Report reveals alarming facts about current UK bank practices

‘Bosses must prioritise long-termist decency over short-termist profit-chasing’

Fake news has become a horrible euphemism for lying. But call it what you will, the dissemination of untruths has become dangerously entrenched in the modern world. If political lies threaten democracy, business lies undermine capitalism. Consider the damage to carmaker Volkswagen after its faked emissions testing scandal or to retailer Tesco when it overstated profits. No sector, though, can compete with banking for the scale, depth, longevity or variety of lying that has infected a whole way of doing business.

It is fashionable for bankers to admit that they lied, cheated and covered it up in the boom years before the financial crisis, but that now they’ve cleaned up their act. Many banks have signed up to new ethics codes and, in the UK, the industry has clubbed together to found the self-regulatory Banking Standards Board – a body that insists its mission is not just to restore trust in banking, but to make banks genuinely worthy of trust. A BSB survey of 28,000 UK-based bankers, published on Tuesday, reveals some heartening progress.

There has been financial reparation, too. Deutsche Bank’s settlement with US authorities in December was typical of the post-crisis hair-shirt confessions. Germany’s biggest bank agreed to a $7.2billion (€6.8bn) deal, admitting that in 2006 and 2007 it mis-sold mortgage-backed securities, having “knowingly made false and misleading” declarations to clients. It was the latest in a long list of banks to pay billions of dollars over similar behaviour.

String of lies

In essence, the financial crisis was caused by a string of lies. Mortgage salespeople facilitated irresponsible subprime lending by encouraging customers to lie about their incomes. Investment banks repackaged those loans as mortgage-backed securities and collateralised debt obligations, and then lied about their quality when selling them on to investors around the world. In some cases, the banks used short selling strategies to bet against the products they themselves had originated.

Goldman Sachs settled with authorities in 2010 over misleading clients, such as Germany's IKB and Royal Bank of Scotland, about its Abacus CDO. An influential US Senate committee report the next year alleged that three other Goldman CDOs were misrepresented to investors. Goldman has said the report was misleading.

Political and regulatory authorities found far more than mortgage fraud in the golden period for deception in banking running up to 2008. Thanks to the usual clean-up mentality that follows a time of crisis, investigators unearthed an array of scandals from the manipulation of Libor interest rates to collusion in foreign currency trading.

In the UK, the king of mis-selling scandals emerged in the payment protection insurance business. Britain’s big banks have already paid out £34 billion in compensation for having duped customers into buying unnecessary insurance cover. The bill continues to mount.

Mis-selling scandal

These historic abuses date back several years, in many cases to before the financial crisis. But the lying and cheating has continued in some quarters. Wells Fargo has been rattled over the past year by its own mis-selling scandal. New account openings halved after it emerged that thousands of employees created as many as 2 million fee-charging accounts for customers without their consent.

The BSB’s report on British banking – though largely positive – contains a number of alarming revelations about current practices. Two statistics relate directly to honesty, or the lack of it. First, more than a third of those surveyed questioned whether their employer’s stated values clashed with everyday business practices. Second, according to the survey: “12 per cent see instances where unethical behaviour is rewarded, 13 per cent see it as difficult to get ahead in their careers without flexing their ethical standards, and 18 per cent see people in their organisation turn a blind eye to inappropriate behaviour”. Such attitudes may be more widespread than bank chief executives, desperate to restore profitability and put the past behind them, would like to believe.

The "tone from the top" is vital. Some have seized on misleading disclosures from Bank of England deputy governor Charlotte Hogg about her brother's job at Barclays, and suggested that regulators must be above reproach if commercial bankers are to be kept in line.

More important still is that bank bosses themselves prioritise long-termist decency over short-termist profit-chasing, and ensure that their own behaviour – through interactions with staff, customers, investors and media – is consistently honest.

Copyright The Financial Times Limited 2017