Financial Cryptography

Extraordinary revelations of British Banks, Bad Behaviour, Fraud, FSA un-regulation, and more!

A series of posts over on Chris Skinner's Financial Services Club has amounted to a whistleblowing expose par excellence!

First up, a victims organisation called BullyBanks has collected over a thousand cases of mis-selling of Interest Rate Swap Agreements (IRSAs) to small / medium businesses (SMEs). To dispose of the essentials quickly, these were complex derivatives that were mis-sold to businesses that had no clue what they were about:

The FSA accepted that the mis-selling of IRSAs had occurred ...

You can see the details on the posts. Chris estimates the potential damage as such:

Jeremy was a victim of the process and has been championing the cause ever since. He now counts 1,200 companies in his group, Bully Banks, out of the 40,000 cases that have been identified so far.

It does not sound like much, but if each case averages £2.5 million compensation, this is a £100 billion exposure and is far bigger than the PPI mis-selling scandal we all know about already.

Did the banks do anything wrong? Chris asks exactly that, rhetorically:

Have banks behaved badly or are customers a little bit stupid?

BullyBanks lays it out:

The substantial majority of the complaints of the business men and business women who are members of Bully-Banks have most of the following elements:

• The complainant is dependent upon finance provided by their Bank. Without that finance they could not continue in business.
• Their Bank sold them the IRSA when loan facilities were being granted or extended.
• Their Relationship Manger advised that the Bank believed interest rates were at an historic low and were going to rise in the medium term.
• Their Relationship Manager warned that the Bank was concerned about the complainant’s ability to finance their loan if interest rates were to rise significantly.
• The Relationship Manager introduced the concept of the IRSA to the complainant – an IRSA is normally outside the knowledge or experience of the complainant.
• The Relationship Manager stated that the IRSA was something that the Bank wanted the complainant to enter into and either made this recommendation as part of the grant of the loan facilities or stipulated it as a requirement as part of the grant of the loan facilities.
• The Relationship Manager then introduced an expert from the appropriate division of the Bank to arrange the IRSA. The expert was introduced as an advisor. No mention was made of the fact that in fact the expert was a salesman earning significant levels of commission on the sale of the IRSA. (No mention was made of the fact that in many cases the Relationship Manager also had annual targets to sell IRSAs.)
• The Bank typically booked a significant profit on the sale of the IRSA even though no mention of this profit to the Bank was made at the time the complainant was advised that the Bank wanted the complainant to enter into an IRSA.

Those are claimed facts from BullyBanks, and the presentation at the Financial Services Club was even harsher.

Rhetorically, we can look at it from a perspective of law. The high-bar charge here would be fraud. In order to show fraud, prosecutors would generally test on three elements: Intent, deception & damages.

In reading all of the information so far published by BullyBanks and FSC, I would say either there is a charge of fraud to be answered, OR, BullyBanks is simply wrong, barking mad and up its tree. Whether their claims were sustainable in court, before a jury, would answer which of the two.

Which brings us to the following paraphrased comment:

“I wonder when the banks will be taken to court for not protecting customers from interest rate rises?”

The question was asked in sarcasm, but it is precisely on point. BullyBanks has made a claim, in effect, that the banks told the customer the IRSA was to protect them from interest rate rises, but their evidence suggests it was a rort to sell the customer an explosive derivative.

In short, a deception, one of the three elements of fraud.

So why didn't the banks get taken to court? Well, it turns out that the above poster is not the only one mystified:

Mainly because of the Parliamentary investigation, the Financial Services Authority was kicked into action and, on June 29 2012, announced that it had found "serious failings in the sale of IRSAs to small and medium sized businesses and that this has resulted in a severe impact on a large number of these businesses.”

So it seems that the FSA initially ignored the complaints. Then because of parliamentary bullying, it investigated, and agreed there was a case to answer for. What did it do next?

However, [the FSA] then left the banks to investigate the cases and work out how to compensate and address them.

Promptly handed the case back to the banks to deal with! Are those words for real? What we have here is ... fraud. Now, either the FSA lied and there wasn't any mis-selling, or there was a bona fide case to be answered.

Worse, the banks agreed:

The banks response was released on January 31 2013, and it was notable that between the June announcement and bank response in January that the number of cases rose from 28,000 to 40,000. It was also noteworthy that of those 40,000 cases investigated, over 90% were found to have been mis-sold. That’s a pretty damning indictment.

Even then the real issue, according to Jeremy, is that the banks are in charge of the process

Even if there is no case found in court, it is still the prosecutor's job to try it. It is not the FSA's job, not the banks' job, and it is certainly not the FSA's role to hand the mess across to the perpetrators.

BullyBanks also smells a rat:

Our lobbying campaign is now focused on addressing this failure by the FSA. ... Bully-Banks has already made a substantial contribution to the raising of this issue in the UK. Bully-Banks is now working hard on the next phase of its campaign in the UK: a submission to the Treasury Select Committee and further lobbying of Members of Parliament. It is also beginning to address a number of legal issues in the UK which have arisen in connection with the mis-selling of IRSAs.

Which reminds me of the mess the Reserve Bank of Australia got into. In short: they were formally advised of a serious suspicion of crime by one of their executives. RBA decided to take legal advice on this claim, and the advice from a notable law practice was that no Australian crime had been committed. So, armed with a legal opinion, the RBA did ... nothing. Fast forward to a media expose, the police investigated, and laid charges against some 8 or 9 people.

It transpires in Australia at least, a federal agency has to by law refer suspicion of crimes to the police. It doesn't have an option of deciding itself.

One wonders then if the FSA knows what it is doing? Open question for British readers: is it a requirement in the UK for Crown Agencies to refer crimes to the prosecutor? Or is the FSA in possession of some magical get-out-of-jail card?

Back to the rhetorical question:

Have banks behaved badly or are customers a little bit stupid?

If, still by way of rhetorical evidence so far presented, fraud were indicated, then the customer doesn't need to be a little bit smart - they are entitled to rely on the banks for banking expertise and fair dealing.

So it seems pretty clear: the banks behaved badly. QED. (If you are still not convinced, check out the bad behavior in the other whistleblowing post ... combine the two!)

But what is more disturbing still is that the FSA behaved even worse. This is a rather damning indictment that British Banks are unregulated. Penultimate word to Chris:

...the industry is known for selling you an umbrella when the sun is shining, only to find the umbrella full of holes when it rains. Is this true? Are we working in an industry purely focused upon ripping off our customers or do we work in a business that is customer focused and honestly trying to help?

I believe it is the latter and, for all the shenanigans of LIBOR, swaps, PPI and more, it is purely a few rotten eggs and ill-judged deeds that have resulted in where we are today, and not a systematically focused industry trying to rip off their customers.

Don’t you agree?

For me: No.

Posted by iang at May 5, 2013 04:56 PM | TrackBack