In the UK if a bank or banker is naughty the Financial Conduct Authority will become involved. Following an investigation by the FCA it will decide whether it is going to impose a fine (and other enforcement steps) or will not do anything.
Very occasionally, if the bankers have been especially naughty the Serious Fraud Office may become involved and take a criminal action. They did this in regards to LIBOR manipulation. (to date, only two people have been banned by the FCA for LIBOR manipulation, but many have been prosecuted or are waiting for their trial).
In 2011 the FSA (as it then was) was becoming more and more aware of people complaining about Interest Rate Hedging Products, such as interest rate swaps. Following an investigation, the FSA set up a system in which every sale of a hedge within a certain class would be reviewed, and would require refunds plus interest to be paid to the customer if the sale of the IRHP was found to have been sold outside of the rules that apply to such sales.
Over £2 billion of refunds and interest later, the FCA (including its predecessor the FSA) have launched a combined total of 0 investigations into the individuals who sold these products. I know, I too wondered how they have managed to fit in so much work in the last five years.
Since the world’s economy collapsed in 2007/08 we have found some of the astonishing things that bankers did at the behest of their senior executives, all in the pursuit of greater and greater profits and bonuses. Shocking examples of bankers selling products that were dangerous, manipulated customers, manipulated benchmarks (LIBOR, ISDAfix, all G10 currencies in FX benchmarks) and sold eye watering amounts of sub prime mortgage securities.
Since that time, we have seen a total of 1 whole person prosecuted by the FCA for the collapse of the banking sector. It was a senior director at HBOS. The CEO of HBOS voluntarily gave up his knighthood. The CEO of RBS involuntarily gave up his knighthood. Neither had their pensions or share award bonuses taken off them (they both have substantial six figure pension payments each year). Both could go back to working in financial services. Only that one lone person cannot.
Compare this to the US:
DOJ to Rescind HSBC’s Deferred-Prosecution Agreement
US Department of Justice tells Deutsche Bank[2] that it wants $14 billion (yes, billion) as a fine for selling sub prime mortgage securities that brought about the Armageddon in the banking sector in 2007/08. So significant is this that Deutsche Bank is now on the brink of collapse, with Angela Merkel saying that the German Government will not bail it out[3] – echoing the events in 2007 that led to the collapse of Northern Rock[4].
US department of Justice fined RBS £1.1 billion[5], again for selling sub prime mortgage securities that directly led to the banking collapse of 2007/08. RBS is already bailed out, so a new bail out is unlikely – but, for the same reasons as happened in 2008/09, RBS cannot fail because it still has too much on its balance sheet. As with previous fines, RBS simply takes the money out of shareholder funds, so the fine was, if one looks at it in a black and white kind of way, paid by you the tax payers whilst RBS’s shares take a beating, which again is impacting the taxpayer more.
Why have I brought these up?
I brought these up because the FCA has never fined anyone anywhere near the kind of fines imposed by the US regulators and Department for Justice. Do not forget that the UK is the official capital of world banking – why are we not leading the way in imposing punishments for misdemeanours? The nearest the FCA got was to fine five banks a total of £1.1 billion for FX trading. No prosecutions. Just a fine.
And, as noted, the FCA has not prosecuted people, only banks. It went after the traders and brokers on LIBOR manipulation. The only senior executive that has suffered was the one HBOS executive who was fined £500,000 and banned for life from holding FCA authorisation.
I noted on these pages some time ago that the Treasury Select Committee has suggested that the enforcement team at the FCA should be taken out of the FCA and made into a new, stand-alone unit. That is because the FCA is inhabited with people who are either from the financial sector, looking for a position in the financial sector or are good friends with people in the financial sector. The FCA had a great leader in Martin Wheatley, but George Osborne fired him for no apparent reason, though it was suggested that it was because he was too unfriendly to banks. Former interim FCA CEO Tracey McDermott again had no history of working in banks (she was in fact a lawyer originally) but she resigned shortly after applying for the CEO of the FCA role. The CEO role is now filed by the former Deputy Governor and CEO of the Prudential Regulation Authority, Andrew Bailey, who is seen as being bank friendly. As CEO of the FCA, Andrew Bailey is also a member of the Prudential Regulation Authority Board, the Financial Policy Committee, and the Board of the Financial Conduct Authority.
It seems inevitable that people impacted most by the Banks and their behaviour want to see the FCA take real action against those that ruined them and/or their businesses. This would include CF21/CF30s who sold IRHPs, those that actively manipulated FX rates, those that manipulated precious metal benchmark rates, those that actively sold sub-prime mortgage securities as prime mortgage securities and those directors and CEOs who allowed all of this to happen. But we won’t see this happen in the UK. We have to watch while the USA prosecutes HSBC’s former head of FX, fines banks real sums of money that actually cause the bank to feel the pinch and takes real action to stop this happening in the future. The FCA’s approach appears to be “well, they did it, nothing we can do now, let them get on with it”. That is not how the FCA actually works, but that is how it looks to those who have nothing because the banks took everything they had.
Why is this important? Essentially, the FCA has undertaken a review of RBS’s use of its turnaround division GRG. Many businesses have made substantial alleged claims that active fraud took place in GRG and these businesses have suffered as a result. It is not just one or two businesses that claim this – it is thousands of them. The only way these people will get actual evidence of fraud is through the FCA’s review. This is because RBS ingeniously had a solicitor from its firm of solicitors (Clifford Chance) at every important GRG meeting taking notes. In the case of PAG v RBS[6] the Court ruled that the notes of these meetings cannot now be disclosed in civil proceedings because they are privileged because either (or both) the solicitor was there to give advice or the meeting was preparation for expected future litigation. Both make the notes privileged. If these notes and related correspondence are privileged, then it will be almost impossible for GRG claimants to prove fraud in court. It is not possible to plead fraud in a claim unless there is clear and convincing evidence of it as at the time of drafting the claim. There are serious consequences for any solicitor or barrister who hints at or alleges fraud without clear and convincing evidence of fraud.
Those potential GRG claimants are therefore looking at the possibility that they may not be able to bring a claim against RBS without evidence in the form of the s. 166 report for the FCA. That is because it looks to everyone as if the FCA is either not going to release the report or, as matters appear now, have sent the report back to its authors to re-write. It was suggested by a journalist on Twitter that the request by the FCA was to make the report less accusatory/damaging. If either are true (and the FCA has refused to say anything, so we do not officially know) then the very people damaged by RBS (or alleged to have been damaged) through a conspiracy (known as an unlawful means conspiracy claim) will either be unable to get over limitation or will be unable to plead even a suggestion of fraud or conspiracy on the part of RBS.
We did see this with Interest Rate Hedging Products. RBS took some of their IRHP cases to court starting with Grant Edwards in 2012, Green & Rowley 2012, Bailey (a Barclays case), Crestsign and PAG. The Courts found in favour of RBS on each occasion. The same potentially may happen to fixed rate loans.
So what can you do? It is imperative that you instruct a highly experienced solicitor to look at your case and get it prepared. It may be the case that the preparation for the case will be subject to the release of the GRG s. 166 report. But, having the case fully reviewed will allow for your case to be pursed much faster. As well as experienced, it is important that you also consider the ability of the lawyers being instructed. Many IRHP cases, fixed rate loans and now GRG cases have lost their cases because the only criteria they applied to their solicitors was whether they offered the work “for free” on a CFA or similar arrangement. We are instructed on a regular basis by people who have done their IRHP or GRG cases on their own or they have had inexperienced representation “because it was free” and later found that the solicitor or barrister was not up to scratch. Many lost their cases because limitation passed and they (the client) were unable to find the eye watering court fee of £10,000. Do not let your case be damaged. Really consider who it is that you are employing. Do not take free advice as being good advice. You need to look beyond the fees charged, you need to look at what history of successes the solicitor has, do they fully understand the whole issues in the round, have they read all of the case law and finally, have they been quoted in the press for their work?
If you would like to speak to one of Muldoon Britton’s experienced solicitors, call 0161 826 6922.
Resources
[1] nasdaq.com – 8 September 2016, “DOJ to Rescind HSBC’s Deferred-Prosecution Agreement?”
http://www.nasdaq.com/article/doj-to-rescind-hsbcs-deferred-prosecution-agreement-cm676170
[2] Bloomberg 16 September 2016 “Deutsche Bank Tumbles as DoJ Claim of $14 Billion Rebuffed”
[3] The Guardian, 26 September 2016 “It’s no surprise Berlin is telling Deutsche Bank it’s on its own”
[4] Treasury Committee (Parliament) 28 January 2008 “A Run on the Rock”
https://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/56i.pdf
[5] Wall Street Journal – 28 September 2016 “RBS Pays $1.1 Billion to Settle Mortgage-Backed Securities Lawsuits in U.S”
http://www.wsj.com/articles/rbs-pays-1-1-billion-to-settle-lawsuits-in-u-s-1475044397
[6] 8 June 2015 Property Alliance Group Limited v The Royal Bank of Scotland Plc [2015] EWHC 1557 (Ch). Download this judgment HERE
