Academic journal article Business Law International

The 'Conduct Crisis': Will Banks Ever Get It Right?

Academic journal article Business Law International

The 'Conduct Crisis': Will Banks Ever Get It Right?

Article excerpt

'The level of fines and other conduct costs now being imposed has demonstrated that practices that may inflate profits in the short term can turn out to cause substantial damage over a longer term horizon.'1


Numbers tell a story. In the case of bank behaviour, they speak louder than words, and they tell a big, and scandalous, story. Research by the CCP Research Foundation" has shown that the 'conduct costs' of 15 major international banks for the five-year period ending in 2013' exceeded £170bn. Conduct costs, in this context, include not only fines imposed by regulators but also other costs that relate to what we have come to know as 'conduct' (in effect, misconduct) .4 These could be, for example, sums paid by way of compensation to customers who have been 'mis-sold' products (such as payment protection insurance (PPI) ) or the cost of repurchasing securities from the market at the behest of a regulator. They do not, however, include the associated cost of employing expensive litigation/regulatory lawyers, the cost of distracted management time or the cost of increasing 'compliance' manpower to cope not just with avoiding future problems but also the tsunami of consumer and SME claims that the conduct crisis has triggered. (Yes, at £170bn and counting, this is a crisis sui generis, not just an aftermath of the financial crisis.) If those associated costs (details of which are not in the public domain) were included, the percentage increase on that£170bn would be significant but, as we shall see, this is an area where accountancy practice and regulatory indifference result in banks being able to say 'what goes on inside these four walls stays inside these four walls'. Table 1 sets out the 'allocation' of the £170bn among the relevant banks - the figure for the whole industry would, of course, be much higher.

The research referred to above was, and continues to be, carried out by the Conduct Costs Project, a project that started life at the London School of Economics but is now located in the CCP Research Foundation (which also fosters other projects in the field of'conduct, culture and people'). It has been directed by the author and the two other directors of the Foundation' for some years and is now working on its third set of'rolling five-year' figures (ie, for the period ending 2014). The three directors are supported by a very able and enthusiastic team of researchers.

This article aims to give a summary of the Conduct Costs Project's work and its relevance in the context of the unfolding conduct crisis and the increasingly desperate attempts to improve bank behaviour that are now being seen in major financial jurisdictions; it discusses potential solutions to the burning question of how the industry might 'account' for trust-related issues and do so to the satisfaction of its stakeholders.

Rationale for the Conduct Costs Project

Why was the Conduct Costs Project started? It was developed from a concern, canvassed by the author in earlier articles,1' that the many questions that commentators were asking about 'sustainability' in financial markets were ignoring a key, even fundamental, cpiestion: can the financial system ever achieve worthwhile sustainability goals if the business models of banks, and their behaviour, are not themselves sustainable?' To put it another way, what is the point of giving awards for, say, 'sustainable bank of the year' to a bank that has been fiddling the London Interbank Offered Rate (LIBOR), manipulating foreign exchange markets, laundering the ill-gotten gains of criminal gangs, allowing information technology systems to fail causing great inconvenience to customers or mis-selling unreliable insurance on a vast scale? Something seemed to be missing in the sustainability lexicon; the 'ESG's activists were, it seemed, not looking very carefully at how banks ran themselves, just at what they did with the money. The scope of'sustainability' (an overused word these days) was limited by the soft focus content of carefully polished public relations (PR) exercises, as typically embodied in 'sustainability' or 'citizenship' reports. …

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