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Lloyds & RBS fined £90m yesterday, but (courtesy of Ed Balls) do they give a toss?

Hardly a day goes by without the big banks being penalised, for the umpteenth time, with a record fine. Yesterday Lloyds was fined £28m for ‘seriously flawed’ sales practices, while RBS was forced to pay the US authorities £62m for breaching US sanctions by dealing with clients in Iran, Sudan, Myanmar, and Cuba.

In the case of Lloyds, more than 1 million products were sold to nearly 700,000 customers, but quite apart from whether these products were genuinely needed, what irked the Financial Conduct Authority (FCA) was the structure of targets and bonus arrangements. That was found to involve sales people being demoted, with a cut in salary of up to 50%, if they failed to hit targets, whilst at the other end of the spectrum ‘champagne bonuses’ were on offer of up to 35% of salary for achieving certain targets, with a one-off ‘grand in the hand’ £1,000 payouts to star performers.

So what were the results? One adviser sold products to himself, his wife and a colleague to avoid demotion. Altogether 14% of Lloyds staff were demoted one tier and lost a large part of their salaries, while 38 others were demoted 2 or 3 tiers. The official Lloyds response is the usual guff: the bank said it recognised its ‘oversight’ of the schemes was ‘inadequate’ and apologised to its customers for the impact it ‘may have had’.

Such crocodile tears hardly explain why the bank’s management ever thought (or cared) that the threat of losing base salary would not simply drive advisers into mis-selling products. And it’s not as though the managers didn’t know. No less than 229 advisers, including 30 of them more than once, were granted monthly bonuses in 2011 despite the bank assessing their sales as unsuitable.

But do Lloyds care about a £28m fine? The bank has made clear it does not regard this as material, and the fact that the share price dropped a mere 1% yesterday suggests investors agree. More to the point, Lloyds has been forced to set aside the enormous sum of £8bn to compensate customers for mis-selling payment protection insurance  But even that can be readily absorbed without any telling effect on either the bank’s finances or its senior managers. As John McEnroe would say, are we serious?

If we were, we would recognise that a big fine to an institution like one of the 4 Big Banks has virtually no effect for 3 good reasons: (i) it is a penalty on shareholders, not managers, (ii) fines will only have impact if they exceed some threshold like 5% of turnover, and (iii) managers escape with impunity. What is really needed is a penalty directed at the mangers responsible, not just the institution. Such penalties should include, in rising severity, (a) a demotion of salary of up to 50% for 1, 2 or 3 years, (ii) disqualification from working in the finance sector for 10 years or for life, and (iii) a custodial sentence for gross misfeasance of office of up to 10 years in the most serious cases.

One Comment

  1. Robert says:

    I do not think people can say much more really except it does not surprise me, I went in this week to get a loan from my bank and right in the middle of a room the representative stated the Halifax have had to change it’s rules. In front of everyone they said we cannot give loans to the disabled because they are basically at risk of losing benefits because well they are you know, I said no I’ve no idea because I’ve had my medical and won yes but you can still lose your claim as people cheat. I do not mind being told I’m a cheat enough politician have done it but if your going to tell me at least take me into a room to do it.

    What can you say about banks I suppose the same as you can about political parties they are needed but sadly they do not need us.

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