Banking StandardsWritten evidence from Nicolas J Bellord

1. My name is Nicolas Bellord and I practised as a solicitor until my retirement in 2000. During my professional career I advised many charities and amongst other matters I introduced many of them to investment on the Stock Exchange after the passing of the Trustee Investment Act 1961 which allowed investment in equities for many of them for the first time. Thus over a period of some forty years I had regular contact with stockbrokers and others in the City of London and inevitably with deregulation this meant dealing with stockbrokers who were owned or controlled by banks.

2. On my retirement, having unfortunately invested my pension fund in the Equitable Life Assurance Society I spent some ten years fighting for compensation for the members of that Society. Until early 2011 I was deputy chairman of EMAG (the Equitable Members Action Group) from which I retired for personal reasons. I am submitting this memorandum on a personal basis.

3. However during my time on the board of EMAG I was closely involved with the production of the Parliamentary Ombudsman’s report “Equitable Life: a decade of regulatory failure”. I wrote the 100 page submission of evidence to the Parliamentary Ombudsman on behalf of EMAG at the start of her inquiry and I was a member of the confidential committee of EMAG which liaised with the Parliamentary Ombudsman’s office during the course of the inquiry. My particular concern was to concentrate on the Chronology, in its various drafts, which detailed the failure of regulation, and I therefore acquired a detailed knowledge of regulation and its failures and in particular the fraudulent aspects of that regulation.

4. Summary

In respect of the Commission’s present inquiries it has been alleged that the regulators or others in positions of authority may have connived at the activities of Barclays Bank in respect of the setting of LIBOR. I have no comment or evidence in respect of this allegation but I would like to draw the Commission’s attention to:

A. Some general comments on the Financial Services Industry.


B. Profoundly improper behaviour by the FSA and others in respect of allegations of criminal fraud not only by Equitable Life itself but by the FSA. My submission is that there has been a culture of impunity at the highest level in the regulation of financial services in that criminal fraud has been alleged but no action taken by either the FSA or the Serious Fraud Office (SFO). It would seem that above a certain level individuals are exempt from the ordinary processes of the criminal law. This is unacceptable.

In this response I propose to cover the following points:

The relevance of the Equitable Life saga to the Banking saga.

Morality, Regulation and the Culture of the Financial Services Industry.

Financial Innovation—Conflicts of interest, gambling, usury and regulatory arbitrage.

The Regulators: their failures and impunity in Criminal Law.

Concluding Remarks.

5. The Relevance of the Equitable Life Saga to the Banking Saga.

The Equitable Life saga relates to the regulation of the insurance industry and it might be thought this is therefore not relevant to the banking industry. However both industries have come under the same regulators namely the Financial Services Authority (often acting as an agent of the Treasury) and eventually the Tripartite Committee. Consumers have had to have recourse to the Financial Ombudman’s Service (FOS) which is the subject of control by the Financial Services Authority (FSA). Further there are general principles of morality and regulation which apply to both industries.

6. Morality, Regulation and the Culture of the Financial Services Industry.

6.1.In the final analysis we are dealing with the behaviour of individual human beings. It has been an observable fact throughout history that human beings have a tendency to behave badly and there is a need for a moral code backed up (to a limited extent) by legislation in order for this behaviour to be corrected in the interests of the common good. Traditionally this country followed the Judaeo-Christian ethical system (based upon but not limited to the Ten Commandments) accompanied by a certain amount of legislation. I will refer to this Judaeo-Christian ethical system as Traditional Ethics. However over the course of the last century there has been a gradual rejection of those Traditional Ethics and they have been often replaced by utilitarian or consequentialist theories of ethics which themselves evolved and have been taught particularly in the UK from Bentham onwards. The idea behind these theories is that no action is intrinsically wrong but one has to calculate the consequences of one’s actions as to which consequences give rise to the greater good. The problem with this is that a person’s perception of the greater good will sometimes be dictated by selfishness or greed and, whilst at other times people may act altruistically, they will be faced with calculating the incalculable particularly in the field of economics.

6.2.To give a simple example. The regulators may have a duty imposed upon them to “support the market” at the same time as “protecting consumers”. These duties, as I will explain further in the case of Equitable Life, can conflict. The regulators will be faced with the problem of calculating where the greater good lies if they are to be good utilitarians and have abandoned Traditional Ethics. Thus deceiving the consumers and using fraudulent instruments can become justifiable in the interests of “supporting the market”. Disaster usually follows.

6.3.The response of the legislature to this situation has been ever more legislation and regulation. The gap created by the abandonment of Traditional Ethics is supposedly filled by this impenetrable mass of legislation. Whereas Traditional Ethics are ascertainable by practical reason and are conceptually simple—tell the Truth, do not steal, be honest, do not deceive, act in good faith, usury is wrong, gambling is a vice etc— regulation by legislation becomes evermore complex and obscure. Just try and make head or tail of the Financial Services and Marketing Act. The legislation comes to be seen as the only guide and provided one can get round it or find a loophole then that is okay. Indeed in view of the obscurity and complexity of the legislation one can always take the chance that a particular breach will go undetected. It is a particular problem with the “black letter” approach of English law as opposed to following the spirit of the law. Regulation, like Patriotism, is not enough.

6.4.Most importantly it is not just the regulated who can misbehave but the regulators themselves as is clear from the Equitable Life saga. There is a real problem of “Quis custodiet ipsos custodes”.

7. Financial Innovation—Conflicts of Interest, Gambling, Usury and Regulatory Arbitrage.

7.1 Conflicts of interest.

Prior to 1986 the stockbrokers with whom I dealt were independent. However from then on they were increasingly owned by non-stockbrokers particularly banks. It seems that a rather rosy view of human nature was adopted and inherent frailty in the face of temptation to wrong-doing was ignored. It became common to believe that everyone could handle conflicts of interest and that “Chinese walls” would prevent any undue influence being exerted on individual stockbrokers. On several occasions I had stockbrokers informing me that they were moving to a different firm because they were unable to give independent advice and were being leant upon. It was obvious that “Chinese walls” were not working.

7.2 In written agreements with stockbrokers it now seems to be the case that they think that declaring that on occasions they might have some unspecified conflict of interest is sufficient to deal with the matter. But what do you do when you have a conflict of interest? Choose the side that advantages you most and risk opprobrium when and if you are found out or lean over backwards in the other direction to avoid being accused of being biased? Either way you are not in a position to give unbiased advice or more seriously to make a proper judgement. In the case concerning Equitable Life in the House of Lords, Lord Steyn declared an interest in the outcome of the case but went on to make a judgement. He may have felt that he had excluded his interest from influencing his judgement but the world at large took a different view. It brought the legal system into disrepute.

7.3 Gambling.

If you look at the historical records of gambling bets placed at Brooks’s Club you will see bets relating to the future price of Government Bonds etc. Historically such contracts were regarded as gambling and therefore made unenforceable. Section 86 of the Financial Services Act 1986 (re-enacted as s.412 FSMA 2000) suddenly made any kind of gambling enforceable subject to certain impenetrable restrictions. Gambling on such intangibles as the future level of a stock exchange index has become commonplace.

7.4. The relevant part of Traditional Ethics lies in the interpretation of the commandment “Thou shalt not steal”. The Catechism of the Catholic Church states “2413 Games of chance (card games, etc.) or wagers are not in themselves contrary to justice. They become morally unacceptable when they deprive someone of what is necessary to provide for his needs and those of others. The passion for gambling risks becoming an enslavement”.

7.5. The first point is that such gambling now permitted by the said legislation is almost invariably with other people’s money when it is carried out within a bank or other financial institution. It can become a form of stealing contrary to the Commandment in that it can deprive others “of what is necessary to provide for his needs and those of others”.

7.6. The second point concerns gambling as a vice involving enslavement. Studies of ordinary gambling in casinos emphasise the illusion, entertained by addictive gamblers, that they are in control and this is a major factor in their addiction which persuades them to continue gambling usually to chase losses. They believe that they have some skill when in fact the casino has stacked the odds against them and the house always wins. In the case of gambling in the financial sector that illusion may have some basis in fact; the gambler’s skill and knowledge of the market serve to reinforce the illusion making the compulsion even stronger. The only escape from this enslavement is to lose everything so that he can gamble no more. Whilst he may believe that in continuing to gamble he may win, he is in fact gambling to lose as that way lies catharsis and escape for him but possibly ruin for the financial institution as was the case for Barings.

7.7. I am not saying that all derivative trading is wrong. Obviously future trading where there is a tangible asset involved, such as a crop, is legitimate. The subject is complicated but it does need to be looked at much more closely with much more restrictions and closer monitoring. Recent experience mandates that there is a need for research and much greater caution in what is allowed.

7.8 Usury.

Traditional Ethics have seen usury as contrary to the Commandment “Thou shalt not steal”. It can be seen as even worse: “Those whose usurious and avaricious dealings lead to the hunger and death of their brethren in the human family indirectly commit homicide, which is imputable to them”.1 The prophet Amos warns: “Here is word for you, oppressors of the poor, that bring ruin on your fellow-citizens in their need; you that long for new moon and sabbath to be at an end, for trading to begin and granary to be opened, so that you may be at your shifts again, the scant measure, the high price, the false weights! You that for a debt, though it were but the price of a pair of shoes, will make slaves of poor, honest folk”.2

7.9 That last sentence of Amos reminds one of the pay-day loans: “borrow £100 and repay £125 in 14 days”3; surely that is usury with rates of interest into the tens of thousands per annum regarded as licit because the lenders are licensed. It is perhaps curious that whilst there is a call to relax further shopping restrictions on the sabbath I have not heard of a call to keep financial trading going seven days a week! But it will probably come. However the question is “What is usury?” To say that all lending of money at interest is usury and therefore wrong is simplistic. The subject is complicated and eventually boils down to oppressive and/or irresponsible lending. On the one hand there is an interesting essay “On Usury” by Hilaire Belloc written after the 1929 crash. On the other hand there is Ayn Rand who says all lending is legitimate and eschews any moral dimension. There is a middle way if one considers Ludwig von Mises when he says: “Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods.” That definition surely implies that there exist “future goods” and that they have a certain value. That is to say one should not lend money to enable someone to buy something that will be consumed and that the valuation of the future goods should be reasonably correct ie interest rates should be realistic but not excessive.

7.10 There has been an enormous change in retail banking in my lifetime. Previously when one wanted to borrow money one would have an interview with the Bank Manager when he would examine what you wanted the money for and either grant you the necessary bank overdraft or not in the light of his assessment. Generally the rate of interest on the overdraft would be two or three% over bank rate. To-day however the local Bank Manager no longer exists and all one can obtain is a “product”. No interview is required—I can just ask for an overdraft facility over the phone or online. However the interest rate is 19.9% ie over 19% above base rate. The bank is saving money by not having the traditional local bank manager who knows his patch, it can close branches and it covers the fact that it is lending in a irresponsible manner by charging a usurious rate of interest that has no relation to the value of any “future goods” even if such exist. Credit cards and store cards are another symptom where people pay for their groceries and then pay similar rates of interest. This is just one example of how bank lending has become usurious and irresponsible, leading to the excessive levels of household debt in the UK. Hilaire Belloc finished his essay by saying the “A day will come”. It may well have done.

7.11 The disappearance of the traditional bank manager who knew his patch and his customers is probably one of the principal reasons that Banks have failed to respond to the Government’s pleas to lend to small businesses in a responsible and sensible manner. They simply lack the structures to do this.

7.12 Regulatory Arbitrage.

This rather fancy expression refers to the practice where in order to escape regulation in your own country you perform some action in another country where there is less regulation. This is what happened in the Equitable Life saga. As explained below the FSA advised Equitable Life to take out a reinsurance contract which they duly did in Dublin—a transaction that was indorsed by the FSA. The Irish Government did not regulate such transactions at all. In the USA you get sent to prison for this kind of activity; in the UK you probably get a CBE.

8. The Regulators: Their Failures and Impunity in Criminal Law.

This part of my response relates to the Equitable Life saga. By regulators I mean all those responsible for regulation and the enforcement thereof. So it includes the Financial Services Authority, the Financial Ombudsman Service, the Treasury and the Tripartite Committee.

8.1 Lord Penrose in his report of 8 March 2004 to the House of Commons of the Equitable Life Inquiry stated in his covering letter addressed to the Financial Secretary to the Treasury “I have informed the appropriate public prosecution authorities of aspects of the evidence and my emerging findings”.

8.2 Nothing more was heard from the prosecution authorities.

8.3 In the last eighteen months a “Vetting Note” was obtained under the Freedom of Information Act from the Serious Fraud Office (SFO). This was an opinion given to the SFO by a Mr Hacking Q.C. Generally this note advised against any prosecution of anyone in Equitable Life on several grounds but notably on the grounds that the regulators knew of the alleged criminal activity viz:

15.1 There was close oversight by the regulators, who had access to large amounts of data from Equitable and throughout the material period were aware of what the Society was doing and on some occasions condoned it.


94. The Penrose report is very critical of the regulators. The relevance to SFO is that in very many cases transactions, activities and representations which might be considered to be criminal offences were known to the regulators. It is, therefore, likely that potential defendants would raise many defences based on having disclosed what they were doing to the regulators and having received their approval, or at least not received their disapproval.

So it would seem that where regulators are aware of criminal activity and do nothing or actually condone it then no action will be taken. Effectively there was a cover-up of the regulators’ misdoings.

8.4 The Parliamentary Ombudsman’s Report “Equitable Life: a decade of regulatory failure” was published in July 2008. It revealed a criminal fraud instigated at the behest of the FSA. In brief at the end of 1998 it was found that Equitable Life was short of assets by £1.5 billion. They were advised by the FSA to take out a reassurance treaty to cover the deficit. On being presented with a draft the Government Actuary’s Department (GAD) advised that it did not do the job. However someone in the FSA or possibly in the Tripartite Committee or the Treasury told the GAD to continue revising it. However nothing substantive changed and a completely worthless instrument, negotiated with a company in Dublin, was used to cover this £1.5 billion shortfall. This was a criminal fraud to misrepresent the financial position of Equitable Life at the suggestion and full approval of the FSA. It is costing the British taxpayer some £1.5 billion to compensate the victims but no individual has been brought to account for this criminal activity.

8.5 After the failure to sell Equitable Life in 2001 a compromise under the Companies Act was proposed. A balance sheet and accounts were drawn up to 30 June 2001 taking credit for the reinsurance treaty. However by that time the FSA and Equitable Life had been advised by Leading Counsel that the reassurance treaty was worthless and that there were enormous potential claims by certain classes of policyholders which indicated that Equitable Life was insolvent. Nevertheless the FSA and Equitable Life allowed the compromise to proceed on the basis of the June 2001 accounts thereby deliberately deceiving the policyholders and the Court as to the true financial state of Equitable Life.

8.6 In December 2008 I wrote a short and a long report, concerning this matter, for the Public Administration Committee. The short report is available at:

The long report was not printed. I attach as an Appendix my full examination of the reassurance treat saga upon which these reports were based. I commented at the time:

“My expectation of the regulators is that they should not connive at the dishonest behaviour of those being regulated nor should they indulge in a cover up. The regulators helped Equitable to arrange a reinsurance treaty which was entirely worthless. If they had not suggested this bogus treaty, Equitable would have been finished in early 1999. Instead, we have continued with dishonest regulators leading to a whole host of other chickens coming home to roost. If anyone doubts this, read the chronology (Part 3 of the PO’s report) from December 1998 onwards.”
(see )

8.7 In March 2010 I wrote to the Serious Fraud Office drawing their attention to this. They sent me a stock reply saying they could only investigate those cases “where there are reasonable grounds to suspect serious or complex fraud”. Over a million policyholders and losses estimated in the billions? But perhaps it was not complex enough for them. They went on to say that they usually only dealt with matters referred to them by the police or other “law enforcement agencies”. I had been told earlier that they would only act on a reference from the FSA. Do bank robbers only get prosecuted if they refer their crimes to the police themselves?

8.8 In a subsequent meeting with Mark Hoban at the Treasury I raised the question of why had there not been a prosecution to which he responded in the sense of “What would be the point?” I found that breathtaking.

8.9 My purpose in submitting this response is to draw the Commission’s attention to the lamentable behaviour of the regulators where those in very senior positions can seemingly act with impunity. The rot in the Financial Services Industry goes to the very top. It is a question of “Quis custodiet ipsos custodes”. I was disappointed that the Public Administration Committee took no notice of my memorandum other than to print the shorter version. I would hope that the Commission will be able to take steps to restore public confidence in regulation and not allow the perception that those at the top are too close to the Financial Services Industry, in a manner akin to the matters being examined in the Leveson Inquiry, so that nothing effective is done and we move to even greater disasters.

8.10. The Financial Ombudsman Service.

The problem for any ordinary member of the public attempting to obtain justice when faced with wrong-doing by a large financial institution is the costs indemnity rule whereby a loser has to pay not only his own costs but those of the winner. Our legal system favours the rich. Suppose an individual has a claim for £20,000 and a 90% chance of winning. If he wins he gets £20,000. If he loses he may get a bill for £500,000 as he pays for the top lawyers employed by the financial institution. Logically he should not sue. Do not imagine that “No win, no cost” is any solution particularly when you are suing an insurance company. The only hope is in the Financial Ombudsman Service (FOS) where no such rule applies and it is free.

8.11 However in the Equitable Life saga the FOS showed itself to be thoroughly venial. The experience of claimants was that it stonewalled every claim at every opportunity. In particular when Lord Penrose’s report was published, which revealed the misdoings of Equitable Life and some of the shortcomings of the regulators, the FOS issued a blanket ruling that it would not consider any claim based on anything in the Penrose report despite a Treasury Minister having informed the House of Commons, at the time of publication, that the FOS was the avenue of complaint for the policyholders and that she would ensure that the FOS had adequate resources to handle those complaints.

8.12 EMAG (Equitable Members Action Group) became so disgusted with the behaviour of the FOS that it commissioned a report from Lord Neill of Bladen Q.C.—a former Chairman of the Committee on Standards in Public Life. His report is available at:

Lord Neill’s overall conclusion was that the FOS fell short of the standards which it had itself proclaimed. The report was rejected by the Financial Ombudsman who in due course received a CBE.

8.13 The Criminal Law.

There is an obvious discrepancy in the application of Criminal Law in the UK. It is blatantly illustrated in the case of the Equitable Life reassurance treaty where not even a criminal investigation has taken place despite what Lord Penrose and the Parliamentary Ombudsman revealed. In an almost identical case with another provider in Dublin involving a similar reassurance treaty, designed to fraudulently boost the balance sheet of AIG, the United States authorities successfully prosecuted the perpetrators:

Why were the perpetrators of the Equitable Life treaty not even investigated? Too high up in the financial system? There is a disgraceful impunity for the regulators.

9. Concluding Remarks.

9.1 I have advocated that regulation is not enough. There needs to be an overriding moral code. I have proposed Traditional Ethics. In the present climate there is a certain hostility to Christianity but all I can say is that if you do not like Traditional Ethics please let me know of a better proven system—utilitarianism is not the answer. Regulators may be faced with dilemmas of choosing between supporting the market and protecting consumers but they must regard Traditional Ethics as being supreme—in whatever they choose to do they must not lie, deceive or act fraudulently. The end does not justify the means.

9.2 It should be a requirement of all those working in management in the financial services industry that they should be of good moral character and should be required to have a knowledge of Traditional Ethics to be taught in conjunction with any required knowledge of regulation. We must get away from the idea that just following the regulations is sufficient.

9.3 The Criminal Law must be used to ensure proper behaviour. At present it is not. Wrong-doers must be seen being sent to prison. There was the ridiculous spectacle of three bankers pleading to be prosecuted in this country rather than being extradited to a Texas gaol. The recent PPI scandal where policies were sold fraudulently has cost Lloyds Bank over £3 billion pounds but has anyone been disciplined let alone prosecuted for that fraud? Why has there been no criminal investigation into the Equitable Life reassurance treaty fraud? Is it because somebody on the Tripartite Committee said “Fix it and I don’t care how it is done.”?

9.4 The myth of being able to handle conflicts of interest needs to be dropped.

9.5 There needs to be much greater restriction and surveillance in the derivatives market; research needs to be conducted to see what is proper and what should be disallowed. The present blanket permission to gamble on anything needs to be reviewed.

9.6 Usury is a complicated subject but present consumer credit legislation is far too liberal. We need to return to sensible and responsible lending for proper purposes.

9.7 Regulatory arbitrage needs to be controlled so that such can only taken place in countries where regulation actually works.

9.8 As I have said this raises questions of “Quis custodiet ipsos custodes”. The Parliamentary Ombudsman’s report “Equitable Life: a decade of regulatory failure” was a remarkable inquiry into and revelation of how the Regulators operated. It has been firm Government policy that no such inquiry should ever happen again. That is unacceptable. The regulators need to be accountable and Parliament needs to make sure that they are effectively accountable. That means that they must be accountable to a body such as the Parliamentary Ombudsman who have the resources to conduct inquiries.

23 August 2012

1 Catechism of the Catholic Church para 2269.

2 Amos Chap 8 verses 4-10.

3 Seen in the window of a loan shop in a main street of Brighton.

Prepared 19th June 2013