For headline writers the banking sector is the gift that keeps on giving. Last week billions levied in fines for rigging the Forex market, this week news that two senior officers of RBS gave incorrect evidence to a Treasury Committee. The lessons of the financial crisis have failed to sink in. Viewed through a narrow optic the fines for Forex rigging look like an enforcement success. Viewed through a wider optic they represent a failure both of regulatory supervision and internal bank governance. Regulators have known since the 2008 crisis of the serious cultural deficiencies within the banking sector and yet the flagrant rigging of the currency markets continued unchecked beyond even the LIBOR probe and well into 2013. The point of a regulatory regime should in large measure be to focus minds and give pause to those who might otherwise be tempted to engage in wrongdoing particularly in an industry fraught with opportunities to make an unethical buck. It is clear however that there was, in this and every such case, no fear factor. On the contrary, the bankers’ conduct confirmed what had long been suspected - that they regarded the UK regulators as toothless watchdogs. This is true not only of the traders but of the supposed guardians of institutional probity in the banks’ boardrooms. If directors had been fearful of the consequences of failing to address internal systems and cultural weaknesses they would have set about addressing them faster and a good deal more effectively following the financial crisis. Yet, while much of the attention of the past week has been focused on the conduct of the barrow boys, very little has been said about the incompetence of the directors responsible for the environments in which they operated and in which a host of other egregious activity including excessive risk taking, mis-selling, rigging, money laundering and criminal facilitation, has gone unchecked over the past decade.
Fish rot from the head. So do banks. The crisis and all that has emerged about the conduct of the banking industry since illustrates a deficit in bank boardrooms that will not be addressed until the criteria for appointment to the boardroom are toughened significantly. To the extent that regulators have approved the appointment of bank directors, they have manifestly been too weak. Despite the systemic importance of banks, there is still no requirement for bank directors to hold a relevant professional qualification.. How, in a world in which pilots, doctors, lawyers and accountants must hold qualifications relevant to their roles can banks be run by amateurs? It is high time that the stewardship of a bank was regarded as a professional discipline in its own right. Yet, nothing in any of the recommendations or proposals to emerge since 2008 even hints at this. With most boards left to recruit in their own image the result is an absence of meritocracy in the senior echelons of the banking sector, fueling the perception that the industry is controlled by a cabal of well-connected insiders serving their own interests- a perception fortified by the abject failure of regulators to hold any bank directors to account for the crisis and the various scandals since, including Forex manipulation. Senior heads should have rolled but predictably, none have.
In addition to stricter penalties we urgently require the imposition of a regime that encourages the appointment of bank directors with the technical competence, stomach and independence to challenge the status quo and engender radical change. The PRA's proposed senior management regime with its threat of jailing bankers for conduct that falls below the normal criminal standard is not only vulnerable to judicial intervention but too reactive. The wrong people need to be stopped from occupying senior positions in the first place. This is hardly innovative when practices in other sectors are considered - with good reason, pilots and doctors are subject to stringent pre-qualification checks - but it is critical to the avoidance of further deterioration in public trust in banks and future crises.
Despite the fact that banks have paid over $100bn in fines in the past few years and set aside almost the same amount again for future penalties, there is not an innate toxicity at the heart of the banking industry. There are very many good people within the sector, dedicated to the prevention of unethical conduct and financial crime. Regrettably their efforts are undermined by boorish incompetence, both on trading floors and in boardrooms. If the banking industry with the enormous resources at its disposal cannot get a grip on itself despite all of the damage that it has wrought, then governments and regulators must by ensuring that those who wield power in boardrooms are subjected to thorough certification and regular recertification of their fitness to do so. GPs and surgeons are regularly tested and retested for their competencies, as are pilots. Those professions perhaps more obviously than bankers hold the power of life and death in their hands, but the financiers run them a close second, wielding enormous power through their control of markets and, in people’s savings, their future and livelihood. It is past time for the boardroom to get professional.
Stephen Platt (Author of ‘Criminal Capital’)