Honesty in the UK Financial Services Industry
Financial service providers, in the UK, have a duty to uphold the principles of the FCA. These principles, in the main, relate to honesty, integrity and transparency. A company that provides any type of financial services to the general public, including the banking sector, short term finance loans and long term equity and debt services need to ensure that they have strict management and control procedures in place. As per the rules of the FCA, this is to ensure that care and control are taken. This ensures that risk is managed effectively. Risk strategies are vital. This is especially true in the banking sector. Banks need to mitigate and manage risk to ensure that consumers do not feel the hit of losses. In this article, we look at the case of the Bank of Scotland plc in March 2012 and how their behavior failed in these respects.
When it comes to public banking, it’s vital that the taxpayer does not feel the burden of any misconduct that is felt. The FCA is meant to ensure that the guidelines within banking are upheld. The banking sector, in particular, is one that has come under intense scrutiny within the course of the last decade. In 2008, the UK experienced the financial banking crisis and a subsequent recession which resulted in a loss of confidence in banking in the UK.
Customers Call for Further Transparency from Banks
Consumers were concerned that their money was not being held in a safe and controlled manner. Of course, this is not to say that there are not responsible financial services within the UK. The UK has many independent financial service providers that strive for honesty, integrity and transparency. They offer their customers a fair deal, and act in a way that is deemed responsible. They ensure that they are providing affordable short-term personal loans. But, they also strive to be a responsible lender and an affordable lender.
With this in mind, it’s not fair to state the entire financial system is prone to misconduct. But, the actions of the larger banking corporations have seen to fit to cause a loss of consumer confidence in this all-important sector.
Misconduct in the UK Financial Industry
There are many cases of misconduct, despite the sector being deemed as heavily regulated. These cases are both historical and present. The media, only in the last month, have stated that there are issues with the way large banking giants are operating. With so many cases in point, it’s vital that we get to the crux of the problem. Why is misconduct occurring despite the market being heavily regulated? What is the FCA doing to actively prevent these issues from arising? And, more importantly, who is being held responsible for these actions?
When a case arises that comes to the public attention, it’s vital these companies and providers are investigated. This is the role of the FCA and the PRA. Cashfloat’s compliance team continue to produce lessons learned from famous FCA cases. We believe that by observing financial misconduct in the UK, we can better ourselves as a financial institution. Here, we will look at the case of the Bank of Scotland plc and their part in failing to mitigate risk and control their systems.
The Case of Bank of Scotland plc- March 2012
During March 2012, the FSA (prior to its reform as the FCA) investigated the Bank of Scotland plc for failings within its corporate division. However, no fine was distributed to the bank as it would have resulted in the taxpayer funding the fine. This was deemed unfair to the public and as such, no penalties were incurred.
During the investigation, the FSA published a censure against the HBOS. The bank had failed to conduct its internal affairs and had serious risk failings within the company. The FSA investigation found that the bank had not made its compliance issues public. With this, they used taxpayer’s money to remedy these problems. The Bank of Scotland plc contravened one of the core principles of the FSA:
“A firm must take reasonable care to organise and control its affairs responsibly and effectively. It must have adequate risk management systems”
By failing to have these controls in place, the bank left itself open to risk. But, it’s clients were also susceptible to risk too.
The Findings of the FSA
During the FCA investigation, it was found that the Bank of Scotland plc had used aggressive growth strategies. These procedures were used between 2006 and 2008. But, this meant that high risk and sub-investment lending was used to ensure that the bank remained profitable on paper. Such is the riskiness of these investments that the complexity, as well as the risk, grew over time.
While the Bank of Scotland completed these high-risk strategies in a bid to force growth, it left the market wide open to vulnerability. As such, its consumers would have been faced with losses should the bank have been affected by economic downturn. While the Bank of Scotland was aware of the vulnerabilities and the sheer magnitude of risk, it continued with this strategy regardless. As such, when the market worsened, the Bank of Scotland still pursued this strategy. At this time, it should have been evaluating the way in which it conducted its business as a whole. Instead, they focused on high-risk strategies and false numbers.
A Lack of Systems and Controls
As per the principles of the FSA, it’s vital that businesses are managing risk. Evaluations and risk management controls are said to be fundamental to the success of a company. As such, mitigating risk is important for the consumer as well as the bank. These financial losses could have impacted consumers, the company, the taxpayer and the economy. Such is the importance of these principles that the whole of the UK can be rocked by these issues of misconduct.
As a result of the misconduct that occurred, the Bank of Scotland had to be bailed out by the UK government using tax payer’s money. While the usual financial penalties were not given at this time, it was vital the Bank of Scotland implemented the right systems and controls to mitigate risk.
The FSA Penalties
Following the investigation the FSA stated that they would not give the bank a levy or fine, as such is the normal protocol. This is because the taxpayer would have had to have paid the fine behalf of the bank. As the taxpayer had already picked up the bill, it would have been deemed as unfair to the public funds.
The FCA and the PRA: Preventative Action
Preventative action is always needed to ensure that this kind of misconduct does not occur again. The public purse was used to bailout the bank and as such a lack of fine is commendable, to an extent. Despite the bank being involved in a serious breach of misconduct, it was bailed out using public funds and government initiatives. As such, there were no ramifications to the bank for acting in this way.
As the FSA conducted a retrospective investigation, there was no way in this case that the Bank of Scotland could have been prevented from conducting itself in this way.
In order to eradicate issues of misconduct in the UK, the FCA needs to ensure that it is proactively involved in the daily core business tasks of large banking corporations. Providing meaningful guidance and offering on-hand support would be important to preventing these issues. As such, a retrospective investigation only serves to allow these larger banks to ‘get away’ with their actions.
A culture of dishonesty and aggressive tactics seem to be commonplace in banking. This needs to be eradicated with the use of vetting and auditing techniques from the FCA. Only then, can these issues be truly stopped.