There is something depressingly predictable about Whitehall’s recent reactions to banking scandals, as if parliamentary interns have trained a monkey to string together a series of buzzwords like “abhorrent” and “repulsive”, before posting them on Twitter in perfect 140 character nuggets of disdain, a kind of highlights reel of Bob Diamond’s select committee hearing. It is great that the Committee’s preliminary report on the Libor scandal, published on Saturday, picked up on Diamond’s evasion in the hearing — even if it ignores one of the major failings of the encounter (the inept questioning of Diamond by the its own members).
But the best thing to come out of the report seems to fly directly in the face of the anti-finance zeitgeist: the Committee calling on the FSA to show leniency when banks admit to breaking compliance.
It is almost as if Andrew Tyrie et al have broken ranks. The public reaction to such a policy could be incredibly hostile. But in the long run it is a good idea.
It would be foolish to suggest that a regulatory amnesty would purge the banking sector of its sins just like that. But giving banks an incentive to own up to misdeeds before they are caught sends out a lot of the right messages.
Care is obviously needed, though. In order for it to have the desired effect, such a policy would need to be complemented by more rigorous supervision — no one wants banks confessing to one failure in order to cover up a bigger one. But, as regulators seem keen to point out nowadays, supervision has its limits. The FSA's Adair Turner himself said it would have been nigh on impossible to catch the individual traders at Barclays who tampered with rates for their own benefit, and his argument is credible.
Whether individuals engage in such behaviour is at least partly a question of a firm's culture — whether or not they think it is acceptable and whether or not they think they will get away with it. And encouraging banks to take a more proactive approach by rooting out wrongdoing, admitting their mistakes and saving money, rather than covering them up and paying more, fosters the right kind of culture.
It sets the tone for what a properly regulated market should be — an environment in which if an individual does wrong, he or she is more than likely to be caught than get away with it, rather than the other way round. It promotes honesty over skulduggery and makes banks that try to conceal their misdeeds look far worse than those that reveal them — both in the eyes of the regulator and of the public, which is where the battle for hearts and minds is currently being fought. This is the opposite of what happened to Barclays when it chose to take the Libor bullet.
The major stumbling block is one that EuroWeek pointed out in last week’s leader — that there is an increasing tendency for reputation-shredding regulatory verdicts to be issued following lengthy periods of investigation behind closed doors.
That is the first thing that needs to change if we are to expect our banks to be honest with us. A circus is no place to set examples, and regulators should take note of that.