very exposed. They are traditionally hot on the deterrent effect of the law (which is regulation by another name) when it comes to blue collar crime (or the aftermath of the London riots) but when it comes to City they have been pushing the opposite position vigorously since at least Thatcher’s time. Expect some nifty political footwork as they try to sidestep any responsibility for the resulting mess.