Banking StandardsWritten evidence from Geoff Hill

The Commission’s Initial Questions

In this section, I use the question numbers in the Call for Evidence:

1. In my experience during the last six years, professional standards in UK banking are not just defective: they are notable only by their absence, especially in respect of lending policies and money-laundering compliance.

(a)My case suggests UK banking standards do not compare favourably (if at all) with those in The Federated States of Micronesia [“Fiji”] and Australia.

(b)Generally and specifically in respect of compliance with the UK’s anti-money laundering regime, the standards in the legal and accountancy professions (and their supervisory bodies) appear to be as poor as in the banking sector. I refer to (2.3) above.

Of course, this has side effects on banks’ conduct too since most of their work in respect of bank-related crime is handled by in-house solicitors, who it appears, have nothing to fear from their own regulatory authority, much less the FSA.

(c)On returning to the UK in 1990, after four years abroad, I perceived a distinct change in culture in UK banks—from a customer-focussed approach in which a “Bank Manager” had kudos and authority, to sales/commission-based operations, over-reliant on call centres.

In respect of the UK’s place in global markets, I can refer only to my preceding answers. For example, from the viewpoint of financial crime it appears that Fiji and Australia are a safer place to do business that the UK.

2. I perceive that the consequences of (1) were: (a) To create two classes of consumer:

Those with limited spending power because they are struggling to pay off existing debts, incurred whilst banks were lending recklessly.

Consumers, who would spend and/or invest now, if borrowing facilities were more readily available at more attractive interest rates.

Both are adversely affected by interest rates—whilst Base Rate dropped to and is held at an all time low, interest rates for consumers (especially on credit cards, overdrafts and loans) have not reduced in parallel. Indeed, rates on credit cards have increased.

(b)To depress the economy as a whole by lack of investment (including inward investment) and consumer spending. By definition, this adversely effects employment too.

3. Public trust and in, and expectations of, the banking sector are at an all time low. I suggest respectfully that the Commission looks for reasons beyond “casino banking”, directors’ bonuses and other major scandals, such as allegations about LIBOR rate-setting process.

Whilst concentrating on high profile and/or risky investments, bank directors’ failed to uphold standards at branch level, where service reduced to the extent that few Bank Managers have decision-making authority and the anti-money laundering regime is ignored, save for checking the identity of new clients.

That said, I must add that, when Business Managers did have authority to approve borrowing facilities pre-2006, they often abused it by reckless lending, for example at (4.3)—probably encouraged by lack of controls and the incentive-based culture.

To illustrate my point, I do not believe it is an exaggeration to say, in terms of public esteem, that bankers are ranked below estate agents and timeshare salesmen—a far cry from the past when someone with the title, “Bank Manager” was held in high regard in his community.

4. In addressing problems in banking standards, I limit my comments to subjects in which I have personal experience or in which there is a clear public perception. They arose inter alia from:

(a)Generally, I believe a number of factors led to main board directors taking their “eyes off the ball” in terms of domestic business.

The culture of incentivised risk-taking, “casino banking” and greed at high level.

The rush for global expansion distracted directors from core business.

Financial innovation also distracted directors from controlling standards and culture in their core business.

Technological developments allowed banks to reduce staff levels in their traditional business sectors by relying on automated decision-making and call centres at the expense of face-to-face contact with clients. Even on a company account, I do not know the name of my so-called “Customer Relationship Manager.”

Depersonalisation of traditionally customer-facing roles is naturally detrimental to client relationships, branch staff morale, ethical standards and culture.

This is not to dismiss technological developments per se. Internet banking and the “fast payment system” inter alia brought significant benefits. However, they cannot replace the personal knowledge that a Bank Manager should have about his clients when they apply for overdrafts, loans and funding for business development.

Corporate structures, which in practice if not in theory, caused senior management to prioritise high-risk investment banking over traditional business.

Lack of competition in the retail market (especially in UK with four banking groups dominating) provides no incentive to drive down interest rates for consumers and improve services. “Retail” includes small to medium-sized businesses.

Lack of robust regulation and effective remedies for consumers has allowed senior bank officials to neglect its traditional business and related compliance issues.

It is evident that (whether by example, lack of adequate supervision or specific direction the unethical culture, evident at senior level, has filtered down to branch level.

(b)I believe that there are clear weaknesses in the following areas:

Institutional shareholders are insufficiently robust in exercising their powers: many of course are financial institutions themselves.

Non-executive directors are insufficiently robust in their role and/or too easily over-ruled by executive directors. I refer, for example, to (10.5) above.

In terms of compliance, I can say with certainty that banks’ compliance with their obligations to disclose suspicious activity in accordance with ss.330/331 of POCA was completely absent in my case.

At branch level, mangers and staff saw the requirements of anti-money laundering procedures as no more than carrying out identity checks on new clients.

If main board Directors of banks (for example (9.1), (10.4) and (10.5) above) and Legal Counsel (for example (10.2), (11) and (15) above) set such a bad example in denying their POCA obligations, it is unsurprising that less senior executives do not comply.

Any remuneration incentives at regional or branch level can only have a negative impact on the willingness of bank officials to admit that their employer and/or their employers’ clients have been defrauded.

I anticipate that the low esteem in which bankers are held now will be detrimental to staff recruitment and retention and, ironically, could result in banks having to offer yet higher remuneration packages to attract the right calibre of staff.

There has to be stronger safeguards in place for whistle blowing.

If non-executive directors (for example at (10.5) above) and MLROs (for example at (10.8) above) can be influenced unduly in carrying out their responsibilities, then less senior executives are likely to be completely cowed.

It is unlikely that banks’ external auditors and accountants will be able to identify weaknesses in anti-money laundering compliance at regional and branch level.

However, when major transgressions occur, banks do engage independent firms of accountants to investigate. For example, in the FSA’s “Decision Notice” (of 2 August 2010) in respect of RBS Group, the FSA gave RBS credit for instructing, “A leading firm of accountants” in early 2008 to independently review relevant matters.

Unfortunately, the FSA went on to say that RBS did not take the required remedial action until several months later.

Banks must be encouraged to extend this practice to lower level crime and money laundering. For example, it is highly unlikely that small terrorist cells would engage in transactions substantially greater than those in my case.

Indeed, I believe an independent audit of all banks’ compliance with the UK’s anti-money laundering regime (at their expense) should be a priority for Government, especially with ever decreasing law enforcement budgets.

The regulatory and supervisory approach, as it stands now, clearly is ineffectual.

Three supervisory bodies appointed to supervise money-laundering compliance in the regulated sector have failed to take meaningful (or any) action against those they profess to supervise. I refer to the FSA, ACCA and the SRA.

With decision-making authority and the ambit of discretion largely removed from customer-facing bank staff, the corporate legal framework and modern banking ethics do not lend themselves to compliance with the criminal law (POCA) or indeed common law in terms of banks’ duty of care to their clients.

5. The weaknesses identified require remedial corporate, regulatory and legislative action: I will limit my comments to domestic action. I do not believe that the UK is in a position to talk of international action until it is compliant with the requirements of FATF domestically.

5.1Clearly, remedial action by financial institutions is required from the top downwards. It should include but is not necessarily limited to:

(i)Intensive training in POCA disclosure obligations and compliance issues generally from top to bottom of the corporate structure.

(ii)A change in attitude to reporting suspicious activity.

Rather than trying pro-actively to find reasons not to make disclosures and/or seeking higher authority before doing so, bank officials should be encouraged to act on their own initiative. In my case, the banks had more than “suspicion” of Catcher, they had prima facie evidence yet officials still refused to act on their own initiative.

One wise Bank Manager, not involved in my case, tells me that if his colleagues ask him about a suspicious transaction, he responds:

“If you have sufficient suspicion to ask me, then you have sufficient to make a disclosure.”

All bank executives should give staff this advice. One person cannot tell another if the latter has “suspicion”. As such disclosures would be made to the banks’ MLRO, this provides adequate safeguards against malicious or negligent disclosures.

Equally, there must be adequate safeguards in place to ensure staff they will not be penalised unfairly for fulfilling these obligations, even if the bank loses money as a result. POCA includes safeguards for persons making disclosures in good faith so there is no reason why this should not be extended to banks’ internal policies.

(iii)Banks should be compelled to make available to customers (on request) the name and contact details of their MLRO to limit the opportunity for other bank officials to cover up suspicion and/or prima facie evidence of money laundering.

Solicitors’ firms are obligated to disclose their MLROs’ identity on request. There is no valid reason why other regulated businesses and their supervisory bodies should not be compelled to do likewise.

However, I am sure that Government cannot rely on corporate action alone to remedy non-compliance. A strong, effective regulatory and supervisory regime is required with the means and a willingness to take punitive action against banks to set an example.

5.2As stated at elsewhere, it is impractical to expect a local law enforcement agency to investigate individual allegations of unlawful conduct by banks (such as non-compliance with POCA) and supervisory authorities (such as non-compliance with MLRs).

(i)In my case, Hampshire police would have had to investigate seven banking groups, the SRA, several solicitors, ACCA and one accountant of its members—at least 11 organisations—all for non-compliance.

This would be asking the impossible of one police force but also it would turn all 11 organisations into hostile witnesses (no doubt accompanied by an army of lawyers to confuse the jury) when the predicate offender was brought before the Court.

(ii)Undoubtedly the difficulties experienced by the police in my case are not limited to Hampshire. It would be perverse and a further waste of resources for each local police force to have to investigate non-compliance in its own area, especially as, in my experience, local staff have a valid defence, ie lack of adequate training.

Therefore, banks’ compliance with POCA can only monitored and enforced economically by a strong and proactive supervisory regime, prepared to investigate individual cases; build up a national picture and take robust, punitive and exemplary action, including if necessary prosecution (via the CPS). I doubt that this can be achieved with industry-led supervisory authorities.

Whilst not industry-led, the Supervisory Authority can still be industry-funded by means of a Government imposed levy. Fines imposed should be returned either to the “victim” of misconduct (if identifiable) or to the public purse. They should not directly benefit the Supervisory Authority, which should be allowed only to recover its costs.

In the event of prosecution, the Judge can be asked to make an order for reparations to victims and award costs to the Supervisory Authority as well as imposing a fine.

5.3In as much as “the letter of the law” is concerned, existing money-laundering legislation appears adequate:

(i)The Regulated Sector has disclosure obligations under ss.330/331 of POCA.

(ii)Supervisory Bodies have disclosure obligations under r.24 of MLRs 2007, which are not limited to suspicious conduct by those they supervise.

(iii)Other POCA offences apply to all individuals and organisations in the UK.

Unfortunately, this regulatory framework cannot be relied upon because no Government department or agency (from HMT and the Home Office downwards) is prepared to take responsibility for “policing” compliance by Supervisory Authorities and businesses in the regulated sector. The tendency always is to refer a case back to the local police.

The only way to remedy this is to appoint a national law enforcement agency to enforce compliance, basing its work on witness reports from individuals and businesses, backed by referrals from local law enforcement agencies (including the CPS).

It is a matter for Government to determine if this can be best achieved by means of a simple policy change (to give an existing agency powers of investigation and prosecution [via the CPS]) or if new legislation is required.

6. Unfortunately, in the time allowed by the Call for Evidence, I have not been able to consider the changes already proposed by the Government, regulators and industry.

However, I would make the following general observations:

6.1Whatever the good intentions of Government legislation and any proposals by the Bank of England/FSA as to how new Committees and Authorities will operate in practice, they are meaningless without an adequate and robust means of enforcement.

6.2Government must provide consumers with adequate protection and cost-effective means of redress against serious misconduct by banks, which is not currently available through the FSA, FOS or other bodies in the existing regulatory framework. I refer to (16) to (19) above.

It is unsatisfactory that UK consumers have no realistic recourse against a bank when its conduct is inherently linked to criminal conduct. “Realistic recourse” excludes prohibitively expensive and innately high-risk Court action and the subsequent potential for banks to appeal.

For example, in respect of (10) above, my solicitor, Counsel and MP were unanimous and correct to advise me to settle out of Court on costs grounds alone. Solicitor and Counsel felt that the importance of the issues involved would lead AIB to use its financial muscle to appeal to a higher Court each time a lower Court found in my favour.

This constitutes abuse of power, especially when a criminal investigation is in progress into the same transactions, which should not be tolerated in a democratic society.

6.3Government must also legislate to provide better protection for honest and ethical bank officials, who are prepared to act even if the interests of the law appear to conflict with the interests of their employer.

The SRA Code of Conduct is made inter alia under Part II of the Solicitors Act 1974. It makes clear that solicitors’ primary duty (rule 1.01) is to uphold the law and the proper administration of justice. This takes precedence over duties to their clients [in the case of in-house lawyers, their employers].

Government should ensure that any new legislation in the banking sector and associated Codes of Practice make similar provisions with regard to bank executives upholding the law over their duty to their employer. It may seem like, “stating the obvious” but clearly it needs to be said.

7. I believe that the Commission should take into account the public’s lack of knowledge about banking law, especially when the consequences are criminal, and make recommendations to improve public awareness.

7.1So that consumers can better hold banks to account, The Banking Code should contain far more information about a bank’s legal obligations and compliance issues. Banks are expected to explain why identity checks are required but should go into more explicit detail about the anti-money laundering regime.

7.2The very fact that consumers are told about a bank’s disclosure obligations might itself act as a disincentive, especially to first-time offenders for example in low-level crime, tax evasion and benefit fraud.

7.3In briefing consumers about the anti-money laundering regime, banks should also take the opportunity to address the misconception that the obligation to disclose suspicious activity is not limited to the regulated sector. Most of the offences under POCA apply to all individuals and businesses in the UK.

In my case, even august bodies such as the FRC (ref. (8.5) above), The Rugby Football Union and Harlequin Football Club Ltd argued that they had no obligation to make money laundering disclosures because they are not in the regulated sector. Smaller businesses did not accept even solicitors’ letters informing them of their obligations.

In fact, all regulated businesses should be required to “educate” their clients in this respect. It would help clients hold banks to account in addition to being a disincentive to low-level crime.

24 August 2012

Prepared 19th June 2013