The following is a guest post about banking executives. If interested in submitting a guest post please read my guest post policy and then contact me.
Large bankers’ bonuses are usually associated with investment banking, where short term gains for high risk strategies are richly rewarded. However the bonus culture is endemic and flows down from the investment banking arm all the way to the clerks in the branch.
The sell, sell, sell culture of the banking industry was prevalent with PPI and the Guardian reported on a former NatWest employee who worked in a branch between 2002 and 2004. The employee reveals the intense pressure staff were under to sell PPI:
“Each quarter the branch had to achieve a certain amount of sales points. We earned these through selling mortgages, packaged accounts, credit cards, referrals to the financial planning manager, and PPI. Large loans with PPI secured the most points.
“Our quarterly bonus depended on how many points the branch as a whole achieved. I recall that hitting 120% of target meant our bonus would be in a higher paying threshold. Working in a branch didn’t pay very well, so the bonus really helped.
“In my role as a customer adviser I had to sell 10 loans a week with seven or eight having PPI – this was known as the penetration target. There was plenty of training in ‘disturbance techniques’, making the customer feel anxious about their ability to repay the loan in the event of accident, sickness, unemployment or death. Every morning we would meet with the manager to discuss how many loans with PPI and other products we would sell. If a customer refused to take PPI we had to explain to the manager the reasons given and which sales objections techniques we used.
10 years on the FCA are still concerned about poor sales practices at some banks.
The Financial Services Authority (FSA)
The Financial Services Authority, a regulatory body set up by the government to regulate the financial industry provide consumer information relating to PPI on their website, listing some of their reasons for PPI mis-selling. These include:
- you were pressured into taking out PPI;
- it was not made clear that PPI was optional;
- you were advised to take out PPI but it was not suitable for you;
- you thought buying PPI was a condition, or would increase your chances, of obtaining a loan or other type of credit;
- any significant exclusions were not explained, such as being self-employed or pre-existing medical conditions;
- the policy was added to your loan without your knowledge;
- it was not made clear that you would pay interest on the cost of PPI if it was added to the loan; and
- it was not made clear that the PPI cover would end before the loan or credit was repaid.
The Serious Fraud Office (SFO)
The Serious Fraud Office refers to fraud as a type of criminal activity, defined as:
‘abuse of position, or false representation, or prejudicing someone’s rights for personal gain’.
They go to say that:
“fraud is an act of deception intended for personal gain or to cause a loss to another party.
The general criminal offence of fraud can include:
- deception whereby someone knowingly makes false representation
- or they fail to disclose information
- or they abuse a position.”
Let’s just cross reference the two government departments for a second there.
|What The FSA Say||What The SFO Would Call It|
|You were pressured into taking out PPI||Abuse a position|
|It was not made clear that PPI was optional||Failure to disclose information|
|Any significant exclusions were not explained||Failure to disclose information|
|You were advised to take out PPI but it was not suitable for you||An act of deception intended for personal gain|
Mis-selling – have we all been duped?
The question at the forefront of my mind after comparing the two departments is why the FSA refers to the PPI scandal as ‘mis-selling’ but the SFO would surely describe it as fraud – a criminal activity where there should be prosecutions.
This begs the question – who came up with the phrase mis-selling and managed to successfully attach it to the PPI scandal?
To date not a single person from the banking industry has faced criminal charges over the PPI scandal.
It is very rare that prosecutors go after high powered banking executives and when they do it usually doesn’t end well as former Governor of New York Eliot Spitzer could probably testify.
The story of Eliot Spitzer
What relevance does a case from America have in Britain I hear you ask? The jingoistic British press has told me that corruption only happens in foreign countries and couldn’t possibly happen here! Well, have an open mind for a while and, if nothing else, it is an interesting story.
Spitzer was the Governor of New York and arguably the darling of the Democrat Party in the pre-Obama days. He had previously worked as the Attorney General for the state of New York a position which typically went after drug and vice prosecutions.
Not Spitzer though. He was a reformist and was trying to bring about change at the highest level. His target was the bankers and CEO’s of Wall Street.
As New York Attorney General, he was known as the “Sheriff of Wall Street.” He is one of the few people with not only the insight and experience to expose Wall Street corruption but the courage to go after the perpetrators.
In 2008, less than a month after writing a scathing editorial for the Washington Post highlighting predatory lending, Spitzer was hounded out of office and forced to resign due to issues in his personal life.
Spitzer couldn’t be kept out of politics for long though and in a July 2013 article titled “Why Eliot Spitzer’s Return Terrifies Big Finance”, Thomas Ferguson, Professor of Political Science at the University of Massachusetts and a senior fellow at the Roosevelt Institute, wrote of Spitzer’s bid for comptroller:
“Suddenly, the Masters of the Universe were staring at their worst nightmare: the prospect of a comeback by the only major politician in the U.S. whose deeds — and not simply words —prove that he does not think corporate titans are too big to jail.
Who, when the Justice Department, Congress, and the Securities and Exchange Commission all defaulted in the wake of a tidal wave of financial frauds, creatively used New York State’s Martin Act to go where they wouldn’t and subpoena emails and corporate records of the malefactors of great wealth, winning convictions and big settlements.
Who in 2005, as New York State Attorney General, actually sued AIG instead of thinking up ways to hand it billions of dollars of taxpayers’ money. . . .
And who in 2013 with business as usual once again the order of the day, is promising to review how the Comptroller’s Office, which controls New York City’s vast pension funds, does business with Wall Street and corporate America.”
Where is our “Sheriff of the Square Mile”?
As yet the FSA hasn’t provided our ‘sheriff’, however their former employees’ career history does make for interesting reading!
Sir Callum McCarthy – The former Chairman of the Financial Service Authority, who had previously worked as a Managing Director and Deputy Head of Corporate Finance of Barclays’ investment banking arm
Sir Hector Sants – Former FSA Chief Executive who later took up the position of Head of Compliance and Government and Regulatory Relations with Barclays Bank.
Natalie Ceeney – Former Financial Ombudsman Service chief executive who was later appointed head of customer standards at HSBC
With the regulators having such close ties to those they are employed to regulate, we might not find a “Sheriff of The Square Mile” from within the FSA.
The BBC’s flagship ‘Today’ programme ran an interview with former FSA employee John Howard. Howard revealed how the FSA were given powers in 2005 to deal with PPI cases but it took them until 2010 to take action.
The industry was described by him as ‘Institutionally Corrupt’, and he told how he had brought this matter to the attention of the FSA before the turn of the century and told them that PPI would become the biggest criminal insurance fraud in history, and the FSA did nothing about it.
Wall St had its Sheriff, it seems here in London we just have wolves.
Would Eliot Spitzer have managed any better at bringing convictions to what the evidence suggests is a case of institutionalised fraud?
I certainly think he would have tried.