The Wonga ‘fake law firm’ scandal has triggered renewed criticism of seemingly lax regulation in the City. How much has really changed since 2008?

Last week’s Wonga revelations were shocking, even for a company with a controversial public profile that had what you might call ‘previous’. In 2012 the payday lender was warned by the Office of Fair Trading after it sent letters to customers accusing them of fraud.

Once again, the spotlight has been shone on the seeming inability (or unwillingness) of City regulators to hold those responsible for wrongdoing in the financial sector to account. How much has really changed, following the tidal wave of righteous political rhetoric that followed the 2008 crisis?

Is it business as usual in the Square Mile? Should it be business as usual, perhaps, up to a certain point – if London is to profit from so-called ‘regulatory arbitrage’ (the practice whereby firms capitalise on jurisdictional loopholes in regulatory systems to circumvent unfavourable regulation)?

Certainly, public cynicism may be reflected in the justified plaudits that have come the way of the Law Society for demanding a police investigation into the bogus legal letters the payday lender sent to thousands of customers. Chancery Lane alleges that Wonga could have committed blackmail and deception, as well as offences under the Solicitors Act.

Nobody was held directly and publicly accountable at Wonga – but should we be surprised? After all, it remains the case that not a single UK banking executive has been jailed in connection with the events which led to the crisis of 2008, nor the multiple scandals which have unfolded since.

Twelve people currently await trial in the UK over their part in allegedly rigging Libor (the London inter-bank offered rate). They deny the charges. But no one at board level has been charged, feeding the perception that there is a general reluctance to prosecute the most senior executives.

Solicitor Kalvin Chapman of Manchester-based Berg is one City observer who believes there is a lack of willingness at the newly minted Financial Conduct Authority to hold senior individuals to account. He said: ‘One needs to consider the makeup of the regulator. People who work for the FCA/FSA [predecessor body, the Financial Services Authority] have either previously worked in banks, or they are waiting for a job to be advertised at a bank.

‘Indeed, many of those working on the FSA/FCA review into the sale of interest rate hedging products (IRHPs) are now working at the banks (and principally Barclays). We take the view that they do not wish to upset their historic or prospective employers.’

Berg has been compiling evidence on behalf of small and medium-sized businesses caught up in the alleged mis-selling of IRHPs. The firm has submitted evidence to the Treasury Select Committee’s investigation into the mis-selling scandal.

Chapman said: ‘The FSA and now the FCA often say that they do not have powers with which to take action against CEOs or banks because, for instance, the FCA does not regulate things such as business loans. However, the alleged frauds committed by the banks have been in insurance (PPI) or derivatives (including IRHPs), so they are covered by regulation. Even if the FCA finds that it does not have sufficient powers, it can always refer the matter to the Serious Fraud Office.’

David Green QC, director of the SFO, denies that there is a reluctance to prosecute at his agency. He told BBC Radio 4’s Law in Action programme recently: ‘I have always been of the view that the Serious Fraud Office’s role is to investigate and prosecute the top-most level of fraud within an organisation.’

But the SFO has its own troubles to bear. Earlier this year, it was forced to ask the government for an additional £19m of funding so it could continue with investigations into alleged Libor manipulation as well as the Barclays emergency cash call of 2008.

Does the SFO have the resources to do a proper job? The Commons Justice Select Committee has questioned the slashing of the authority’s annual budget since the onset of the financial crisis from £51m in 2008 to £36m this year.

Green believes this misses the point. He said that the reason senior executives have not been prosecuted is not attributable to a lack of investigative resources but rather the law itself, which requires evidence of dishonesty to bring a case against an individual. He believes that a minor change to section 7 of the Bribery Act to cover all financial crime, not just bribery, could clear the way for board members to be prosecuted for future misconduct.  

Such a change, as suggested by Green, would put the UK in a similar place to that afforded by the ‘wilful blindness’ doctrine in the US. Courts there apply the doctrine of wilful blindness to hold that defendants cannot escape the reach of statutes by deliberately shielding themselves from clear evidence of critical facts strongly suggested by circumstances.  

The same goes for ‘Untreue’ (breach of trust) in Germany. German prosecutors are currently bringing a case against six directors at HSH Nordbank for breach of trust and derogation of duty leading to real damage at their bank. If found guilty, they face hefty fines and prison sentences. Such a case could not be brought in the UK.

Kalvin Chapman

‘One needs to consider the makeup of the regulator. People who work for the FCA/FSA have either previously worked in banks, or they are waiting for a job to be advertised at a bank’

Kalvin Chapman, Berg

Not everyone believes criminalising top bankers is the correct approach to clean up the City. Stephen Parkinson, head of criminal law at Kingsley Napley, told the FT last month: ‘In my view, it is the institutional culture that requires a clean-up – not the scapegoating of senior scalps. It has become far too easy to take pot shots at bankers these days, but criminalising an entire management sector… is not the answer.’

Another industry specialist who believes that the culture of institutions should be targeted for change is Professor Roger McCormick, visiting law professor at the London School of Economics. His prescription is for more transparency. ‘The criminal law will not produce anything very radical,’ he told the Gazette .

‘My own view is that the best way to rein in behaviour is to require much more detailed reporting on the [costs of poor conduct] and how they [the banks] are going to reduce them.’

McCormick’s project, updated for 2013 last week, crystallises the total cost of misconduct (fines and redress) at 10 of the world’s largest banks. Together these have cost their shareholders £160bn through poor conduct in the last five years.  

‘My project is to require more information to be given to the public and to require management to give an explanation about what they are doing. Regulators should compel banks to make full disclosure of all material facts – and fines are material facts – and also to make [those facts] easier for consumers to find. It [the project] produces a shaming effect if you are one of the worst banks, and it makes it possible for banks to be compared with each other.’

McCormick hopes to expand the number of banks in the study. At present, some ‘material developments’ are not covered. BNP Paribas is in the headlines after agreeing to pay a $9bn fine for sanctions-busting; Dutch bank ING was fined $619m for a similar offence in 2012; and Deutsche Bank was fined €725m for its part in the Libor-rigging scandal. The trio are not among the 10 banks whose conduct costs are currently available for scrutiny in the professor’s study.

McCormick’s project certainly caught the attention of watchdogs who convened for a Consumer Protection Day in London last month, held jointly by the three European financial regulators. One topic for discussion was the benefits of having board directors publicly account for, explain and disclose how they intend to rectify past wrongdoing, with regard to helping regulators hold individuals to account.

Steven Maijoor is chair of the European Securities and Markets Authority, which aims to build a single rulebook for European financial markets. He told the meeting: ‘One of the most powerful tools of a regulator is to be able to remove people at board level.’

Maijoor’s comments chimed with those of consumers who continue to question ‘cosy’ deals with regulators that let board directors off the hook.

Across the Atlantic, however, there is growing exasperation about using the blunt – if convenient – sanction of a corporate fine, with ‘no more questions asked’.

Better Markets, a Washington DC-based campaign group which promotes the public interest in financial reform, is suing the US Department of Justice over its 2013 deal with JP Morgan Chase, which saw the latter pay the largest fine in US history – $13bn – but walk away with perpetual immunity from civil action. As part of the settlement, JPMorgan acknowledged it made serious misrepresentations to the public – including the investing public – about numerous residential mortgage-backed security transactions.

Dennis Kelleher, president and chief executive of Better Markets, explained: ‘The American system of government is based on checks and balances, as well as on transparency, so the American people can be informed and hold the government accountable.

‘The DoJ’s mostly secret actions in granting the biggest, richest, most politically well-connected bank in the US blanket civil immunity for years of egregious illegal conduct that touched every single American violates all those principles. The executive branch through the DoJ simply cannot, on its own and without any review or approval by anyone, including the courts, cut such an historic deal and leave the American public in the dark.’

BSC recommendations

  • A new Senior Persons Regime, replacing the Approved Persons Regime, to ensure that the most important responsibilities within banks are assigned to specific, senior individuals so they can be held fully accountable for their decisions and the standards of their banks in these areas.
  • A new licensing regime underpinned by Banking Standards Rules to ensure those who can do serious harm are subject to the full range of enforcement powers.
  • A new criminal offence for senior persons of reckless misconduct in the management of a bank, carrying a custodial sentence.
  • A new remuneration code to better align risks taken and rewards received in remuneration, with much more remuneration to be deferred and for much longer.
  • A new power for the regulator to cancel all outstanding deferred remuneration, along with unvested pension rights and loss of office or change of control payments, for senior bank employees in the event of their banks needing taxpayer support, creating a major new incentive on bankers to avoid such risks.

As Kelleher is only too aware, Americans have watched their government bail out Wall Street and save the banks with no strings, while ordinary Americans suffered from the economic calamity that Wall Street’s illegal conduct caused.

He added: ‘Given that our government now claims to be bringing accountability to Wall Street, citizens are entitled to know the key facts related to this case to judge for themselves and to have an independent court evaluate the settlement to determine if it is in fact fair and in the public interest. The trust, confidence and faith of the American people in their institutions of government are at stake in this case.’

Chapman is doubtful that any such action could be countenanced in the UK. He explained: ‘Here, no government agency has a duty of care to members of the public. Consequently, there appears to be no manner in which the FCA can be sued. You never know though, there could be someone inventive enough to try.

‘I suppose there is the possibility of a private prosecution if it can be evidenced (very well-evidenced) that the FCA colluded with the banks in order to ensure as little redress is paid as possible. However, there is no evidence that would back this up, and the likelihood of finding such evidence is unlikely to surface unless a whistleblower turns up.’

Chapman is more hopeful about bringing private prosecutions against individuals and believes the first of these will reach the courts in 2015.

‘With regard to CF21/CF30s [investment and customer advisers] being prosecuted, it would seem that the only option available is to take private prosecutions,’ he said.

Berg is working with a number of groups with a view to ensuring that the worst-offending CF21s and CF30s are prosecuted privately in relation to the sale of IRHPs.  

‘When an adequate and properly evidenced case is prosecuted it is likely that the CPS will then take the case over. There are numerous groups at present, all of whom have collected and collated evidence against specific former CF21s and current and former CF30s.  

‘If you speak to groups such as [small business lobby group] Bully Banks, they can all identify the worst offending IRHP salesmen. It is hard to comprehend why the CPS will not take these cases. The FSA and the FCA have been asked numerous times to prosecute, but will not investigate.’

Berg also believes the FCA has fallen short in not prosecuting bank staff who have admitted falsifying customer signatures on PPI applications. Chapman continued: ‘There is already evidence in the FCA’s hands that ordinary branch staff at [a big high street bank] faked the signatures of customers on loan documents to ensure that they got PPI when it had never been asked for. Why have these people not gone to prison?

‘Faking a signature is serious. Consider the Solicitors Disciplinary Tribunal findings on solicitors who fake signatures. That would justify striking off the roll and inevitable prosecution given the serious breach of trust.’

One established way of gathering evidence about who knew what at the top of an organisation is to start with the relative small fry and work up. So Chapman’s strategy makes sense.

He added: ‘We view almost everything that happened as being fraud, and the Fraud Act 2006 is so wide and so broad that most can be prosecuted for fraud and would get sufficient time in jail.  

‘However, for the CEOs to go to prison, one would need access to the emails and documents produced at the relevant time to prove that things were done with the intention of committing fraud. Without access to this the job is impossible. The only people who could get access to this are the police or the FCA.’

Chapman also accuses the government of dragging its feet: ‘The Parliamentary Commission’s report [Changing Banking for Good ] was fully accepted by the government. This demanded new criminal offences that would ensure board directors could expect jail time if prosecuted.

‘In order for this to happen, however, the government must implement what it stated it would do. To date all that has been done is the Lambert report [the Banking Standards Review conducted by Sir Richard Lambert], which recommended a “Council” that has no powers, and as such is a total waste of time and effort.’

A quick glance at key recommendations (see box above) of the Banking Standards Commission’s report, published more than a year ago, reveals the full extent of the opportunities that Chapman believes have been lost. Indeed, Andrew Tyrie MP, who chaired the commission, expressed frustration six months ago that the committee’s call for a clawback of bonuses had not yet being written into UK law. Six months on, it still has not, although the Bank of England did consult on a clawback provision in March this year.

Ensuring that those responsible for financial wrongdoing would have to hand back any money they earned as a result of that wrongdoing would go some way towards addressing the public’s demand for accountability. However, lobby group the British Bankers’ Association has cast doubt on the viability of imposing such a claw back measure.

It said: ‘It could be argued that such repayment provisions are unenforceable on legal grounds because they are a “penalty clause”; and/or a restraint on trade; and/or counter to the doctrine on forfeiture.

‘It may be that a court would be willing to enforce them where the individual concerned had been directly involved in wrongdoing, as evidenced by a successful enforcement action, but where that individual has been more tenuously involved in a matter involving disciplinary action or where clawback is sought as a result of a wider failure of, for instance risk management, courts may be less willing to enforce such clauses.

‘Inevitably the costs of legal action to claw back previously vested variable remuneration are likely to be significant, possibly exceeding the value of any amounts recovered and may not ultimately be successful.’

All of which may be true. But it is not what an angry public wants to hear after enduring the worst recession since the great depression, caused by a seemingly impervious financial services sector.

Elle McDonald is a financial services journalist and consumer advocate