How do we stop bankers melting the economy again?
That crucial question in the regulation of the financial sector has arguably not yet been fully answered after the crash of 2008, but the Chancellor appears to have found one: we don't.
The regulation and oversight of the day-to-day conduct of business in the banks is carried out by the Financial Conduct Authority. Andrew Bailey has just been appointed its new Chief Executive - after his predecessor Martin Wheatley's contract was somewhat surprisingly not renewed. It is up to the FCA to monitor the conduct of banks, using paper trails which may exist, or may not...
The FCA has been hitting big bank after big bank with fines for misconduct. Between 2013 and 2015, the FCA fined the UK's four biggest banks: HSBC, Barclays, Lloyds and the Royal Bank of Scotland group - to the tune of £1.26 billion. What is deeply worrying is that these fines are for misconduct which took place after the economic crash of 2008. Yet there has been only one successful criminal prosecution. So much for the much vaunted "change of culture".
In March 2015, the FCA trumpeted that it would soon begin a thorough review into banking culture. Without the FCA apparently doing any work on it, that review was abandoned in December. The task is instead to be left to the Banking Standards Board - a body which can neither punish banks for wrongdoing nor publish its reports on individual banks unless they agree.
Correspondingly, the government is abandoning its own legislative change which were due to come into force in March 2016. That change was the "reverse burden of proof". That policy was introduced by the Coalition government in the Financial Services (Banking Reform) Act 2013. It would have meant that, where misconduct was alleged, senior personnel in the big banks would have had to demonstrate that they took reasonable steps to prevent that alleged misconduct from happening.
In December 2013, when speaking of the stricter legislation being introduced by the government, including the reverse burden of proof, a Treasury Minister told Parliament that the "introduction of this offence means that ... in future those who bring down their bank by making thoroughly unreasonable decisions can be held accountable for their actions. ... Senior managers could be liable if they take a decision that leads to the failure of the bank. ... The maximum sentence for the new offence ... reflects the seriousness that the Government, and society more broadly, place on ensuring that our financial institutions are managed in a way that does not recklessly endanger the economy or the public purse". That Minister was the then Economic Secretary to the Treasury, Sajid Javid MP. Before entering Parliament, he had been employed by Chase Manhattan Bank, and then had run Deutsche Bank UK.
By June 2015, the Chancellor George Osborne was already in partial retreat. In his Mansion House speech he said that he was certain that "ratcheting up ever-larger fines" was not the way in which banking regulation should continue, but rather that "boards and top management must live up to their responsibilities - and face the consequences if they don't".
By October 2015, the Chancellor was in full retreat. That was when he started his Bank of England & Financial Services Bill, in the House of Lords. This Bill has now reached the House of Commons. Bizarrely, this Bill repeals the Chancellor's own 2013 legislation - before that legislation has even come into effect! So the Chancellor diagnosed a problem (reckless bankers - well spotted). Then he prescribed some remedies (including the stringent "reverse burden of proof" - well done). Now he is proposing to abandon that remedy - without ever having tried it.
When this Bill was being debated in the House of Lords, the government Minister Lord Bridges was unable to answer the obvious question as to what had led the Chancellor to change his mind. One can but speculate: between July and December 2015, George Osborne met with 5 of the biggest banks in the UK. The Bankers' Chancellor indeed. (In the same period in 2014, he had met with none of them.) For post-2008 misconduct, four of those banks (HSBC, Barclays, JP Morgan, Santander) have been fined by the FCA; and the fifth (Standard Chartered) has been hit hard by USA regulators.
Research by Reuters shows that seven big investment banks in the UK between them only paid £21 million in Corporation Tax in 2014 - despite revenues of £21 billion, and profits of £3.6 billion. At the same time as some banks play fair, other banks continue to try to get away with it, basking in their world of structural complacency, whilst real people up and down the country are struggling to make ends meet.
The Chancellor should have stuck to his guns, and done the fair thing for the British people - regulate and tax the banks properly. As it is, the Bank of England & Financial Services Bill signals a major retreat by the Chancellor from what was until now his own policy. Thus, whilst he stands firmly behind his failed austerity (National Debt up 60% in his six years in charge), he is going soft on banks.
Rob Marris is the shadow financial secretary to the Treasury and Labour MP for Wolverhampton South West