/ Money

We need bigger penalties for top bankers

RBS sign

In perhaps the understatement of the year, the headlines about the FSA’s report into the failure of RBS said that it was caused by ‘multiple poor decisions’. So should bankers be held accountable when they fail?

Well, the Financial Services Authority (FSA) report was launched today and says that senior executives didn’t understand the risks they were taking and were focused on growing the business at all costs. The board of directors did not do enough to challenge the decisions of senior executives.

Just when they should have been more cautious, executives embarked on the largest takeover in banking history by purchasing ABN Amro, even though they had only done ‘limited’ investigations into the overall health of the bank.

RBS based its decision on access to ‘two lever arch folders and a CD’ about the bank.

The FSA goes on to admit that there were failings in its old methods. It says it previously focused too much on box ticking and even said that in 2006 and 2007 it had ruled that RBS was a ‘well-managed’ firm and would benefit from less scrutiny. All of this was encouraged by politicians who called for a ‘light-touch’ approach to regulation.

Taxpayers paying the price

Taxpayers are bearing the consequences of these decisions. As of today, we are sitting on a loss of £26 billion from our stake in RBS. Whilst senior executives were handsomely rewarded, taxpayers have ended up guaranteeing RBS on losses it made trading complex derivatives and on loans to hedge funds based in the Cayman Islands.

However, no individual RBS executive will be subject to disciplinary action for these decisions. While the regulator concluded that executives had fallen short of best practice, their actions were not unreasonable.

Hold banks to account

Today’s report suggests that in the future there should be greater opportunity for the regulator to take action against senior banking executives for failure, something our Chief Executive, Peter Vicary-Smith picks up on:

‘The FSA report is a damning document. It reveals the inherent flaws in a corporate culture that focuses on bonuses and short-term profits. The Chancellor must confirm he will take tough action to protect consumers when he publishes his response to the Independent Commission on Banking next week.’

The report also suggests that automatic bans should be handed out to failed banking executives and a greater proportion of their bonuses should be subject to clawback if the bank subsequently performs poorly.

Should we make it easier to hold senior management to account for failing banks? Would senior executives at RBS have taken a more cautious approach if they knew they would be subject to enforcement action if the bank collapsed?


The real question though is…

Which hedge fund indirectly paid the bonuses?

As in, RBS managers were simply doing as they were told in order to make a hedge fund an obscene profit.

Why else would someone get a full bonus when they and the business have not performed well? Why can’t we, the layman, understand why such seemingly stupid decisions are made?

The report isn’t damning, in my opinion, it’s just a ruse

frances says:
13 December 2011

What would you charge them with ? Incompetence ?
May as well have incarcerated Al Capone for not running the Family properly.

Ellen Brown wrote an article recently called “Sheared by the Shorts”.
It makes interesting reading and shines a light on the shady activities
of the Financial world.

Do read it – it’s well worth Googling.

Bev Bruce says:
16 December 2011

I worked for RBS very briefly but left because of the way they encouraged employees to harass customers into making payments to overdue accounts. The culture (which came from senior management) was to daily humiliate employees who had ‘failed’ to bully enough people to make payments (including demanding they borrow credit cards from family members to make immediate payments over the phone). This was to try and meet targets so bonuses would be paid and it is this sort of behaviour which must also be penalised. Success is not measured simply by meeting targets, it should also be measured by demonstrating good practice.

Webster - Bromsgrove says:
16 December 2011

I have banked with RBS for 30, but their general attitude and customer indifference has encouraged me to move to NatWest, in preparation for the sell-off of the England elements of the bank. How can a ‘people’ owned business continue to pay obscene bonuses to staff, particularly when every other area of our society is tightening their belts? The Governments attitude that key personnel would walk unless they do is not sustainable. Surely there must of have been some part of our commercial law that permitted the authorities to go after Goodwin; take action against is pension entitlement; remove his knighthood and; exclude him from holding directorships in future?

Stewart says:
16 December 2011

Goodwin, as Chief exec. at the time of the AMRO decision, is culpable of not performing due diligence – why would any sane person rely on the findings of another bank, which then walked away from a deal with AMRO, to base the decision of his own bank to enter a deal with AMRO? This seems to be gross negligence of his duty. Surely his assets should be confiscated under the Proceeds of Crime Act? It is even alleged that he was busy pursuing a female employee at the time.
With reference to the obscene bonuses collected by investment bankers gambling away other people’s money, this short termist culture has brought misery on thousands of small time investors and ordinary members of the public. All bonuses should be stopped. If we are all sharing the pain of recession, why should the ones that caused it escape with their millions, while the rest of us are wondering how to survive?
If the bankers had not got away scot free, I doubt if any riots or strikes would have happened.

19 December 2011

I agree with all your comments.
i do not understand why all the directors of RBS have not yet been disqualified from holding office!

I agree with Webster Bromsgrove.

This bank only exists because of the taxpayer.

Fred Goodwin lives on a annual pension of around £340,000 and he is only 53yrs I think. He repaid a tiny amount of the capital which still yields this impressive living which only about 1% of the country enjoy during their working life.

He clearly lacks the skill of the top 1% but not the cunning and the massive misjudgement and greed that so few people have.

My hope now is that this report will mean they will go after Sir Fred and claw back more of our money and that the retribution (loss of title, barring from directorships in the future and retrospective loss of bonus) lives up to the name of ‘Fred the Shredded’ a counter balance to the Name of ‘Fred the Shred’ that he earned.

name ‘Fred the Shred’ that he earned.

It would take far too long to describe properly the depth of my feelings on this issue. So I will keep it short and just say that I believe that we have been badly let down by Politicians, Regulators and even by those organisations who campaign on behalf of citizens on this issue.

Nothing less than full separation of Retail and “casino” banking will do. But that is not what we are going to get is it? At best we will get a “Chinese walls” type separation, and Mr Osbourne will pretend he is being tough. It is not going to work. Chinese walls only work when all parties need them to work. Banks will find their way around it. Finding their way around regulations to the detriment of their customers is what they do best.

As for the Bank executives and directors who got us into this mess, they should be prosecuted. It is hard to believe that culpable offences have not been committed here. If they are not, the public should be told the reasons why not (in detail) for the sake of Public confidence in the process.

In either case there is no reason why these same Bankers are still running these Banks. The fact that many of them still are is an absolute disgrace.

pumpkin pie says:
16 December 2011

”How can a ‘people’ owned business continue to pay obscene bonuses to staf’f” .. Great comment but believe me most of the ”staff” do not get bonuses, just the fat cats up the top and higher management tiers. The staff are treated with the attitude ‘if you dont like it, there are plenty more who would like a job’ when any issues are raised. All RBS bosses care about is figures and the staff morale is terrible. No pay rises, no bonuses, staff paying higher rates than customers. Staff are bullied by management and treated with disrespect. Staff are expected to say ‘yes’, like a nodding dog, to everything asked of them or there will be consequences. Fred the Shred has a hell of a lot to answer for but no dount he will carry on sitting comfortably in his 2.5 million house, not giving a stuff that he ruined RBS and just walked off into the sunset with his extortionate pension…

Zilch says:
16 December 2011

Until the government decides to bring the banking sector into the 21st century they will get away with simplistic retail services and gambling. What we need to do is to give the banks and mutuals something socially useful to do and then monitor their performance. A relatively straight forward improvement to the standard current account would allow tax and benefit accounts (see: http://taxandbenefit.com) to be an option for consumers so that they can allow their bank or mutual to deal with the government. What could be better: you won’t have to deal with HMRC, fill in any tax forms, deal with any tax codes and see all your tax and benefits in one place. Not only that but HMRC would monitor them giving them something more usefully to do than hassling us. The pluses of such a system are numerous the savings huge. It basically addresses the need to not hold data centrally whilst allowing up-to-date information to be gathered centrally.

graham andrews says:
16 December 2011

i can only agree with what everyone has said. Fundamently its pigs in the trough…! combined with the kings news clothes ..hes nude no he isnt it etc.
Vested interests in the status quo wont allow major change in my view unless we all kick up a stink.
Pursue and prosecute goodwin and his board.
Alter city renumeration (ftse 500) such that all board salary packages are voted on at the agm by the shareholders + shareholders must have an elected representative on the board.
That’ll shake things up!!
Secondlly no mp can take up a job in a ftse 500 company whether consultant or employee for 2 yrs after leaving parliament
thirdly pay mps £150,000 a year….we get the mps we deserve now…pay them properly with no expenses.
thast radical …nut it wont happen will it.

Richard Henderson says:
16 December 2011

How wonderfully hypocritical most of the national ‘debate’ (read ‘witch-hunt’) is. So bankers should be locked up for making mistakes, should they? How many people would be free in this country if the same test was applied to other occupations?

Or perhaps it is mistakes leading to the taxpayer being landed with a bill that get your goat? In that case, how many civil servants would still be out of jail today? The difference between them and the bankers, of course, is that bankers had paid huge sums of taxes (personal and corporate) into the public purse before the latest catastrophe, whereas the bureaucrats always and only cost us money.

All this synthetic indignation is simple envy dressed in legalistic clothes. The loudest demands for retribution come from a) people who have no idea what actually happened; and b) those who hope to profit personally from anti-banker feeling – notably politicians of course. Now there’s a coincidence – aren’t those the people who cost us a pretty penny not by making mistakes, but deliberate, conscious bare-faced fraud?

It is time to nationalise the banks and not allow banks which have been nationalised (eg. Norethern Rock) to be sold at knock-down prices to friends of the Tories and Lib Dems. That is, multi millionairs like Richard Branson.

George Rowley says:
17 December 2011

I agree with Jeff.. It would take far to long for me to express and discribe properly my depth of feeling on this issue. We have all been conned and let down by the Politicians, the Regulators and even those organisations who claim to represent and campaigne on behalf of the public on this issue. There should also been action against the Law firms who advised in these matters.

There should be at least one Bank, which should be the National Bank of the UK. It could be a New Bank or even a revitalised bank like the Post Office Bank or the National Savings Bank. Everyone else in the Banking sector should be allowed to fail if needs be, that is the the shareholders should be allowed to fail. All depositers should be protected.

The fact is that major changes in the status quo will just not happen, and this report is just a smoke screen and a pretence at some other kind of self regulation. George Osbourne, is a member of the very same establishment as is the Prime Minister they are all in the same club. Lets understand that the Chief Excutive officers of all the other Banks are at the same trough and they will do everything they can to prevent change.

Its just the same as all the MP’s a few of the MP’s were prosicuted but they were only a token number and no explination was give as to why more MP’s were not prosicuted! Its the same with Fred Goodwin if you wish to pursue Mr Goodwin then you have also to pursue all the other’s at fault in the Banks concerned

The fact is what happend with the banks was at best negligence and at worst fraud, the same is also true with MP’s expences.

Having worked for both ABN AMRO and RBS prior to the takeover, as soon as I heard that this was in the pipe line I knew it would end in tears. ABN AMRO had made the dreadful mistake of paying a huge amount of money to EDS for their ‘BestShore’ IT services, so all their systems were taken away and hence they lost any real control over them. The project was a disaster (even if no one admitted it) and is a prime example why outsourcing should be avoided at all costs. Additionally their cost/trade was reportedly three times that of any other investment bank. NatWest had taken over RBS which was akin to the snake swallowing the crocodile (in every respect) and then RBS takes over ABN. Where does it end? When their is only one bank left?

It should never have been allowed. The FSA, banking ombudsman or the Bank of England should have permitted it. Nor should they have allowed Lloyds to take over Halifax. All of these take overs were sold to shareholders and the public on the basis that they would improve efficiency and lower the cost for customers. None of these objectives have been met.

Barry Northam says:
17 December 2011

I have two suggestions.

1. Given that, at least in theory, parliament can do whatever it decides to do, it should pass a law making Bank directors personally liable for the Bank’s debts [if this works, we could consider expanding it to cover all company directors].

2. Make it retrospective to 2007.

Retrospective laws are fundamentally bad laws that no
legislature should even contemplate doing, the great American
jurist Fuller had stated.

The limited company is a separate legal entity responsible
for its own debts and liabilities. One doesn’t ever sue the
directors of the company.

“MUTUAL life insurer Equitable Life today announced it will sue 15 former directors for about £3bn.

The society said the 15, who include Jenny Page, former chief executive of the New Millennium Experience Company – the company behind the Dome – and former National Lottery regulator Peter Davis, served on its board between 1993 and 2000 when it lost a legal battle in the House of Lords, leaving it with a £1.06bn liability.

Equitable recently announced it was also taking legal action against its former auditors Ernst & Young, who are being sued for £2.6bn.”

I think someone is incorrect.

As for retrospective laws being fundamentally bad laws I am not convinced that American jurists necessarily are a good place to look – the American legal system is quite the most extensive of any country but that does not equate to the most just country.

Here is an example from Australia where solicitors, accountants and other crooks defrauded the Government of due tax. So up to a billion dollars had to be paid by other tax-payers to cover the uncollected tax.
I think it would be hard to find anyone other than the direct and indirect beneficiaries of the fraud who would defend it against retrospective law-making.

Yup… the directors of a company can sue the company as being
a separate legal entity, of course, and vice versa.

graham andrews says:
17 December 2011

mp’s wonder why the public isnt interetsed in voting/politics…this bankling crisis has the answer in my view.
A) mps who want an easy life and support vested interest not their voters eg exspenses scandal, jobs in the city, lucrative lecture tours the gravu train in europe etc
b) boards of directors who dont understand their business and have no morals just me me me.
c) when the banks cuase a huge crisis we bail them out..thats not capitalism..thats wating our money!! (mp’s maintain vested interest
d) 3 yrs on and what action has been taken against banks????????
e) disillusioned with mps yet? who still dont seem able to grasp why we are so angry.
I didnt cause this crisis i lived within my means. i have some savings and all i can get now is 3%.
yet the city bonus train roles on as if nothing happened.
i am angry, i dont know about you.

I just don’t understand Richard Henderson’s logic. Everyone makes mistakes, but the mistakes of too many bankers were the result of intense greed

Dunc Wooster says:
18 December 2011

“So should bankers be held accountable when they fail?”

In short, yes.

In the case of RBS, the actions (and inactions), words and decisions of the executive directors and chief executive (Goodwin) as well as the non-executive directors and chairman ALL ought to be examined closely, and wherever they have been found to be negligent, incompetent or reckless, then they must face significant penalties.
The range of penalties should include disqualification from any future executive or non-executive roles in listed companies, loss of honours (MBEs, Knighthoods etc), very large fines, forfeiture of pension rights, and seizure of assets. Even jail terms should be used if misdeeds have caused damage to the wider economy or society or environment, as in the case of RBS and other banks.

Of course this has to apply not just to banks but to ALL sectors, such as energy, oil, railways, insurance, etc.

But I fear none of this can happen because at present companies and their directors seem to be above the law. Our criminal justice system needs to recognise “corporarte criminality” and pursue those criminals with the same vigour as any mugger, burglar, or conventional bank-robber.

While in charge of the companies that employ them, these people abuse their power by rewarding themselves massively, but they do not face any losses or penalties for their mistake or folly. Our system of corporate governance is weak and ineffectual, so directors recognise no auhority above their own, and have no fear of any consequences.

The law CAN make a difference.
In the USA, after the Enron corruption scandal, the Sarbanes-Oxley act made corporate executives liable to jail terms, which transformed working practices throughout corporations as suddenly fearful executives focussed on eliminating corrupt practices from their companies.

Zilch says:
18 December 2011

I agree with the idea of one or two banks being completely state owned to give people a choice of private bank, mutual or state. I also think that we should have the option of one of our state bank accounts being used for tax and benefit calculations. Once this was shown to work as well as saving vast amounts of money and hassle then other mutuals and private banks could be be brought up to speed. We need better government and we need to stress practical steps they can take as they clearly have little idea what to do themselves (i.e. government / official advisors).

Martin says:
18 December 2011

re this: ‘senior executives didn’t understand the risks they were taking and were focused on growing the business at all costs.’

I worked for an IT in an an investement bank and became convinced that IT were the only people who understood the complex instruments like Collaterised Debt Obligations (CDOs) and Credit Default Swaps (CDS).

When we were asked to build a system to support CDOs my comment back when they were described to us was that by bundling lots of of junk dept up and creating a single investement grade CDO out of it it was alchemy and they were turning base metal into gold, and was too risky, especially as they were bundlinhg up junk mortgages and calling them investment grade.

The reply I got from the quant was “Yes, but we’re making lots of money out of it so do as we say”

As part of IT you have to make sure every eventuality is covered, but when we went back and siad “How should we cope such-and-such happening?” the annswer we got back was “Oh, we hadn’t thought of that”, and eventually they asked IT if it could come up with a resolution

As regards the board members I don’t suppose they even knew what CDS or CDO stood for.

Incidentally, as regards traders’ bonus’s their bonus would be 10% of any profit they made for the company, and profits in the 10’s of millions were quite possible for an astute trader. No profit = no job and summary dismissal. Also they were paying the full tax on their bonus’s (I saw the figures) which explains why neither the Labour or Tory governments wants to do anything abouit it.

I can’t see why any board member, of any company, banking or otherwise, should be a paid bonus or payrise, or golden goodbye if the company makes a loss.