Is there still something rotten in the UK banking system? I think so

One of the long-running themes of this blog is that there is something rotten in the state of British banking. This does not make it alone of course as plenty of other banking systems have similar issues. It was only yesterday I was discussing the latest details of the economic collapse in Greece which has seen her banks collapse and have to be rescued with ever more money. This gives us a clear idea of the modus operandi of the “too big to fail” strategy which is that the bankers always win. A central tenet of my argument against that philosophy is that it gives the banks no real incentive to change and so we rumble along with many of the same problems and issues which contributed to the credit crunch. My contention is that so far we have only dealt with the tip of the iceberg of the problems with our banking system.

The Payments Protection Insurance Scandal

I wish to use this as an example of how so little has changed. I would like readers to consider as I outline the scale of this issue who has been actually punished for their involvement in this? I am struggling to think of anyone at all.

For those unaware of the details this was where loan insurance (PPI or Payment Protection Insurance) was sold with a loan or overdraft by a bank. Nothing wrong with that it itself except that it was often sold to individuals who could never claim such as the self-employed and pensioners as you had to have employed income to qualify for a payout. Why did it happen? The banks received juicy commission payments for selling this insurance. To give you an idea of the scale I worked for the small business section of Lloyds TSB for a time in the early part of the last decade and was told that the commission for its overdraft protection plan could be 52% of the total premium. It made me wonder how it could ever pay out on any scale as more than half the premium was “lost” at the start. But you can also see the attraction of this for staff as the commission was a large part of how they could earn a bonus via sales targets. Also in another bad influence it led to a growth in the management structure as they placed themselves in the chain of command and took the credit and also bonuses for themselves for being responsible for such large juicy commission payments. Management saw its role as “kicking ass” so to speak if commission payments were not high enough and taking the credit when times were good. You may have spotted that this had nothing to do with a relationship with a banks customers as many were exploited and was often a shocking way of dealing with staff.

This bubble eventually burst and we now see the scale of the cost. Which magazine has estimated this week that £12.3 billion had been put aside for provisioning against the claims. As Royal Bank of Scotland or RBS have added £400 million only this morning we can make that £12.7 billion and rising. I pointed out earlier that there had been a lack of punishment for this -as after all bank management had taken the credit and bonuses in the “good times”- but actually the situation is even worse as Which points out.

At the same time, senior Lloyds executives who presided over PPI are still due to get bonuses worth hundreds of thousands of pounds early next year.

As I said at the beginning of this article there remains something rotten in the state of British banking. Even worse the large amount of provisions is unlikely to be enough as Which has calculated that even with the extra £1 billion that it has announced Lloyds provisions will run out in March at the current rate of claims. So we see another theme of this blog which is that big mistakes are admitted piecemeal which we saw for example as the Irish banking crisis unfolded. As some must know the truth there needs to be an investigation as to why it is not revealed. Otherwise we will go on with a drip drip feed of more claims at each announcement of the latest bank figures.

If we review this section we may have a brief sigh of relief and think at least that is in the past. Unfortunately I do not believe that there has been any fundamental change in the sales cultures of our banks. Staff will be put under pressure to hit sales targets which on the upside bring bonuses and on the downside help avoid the sack. This pressure is one of the main drivers of miss-selling. I do not know what the next scandal will be but with the same culture it will be along. For those who cry that better regulation will help us I would point out that the track record of the 4,500 employed by the Financial Services Authority of FSA is that they do not know either, or perhaps more worryingly that they have been willing to overlook it.

Royal Bank of Scotland

Today’s figures have confirmed again my argument that our banks are in trouble and need fundamental reform. Please remember as you read the quote from the BBC website that out banks are supposed to be in a recovery period and improving.

RBS reported a pre-tax loss of £1.26bn for the three months to 30 September, against a £2bn profit a year earlier.

According to Chief Executive Stephen Hester this is called “making progress”. Has anybody checked if he walks backwards? Mind you the BBC seems to have accepted that line.

The mis-selling and other charges overshadowed underlying progress at the bank

Apparently all losses,charges and mistakes are temporary and profits are permanent and will exist to the end of time. I have updated my financial lexicon accordingly.

Also there are serious issues with the standard of and reporting of profits and losses. if you would be kind enough to glance up and remind yourselves of what the BBC reported now see the Daily Telegraph.

Royal Bank of Scotland has reported a £1.38bn third-quarter loss

I am glad that this is clear! Also we have the issue of this below which to my mind is a clear accountancy scandal but gets little attention because it is not understood. From the RBS report.

after £1,455 million pre-tax accounting charge for improved own credit

Yes that is correct if you do better you end up with a charge and if you do worse you end up with a profit. Regular readers may recall I have discussed this form of profit manipulation before.

If  we take a step back and look at the situation I am left wondering how much actual banking RBS wants to do. The journalist Ian Fraser who follows it closely has recorded various instances of it withdrawing credit from small and medium-sized businesses. Also in echoes of what happened in Japan when lending targets were set some are seeing the company lending them money change. No doubt stale or reduced loans will not be in the numbers in the entity presented to the Bank of England’s Funding for Lending scheme. You may have spotted that the Bank of England has adopted the flawed target culture here too.

If all this has made you uncomfortable there is always in Matrix terms the blue pill and this from RBS Chief Executive Stephen Hester.

The RBS restructuring programme continues to make excellent progress as we take the action needed to make the bank safer and stronger

I wonder how many of the dreadful commercial property loans RBS made have been fully accounted for.

Libor and energy market manipulation

We now know some of what went on. The London Interbank Offered Rate or LIBOR manipulation enquiries will gather pace over time. Whilst Barclays took the initial flak it was not possible for one bank to manipulate such a market on its own there had to be others. Now we see Barclays -not its year is it?- threatened with a US $470 million fine for manipulating the energy market in California.


Due to its problems in its home country of Spain and according to its latest report bad debts in Brazil too Santander is no longer expanding its lending in the UK. Will it retrench more? We have to face that possibility that a (likely) deepening of the economic crisis in Spain where there were further poor numbers today will led to Santander being less willing to lend in the UK. I have argued many times that whilst it was politically convenient at the time we let her buy too much of our banking sector. Please do not misunderstand me Spain is a friendly nation and I have no issue with a Spanish bank buying a UK one, my issue is the scale of what happened, and it made us vulnerable.


I have managed to get to this point without revealing that due to the commercial property losses not fully revealed on our banks and likely derivatives losses that I think that they could easily be insolvent. Adding this to the list of problems above shows the scale of the problem that we face I think especially as there is little or no sign of a genuine change of culture. I gave my views as to what we should do just over a year ago in the article linked too below.

But as 2012 has developed let me give you a signal I have seen which has confirmed me in my view and hurt many of you in your pockets.

Co-operative Bank, Halifax and Clydesdale and Yorkshire Banks and Santander and Bank of Ireland and Royal Bank of Scotland

They have all raised standard variable mortgage rates this year on what are essentially captive customers. Interesting in a period where we keep being told interest-rates are low and in fact the official description of the ZIRP strategy is Zero Interest Rate Policy. How do you get to zero by raising them?


20 thoughts on “Is there still something rotten in the UK banking system? I think so

  1. Shaun,
    As interesting as ever. The point that those at the top or indeed involved at any level simply NEVER pay for their misdeeds is absolutely right.
    As it happens, I used to be a director of a major investment bank and came across Stephen Hester when he was at another investment bank. His bank made a £4 million commission from a single deal selling a particularly toxic type of bond issue to a client of mine, which we advised against at the time. Net result: my client had to buy back the bond at a loss of many millions, Hester got a bonus and is now CEO of a major bank.
    Another example is that of Hector Sants, who was still earning from his CSFB LTIP while at the FSA. At the FSA, he along with the entire FSA, missed the banking crisis. Net result: Sants promoted to run whole FSA, then recommended for deputy governor of BoE (until stopped by an MP committee).
    on PPI specifically, however, I think that (outrageous as the practice was), the pendulum has gone a long way the other way – I have never taken out PPI but have had zillions of emails asking me to claim by claims handling firms and I doubt very much whether all claims are genuine.

    • Hector Sants is known professionally to an old friend of mine, they were on an FSA committee together. I was only speaking to him last week about Mr Sants; he described him as an rrogant puffed up toad.

    • Hi James/Andy

      I did know Hector Sants back in the day so to speak when I was in my first job out of university at Phillips and Drew. Although he ran the New York office I am sure I met him although sadly I do not remember it. But I thought it best to be clear about any personal contact,although I have declared it on here before.

      The PPI issue has become quite a tangled web. The claims companies are a national scandal but as the spending increase caused by the compensation counts towards GDP there is no official enthusiasm to deal with it…..

  2. Rather than just claim compensation for mis-sold PPI, I’d like to see a customer go to the police with an accusation of fraud.

  3. Shaun, you could write a book on the failure of regulation in the UK, pension transfers, low cost endowments, PPI. Even the redress process of the pension transfer debacle is so flawed – the FSA telling people to put money back into bankrupt/under funded “Safe and guaranteed” final salary schemes when no such guarantee exists – it is a scandal waiting to happen.

    PPI is an excellent product when it is priced correctly and sold to suitable clients. It provides financial protection in the event of accident, sickness or unemployment, surely protecting a borrower’s ability to meet financial commitments is a good thing. As ever the FSA has taken a sledgehammer to crack a walnut an over-regulated the sale of PPI so heavily it is virtually impossible for a lender to sell. SO now no clients are protected against the future and PPI has been regulated out of existence. How is this in the interests of consumers. So I’ll ask again, as I have done on here previously: Where was the FSA when the PPI miselling was going on? In my opinion it was too busy patting itself on the back and paying senior staff bonuses. And to think Lord Turner is a serious contender for the vacancy at the Bank of England…

    Finally, you question the level of PPI premiums once the 52% commission had been removed. Having discussed the matter with a pricing actuary a while ago, it seems the premiums were approximately 10 times a proper commercial rate. In my view this constitutes the best userous behaviour, and at worst a direct fraud on customers. We can only surmise why criminal sanction has not been levelled at the perpetrators…

  4. I think it is certain that the banks are insolvent, rather than just likely.
    The banks should be made to ‘fess up their actual financial position. So far as I recall, for a limited liability company to trade whilst insolvent is a criminal offence committed by the directors and makes the shareholders personally liable for the debts of the company. More than past time that these laws should be enforced.

    • Hi MickC
      I think the question is, are the CBs insolvent? as they are all ‘clicking’ the liquidity for the commercial banks to hide behind. Does the CB drive a country to be insolvent or vice versa in our ‘alice in wonderland’ fiat world?

      • Please tell me if you think this is wrong, but in UK the CB is part of the government and the government is a currency issuer; so how can they be insolvent except by the crass stupidity of some politician allowing it to happen. They can issue as much money as they like; but I can see that if they issue to much, inflation will climb.

    • HI MickC

      If we go back to the beginning of the credit crunch how about RBS? It had a £12 billion rights issue in the summer and collapsed in the autumn! Promises made in that prospectus by the board of RBS are legally enforceable and it is beyond belief that some of them were not false. And yet nothing has been done..

      Meanwhile we see people prosecuted for benefit fraud where there is dishonesty yes but a far smaller crime in terms of scale.

    • I think that you can be sure that the banks will never do anything that might benefit anyone else, so that is a yes. It already had crossed my mind that the PPI payments would be tax deductible, so would yet again be the poor old taxpayer footing the bill for at least part of a bank’s misdemeanours…

  5. Why oh why did we just not fully nationalise RBS (and HBOS) wind it down and split off any of the good bits. All of these PPI refunds are just handing a small portion of taxpayers money back to them i just don’t see why no-one can see this.

    • Hi Jason

      I agree except the money is being handed back to a sub-section of the population rather than taxpayers in general. In all the talk of income distributions this never gets mentioned.

      It would have been more honest to nationalise RBS certainly,after all 83% ownership pretty much means that anayway so why not have some of the pluses as well as the minuses?

  6. Hi Shaun,

    Another excellent blog.

    Why aren’t all of the bad debts within a bank priced as such? Because all of the weak banks will be insolvent and many (most?) of the strong ones would be fatally holed below the waterline! There is obviously an element of good loans going bad in a depression, but I suspect the majority that will be bad already are, but just for solvency reasons, the losses will be drip fed on to the balance sheet as and when they have the profits to cancel out the losses, to give the illusion of solvency. The BOE are doing their bit to help boost bank profits through QE and the FSA by ignoring the relationship between the cost of money and rates charged by incumbent customers of mortgages and other loans.

    This is why I’m convinced that the Spanish bank bailouts over time will be at least €300bn, which is the price put on their property bubble and maybe with continued economic decline, considerably more.

    Until the UK zombie banks are fixed, we will continue to have a zombie economy with at best stagflation.

    I came to the conclusion some time a go, that legislation is much better than regulation for most things. With legislation you don’t need big white elephants like the FSA and a productivity sapping box-ticking culture.

    As an example of legislation v regulation:

    If a traveller convinces a pensioner to spend 10 times the going rate to repair a non-existent roof problem. Legislation is used to charge them with fraud and they go to jail, as we have seen with numerous court cases.

    If a regulated bank employee sells a PPI policy for 10 times the going rate, to a self-employed customer who they know can’t use it. They get a bonus, their boss gets a bonus and the bank directors get a nice fat bonus and probably get to exercise a share option on the records profits from the fraudulent sales. At worst, the regulators if they they can be bothered to drag them themselves away from their congratulatory, aren’t we good, mutual backslapping and pseudo performance bonuses, may investigate, so they have pay the money back in a few cases.

    Now if legislation was applied across the board, then we would see a lot more bankers sharing cells with travellers.

    Such potential punishment would concentrate the minds of many in the banking industry as to whether something was fraudulent or not and what the personal consequences would be for them. If they carried on as they do now, I’m sure it would then be sensible for many of them to carry a toothbrush at all times!

    So my record of the day is for the bankers and their alibies – Good morning Judge by 10cc.

    “He didn’t do it, he wasn’t there
    He didn’t want it, he wouldn’t dare
    I didn’t do it, I wasn’t there
    I didn’t want it, I wouldn’t dare”

    • At first I thought your comparison of “travellers” with “bankers” was being unfair to travellers. But then I thought about it and came up with another similarity… “travellers” dont do very much “travelling” anymore do they? And bankers… well lets just say, if they’d stuck to “banking” then we wouldnt be in this mess now would we?

  7. Rod, I agree that banks should price in their obvious losses, provided that the result is not so volatile that their results become (even more) meaningless. The big problem with bank reporting is the true value of their balance sheets, which in my view are largely works of fiction except over a very long time period. The other problem, which Shaun has mentioned in the past, is that the whole banking activity is based on confidence that the overall economic situation will continue without a major fall in activity. This has not proved to be so, and frankly should not be expected to be so, and we are paying for that unjustified assumption as banks have cleverly socialised their ‘unexpected’ losses with the help of our terminally ignorant and panic-prone politicians. It’s a famous Brownism, that boom and bust had been abolished. Without going into fractional reserve and all that, we do however ‘benefit’ from the banking system as it is, because far more credit has been available than otherwise would be the case. In fact, so much has been available that we have the highest personal debt per person in the world!

    As for Spain, I can’t agree more. The real number that needs to be written off or charged to other countries if Rajoy gets away with it is indeed around €300bn, but don’t expect to see that number mentioned for another couple of years. Spain has to be seen to be trying to reform itself before it can admit the truth about its banking/real estate fiasco. Even to itself.

    • Hi Carys

      During the week I saw some numbers tweeted which compared the bailouts so far of the Spanish and Irish banking sectors. Comparing them to relative size of economies then the Spanish bailouts so far are one tenth of the Irish equivalent. Was Spain’s housing boom only one tenth of Ireland’s? Of course not…

      So as you and Rods have pointed out We aint seen nothing yet.

  8. Interesting comments, such as those on the corporate property finance and their impact on balance sheets as well as bonus culture.

    There are still many dark places where a light is yet to be shone.

    Is a Pecora style Commission – or public inquiry the only answer?

    Those banks that have benefitted from Funding for Lending should be reversing the mortgage rate rises announced in the spring. Any banks that increased mortgage and have yet to ask for FfL should be invited to do so, reverse those increases or risk receiving an enforcement visit from BoE, FSA & HMT.

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