Why Is No One Talking About Regulating the Banks?


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Why Is No One Talking About Regulating the Banks?

In 2008, the world's economy crashed. Afterwards, we were told banks would be broken up. So what happened?

Do you remember that time the government nationalised the banks? On the 13th of October, 2008, that's what the Telegraph reported. The global financial crisis had rooted itself so deeply into Britain's economy that the Prime Minister at the time, Gordon Brown, temporarily adopted one of Marx's proposals from the Communist Manifesto. Royal Bank of Scotland received £20 billion of taxpayers' money, meaning that, in 2008, you became the majority shareholder. "The government cannot just leave people on their own to be buffeted about," Brown explained.


Could we have imagined back then, when the entire global economy looked like it was made of candy floss and might just dissolve altogether, that less than ten years later a general election would take place with barely a mention of the banking system? We're still living with the effects of the financial crisis – the public spending cuts that were justified by the crisis are continuing – but no one is talking about it any more. Almost ten years after Lloyds Bank received a £17 billion bailout, British wages are still flatlining and most people in poverty live in working households. Meanwhile, the bank – which expects to be fully back in private ownership by the end of the year – has reported a handsome jump in profits.

So what are we missing by neglecting this issue?

Was Brexit Retribution for the Financial Crisis?

It won't come as a huge surprise that the British public's trust of the banks plummeted following the financial crisis. In fact, the British Social Attitudes Survey reported that, in 1983, 90 percent of people thought that banks were "well run". This figure had declined to 19 percent in 2012, which, according to the researchers, was "probably the most dramatic change of attitude registered in 30 years of British Social Attitudes".

James Morris, a former pollster to Gordon Brown and Tony Blair, told me, "City bankers have never been popular. People have affection towards their local bank manager, but they've always thought that banks themselves operate with self-interest and are unchecked. The financial crisis made that central to people's understanding of what is going on in the country and why."


Thus, there was a moment in the aftermath of the financial crisis where there was opportunity for real reform. But politicians didn't take it (and perhaps some didn't want to take it), instead transforming the financial crisis into a crisis of public spending. But even though the coalition government elected in 2010 prescribed "swingeing cuts" to public spending as a way of dealing with Britain's escalated debt following the crash, public anger towards the banks persisted. In 2012, a YouGov/Sunday Times poll) showed that just 1 percent of people think senior executives of the biggest banks have improved their behaviour since the financial crisis began.

But on this issue and so many others, Brexit has complicated the picture. In the run-up to the EU referendum, YouGov found that "the people who run big businesses (36 percent) and banks and financial companies (32 percent) are seen as the main beneficiaries of the European Union. Politicians (32 percent) are also seen as major beneficiaries of EU membership. Small business owners (26 percent) and people in low incomes (25 percent) are the most likely to be seen as losing out because of the EU." It's possible that British voters saw leaving the EU as a way of tackling the massive inequalities present in the financial crisis, simply because it was the only major economic change on offer.

Since the EU referendum, the public's relationship with the banks has been further complicated by Brexit: "Brexit has changed the issue again because people don't want the banks to move abroad. So the picture is much more conflicted, but fundamentally people still have a massive trust problem," says Morris. On the 13th of May, the Irish Times reported: "The UK's exit from the EU will force international banks to move some activities out of London because they can no longer rely on the City for seamless access to the EU." This has put the British public in a bind: it is reliant on a sector it no longer trusts.


Did the Government Let the Banks Get Away with It?

In 2013, The Economist noted: "In Britain, which had to bail out three of its biggest banks, not one senior banker has gone on trial over the failure of a bank. This is very different from the response of prosecutors in earlier banking crises, such as the meltdown of Savings & Loans institutions in America in the 1980s. In that case more than 1,000 bankers were convicted for their misdeeds." The reason for this is simple, The Economist says: it is not actually illegal to run a bank into the ground. In 2015, George Osborne watered down rules that meant senior bankers would have to "prove their innocence" when it came to wrongdoing in their banks. The new rules put the burden on regulators to prove that managers knew bad behaviour was taking place.

But it's not just about the banks themselves. There is a whole apparatus surrounding the banks that enabled them to run themselves into the ground. David Walker, author and former director of public reporting at the Audit Commission, says, "Big accounting firms do both companies audits and provide a range of services to those same companies. This is a conflict of interest. They also have their fingers in the pies of the government – they provide consultancy services for free."

In 2006, two years before the multi-billion pound bailout, there was not a single meeting between the banking regulator, the Financial Services Authority (FSA) and the auditors of Northern Rock (which was Pricewaterhouse Coopers) or HBOS (KPMG). There was only one meeting between RBS' auditor, Deloitte, and the FSA. In fact, despite signing off RBS accounts right before the crash, Deloitte continued to audit the bank until the end of 2015. In 2013, RBS paid Deloitte £30 million in auditing fees. Between 2010 and 2013, Deloitte and two other big accountancy firms, Pricewaterhouse Coopers and KPMG, donated £1.14 million in kind (i.e. mostly staff secondments) to Labour, the Liberal Democrats and the Conservatives. In 2011, Deloitte announced record revenues of US$28.8 billion (£18.7 billion), making it one of the few businesses to benefit from the financial crisis. There have never been any significant repercussions for the accountancy firms who audited the banks.


There's Another Financial Crisis On the Way

Although there have been some reforms on the banks since 2008, a lot of the underlying causes of the financial crisis remain unchanged – and some are getting worse. One of these is that wages are stagnating and the cost of living is increasing. This means people are getting into higher and higher levels of personal debt to maintain the same standard of living. In January of this year, the Guardian quietly reported that "Consumer credit figures from the Bank of England revealed Britons ended the year slapping their credit cards on shop counters as if the financial crisis was a distant memory."

According to a parliamentary briefing paper, a lot of non-mortgage debt is coming from people needing to pay for cars and taking out personal loans. In January, the Bank of England's Credit Conditions Survey showed demand for unsecured lending increased in the final three months of last year and is expected to grow during the first quarter of 2017. In April, the Financial Policy Committee, which monitors risks to financial stability, warned: "The recent rapid growth in consumer credit could principally represent a risk to lenders if accompanied by weaker underwriting standards." Just two months earlier, The Financial Times' Martin Wolf told the BBC, "I think it would be very optimistic to think that such crises [like the crash of 2008] will not or could not recur."


Banks Are Still Enabling Money Laundering

The journalist and author Ben Judah, who has covered money laundering extensively, says: "We live in a world where trillions of dollars are circulating completely anonymously. It's all hidden in a parallel financial world of offshore jurisdictions, inaccessible trusts and shell companies. This is a golden age of money laundering."

Do you remember that scene in Wolf of Wall Street where Jordan Belfort's friends tape money to themselves to smuggle it to an offshore account in Switzerland? Well, today's Wolves don't need to do that. Modern-day Tony Soprano wouldn't need to stash his mob money in his mother's nursing home, either. Now criminals can just go to an internet cafe and set up an offshore shell company in 15 minutes. "One of the consequences of neoliberalism and reduced financial regulation is that people can just sit at home transferring money over the internet – and that's perfect for criminals," says Judah. Once these offshore companies have been created, criminals and autocrats can use them to purchase property in London – seen by many experts as the global capital of money laundering.

In fact, Roberto Saviano, the leading authority on organised crime, once told Parliament that London is the most corrupt city in the world: "It's not UK bureaucracy, police or politics, but what is corrupt is the finance capital. Ninety percent of the owners of capital in London have their headquarters offshore. Jersey and the Caymans are the access gates to criminal capital in Europe, and the UK is the country that allows it." Anonymous offshore companies now own nearly 10 percent of all properties in Westminster, 7.3 percent in Kensington and Chelsea and 4.5 percent in the City of London. Of course, there's no evidence to suggest that all of these offshore companies are engaged in anything underhand, but it is known that offshore companies are a well-established tool of money launderers.


This type of money laundering, favoured by human rights abusers and organised criminals, relies on the legitimate financial system to prop it up. Without an offshore system used for legal tax avoidance, dirty money would be a lot harder to hide. Similarly, without lawyers and estate agents who are willing to overlook the activities of their clients, kleptocrats just couldn't buy millions of pounds worth of real estate in the capital. It's not accurate to view money laundering as a separate financial system: it is woven into the economy, it relies on legal economic structures and it has been enabled by a deregulated financial system.

The Tories Don't Want to Do Anything About It

The truth is that, although the public remains angry and cynical about "greedy bankers", anger has been abating steadily since 2008. Political parties are under significantly less pressure to crack down on the financial system in the current political climate. In fact, much of the rhetoric and policy of recent years has centred on "moving away from banker bashing", even though in reality very little bashing happened at all. So the fact that the financial system hasn't been talked about much in the general election is reflected in policy: the parties aren't offering a great deal.

Labour has the most comprehensive policies of the major political parties, proposing a Robin Hood Tax. The tax would be set at a rate of 0.5 percent on all transactions between financial institutions, and Labour reckons it would raise between £4.7 billion and £5.6 billion a year for public services. The party also plans to break up the banks, saying in their manifesto:


"Labour will overhaul the regulation of our financial system, putting in place a firm ring-fence between investment and retail banking that will protect consumers. We will take a new approach to the publicly-owned RBS, and launch a consultation on breaking up the bank to create new local public banks that are better matched to their customers' needs. And we will extend existing Stamp Duty Reserve Tax to cover a wider range of assets, ensuring that the public gets a fairer share of financial system profits."

The only mention of any regulation in the Conservatives' manifesto is the dissolution of the Serious Fraud Office – a move which could lead to "significant damage" to the UK's effectiveness in tackling economic crime, according to a leading group of financial lawyers. Mind you, that's not how the Tories put it:

"We will strengthen Britain's response to white collar crime by incorporating the Serious Fraud Office into the National Crime Agency, improving intelligence sharing and bolstering the investigation of serious fraud, money laundering and financial crime."

Since the Tories are in government, we can get some idea of what they might do based on what they're doing already. Earlier this month, the government sold off the Green Investment Bank to Macquarie, an Australian bank. The bank was founded in the wake of the financial crisis, and its aim is to invest in green infrastructure projects. The sale suggests the government won't consider nationalising the banks anytime soon.


When George Osborne was chancellor he enacted some measures which effectively shielded the banks from retribution. In 2014, he attempted to prevent the EU putting a cap on bankers' bonuses (he failed). In 2015, he gave a speech in which he urged an end to "banker bashing". Osborne did introduce a bank levy after the financial crisis, but this was relaxed in 2015 too.
What this lack of policy shows us is that campaigners need to push politicians once again in taking measures to rein in the financial sector. "There has been no serious discussion about money laundering in the election. The Labour Party has failed to weaponise this issue," says Judah. "Offshore could be a crusade for the left in the way the EU was a crusade for the right."

Radical Alternatives

Luckily there are people working on radical policies that would substantially alter the financial sector.

In 2016, the New Economics Foundation think-tank set out proposals for the total nationalisation of Royal Bank of Scotland. The proposals, which go so far as to suggest who the bank should have on its board of trustees, aim to transform it into a community-led public service: "Although the bank will aim to generate profits, but this is not the primary purpose of the bank."

In fact, the prospect of nationalising the banks is something that many left-wing figures have been demanding for a long time. In 2014, Professor Costas Lapavitsas – a former figure in the left-wing Greek party Syriza – proposed the idea in a paper for the Centre for Labour and Social Studies. He argued that banks that were partly nationalised as a temporary measure in 2008 should be taken over by the government altogether. This, he says, would alleviate the problem of our economy being too reliant on the financial sector – meaning that banks uprooting themselves to Frankfurt after Brexit would be less of a big deal.

The MP Margaret Hodge proposed an amendment to the Criminal Finance Bill which would address both money laundering and tax avoidance. The amendment would force companies to reveal their beneficiaries – in other words, the secretive individuals that actually get the money these companies make. Right now, a body exists in Britain that does this, called Companies House, but there isn't one for the British Overseas Territories like the British Virgin Islands, which has more companies registered to it than people living there. This amendment represents a massive shift in tax transparency standards both in Britain and internationally. Unfortunately, the Bill passed into law in April and, despite having cross-party support, the amendment failed – something that was condemned by tax transparency organisations and Christian Aid. Campaigners now need to start putting pressure on government all over again.

The campaign group Positive Money suggests taking away the power of the banks to create money. Banks create money by giving out loans. It doesn't do this by giving people physical money; it does it by putting deposits in people's accounts that often vastly exceed the value of the money the bank actually has in its vaults. The financial crisis happened essentially because US banks made too many loans to people who couldn't pay them back, and this created a domino effect around the world. Positive Money argues that the state should be able to create money instead, via a democratic and accountable process. This would also mean the economy wouldn't have to rely on people getting into debt in order to create money.

Nine years on, the financial crisis is still shaping our politics. Arguably, the cuts to public spending and stagnation in wages that the crash precipitated played a significant role in the kind of public anger we're living through today. But one thing is clear from this election: politicians are unlikely to be addressing the problems in the financial sector anytime soon. Even Labour, which has a plan on the banks, hasn't really made it a centrepiece of its campaign. The solutions are there, and they're being debated – but we need a government which is willing to see them through.