New millennium came with a new financial scandal: the payment protection insurance (PPI) scandal. People taking out loans were forced to buy expensive insurance, which generated around £5.4 billion in annual premiums for banks and provided little protection for borrowers. This scandal is still being played out and banks may be forced to pay £10 billion in compensation.
The above has been accompanied by money laundering, tax avoidance, tax evasion, fraudulent practices to inflate share prices and of course the banking crash, which has brought the global economy to its knees.
Whichever way you look at it, banks have been serial offenders and continue to act with impunity. The entrepreneurial culture of making private profits at almost any cost has had disastrous social consequences. Fines and forced compensations have just become another business cost and the usual predatory practices have continued.
There are two main drivers of the financial scandals. Firstly, markets exert incessant pressures for ever rising profits and don’t care much whether they come from normal trade, money laundering, tax avoidance and other dodges. Secondly, the idea of assessing people’s worth through wealth is deeply embedded in western societies.
Profit-related pay became the mantra from the 1970s onwards and has been a key driver of the abuses. The typical tenure of a FTSE 350 company’s CEO is about four years and declining. In this time, people at the top need to collect as much personal loot as possible and have little regard for any long-term consequences. The performance related pay applies at the lower echelons as well and again encourages short-termism and neglect of any social consequences.
In principle, regulators and politicians should be able to able to check the abuses, but the UK political institutions are weak. There is little competition amongst the political parties to devise socially responsible policies.
For the past 40 years, they have all offered various shades of light-touch regulation and veneration of markets. There has been no attempt to alleviate market pressures by forcing banks to operate as co-operatives or mutuals. Corporate and wealthy elites fund political parties and have organised effective regulation and accountability off the political agenda.
The regulators of the financial sector come primarily from the same industry and have sympathies for the narrow short-term interests of that industry. After a stint as a regulator, they then return to the same industry. The revolving-doors and ingrained conflicts of interest have prevented effective regulation and accountability.
Reforming political institutions is a necessary condition of controlling banking frauds, but a durable change is not on the horizon.
This article first appeared at The Conversation.
