It is no great revelation that the Cabinet is split on Brexit but the most fundamental split is not one that the mainstream press spends much time analysing. The big divide is between those Cabinet members who want a Canada-style free trade agreement and those who want Norway-style access to the single market. A free trade agreement would mean some upheaval for business but would put Parliament and the British courts in charge. A single market access deal would change little in practical terms for business, but leave power with the European Court of Justice while single market rules and regulations would be made without UK input.
The Chancellor has cast himself in the role as defender of the City, arguing successfully that a minimum two year transition period should run from March 2019, which would give the UK single market access. This would enable the banking industry to retain current passporting arrangements and stop the exodus to the continent of the UK’s one million financial services jobs. While we all like to bash the bankers, sending them away would be bad for us – even if a quarter of the financial industry left due to Brexit, this would represent an economic contraction of 1.8% – a fairly material recession from the contraction of just one key industry.
Even if a quarter of the financial industry left due to Brexit, this would represent an economic contraction of 1.8%
Mr Hammond’s prime motivation is not love of banks and bankers, nor any offers they might make to him when he leaves the job, as his detractors might claim. He is motivated by the fear of being remembered as the Chancellor who let Britain slide back into fiscal ruin. The financial services sector contributes £66 billion to UK tax receipts, representing 11% of total tax take. Lower revenues from financial services would put an end to all hopes of bringing the budget back into balance – even at the top of the economic cycle (as we may well already be).
Yet to many politicians, the banks symbolise a failed version of capitalism: a capitalism which gave the banks the freedom to privatise their profits and nationalise their losses. Critics say that the financial services industry was allowed to grow unregulated, using its muscle to extract unfair profits from British business. Rather than bringing benefit to the real economy, they stand accused of extracting investment from the real economy.
The culture of greed in the banking sector meant that irresponsible lending practices were not only tolerated but incentivised. Relationship bankers were encouraged to take advantage of the asymmetric power that they had over their customers to win bonuses for themselves and their teams. Champagne corks would pop each and every time a customer produced the targeted profit, regardless of the consequences for customers. Bankers used often complex derivatives to “double down” on the profits, often at huge cost to their small business customers. Such instruments are now the basis of hundreds of lawsuits filed against the banks by exploited businesses.
The unrelenting focus on taking customers for all they could get spilled over into a number of clear cut cases of fraud. At HBOS in Reading alone, a scam perpetrated by six individuals between 2003 and 2007 cost small businesses a total of £1 billion, but it took until February this year for those individuals to be convicted. When Lloyds took over HBOS in 2009, they were alerted to the problems but still their official position remained that they had investigated the matter but found nothing untoward. The then Chairman of Lloyds did not look into complaints lodged with him, on the grounds that it would not be “appropriate” for him to respond. In short, Lloyds behaved as if they did not want to know. The bank did all it could to keep losses below £285 million, the level at which the Audit Committee would have to disclose the fraud.
There are literally hundreds more legal cases lodged by British businesses who were undermined by the underhand tactics of bankers such as the criminal manipulation of LIBOR, of repo rate abuse and of SLS abuse. Just this autumn, two Munroe property companies filed a claim against Lloyds for non-disclosure of contingent liabilities and LIBOR manipulation, said to be for more than £100m. The suggestion is that, while the bank’s customers thought they were performing well within terms, the bank viewed them as a bad credit risk by using an undisclosed set of internal measures. Another high profile case that Lloyds will seek to defend will be Noel Edmonds’ claim for £300 million in losses at the hands of HBOS Reading.
Many cases go unreported and never reach the public spotlight because banks prefer to settle the most controversial cases with their litigants, requiring them never to speak in public of the treatment they encountered. In August, RBS settled with Stuart Wall who is thought to have claimed in the region of £650 million in consequential and direct losses. The banks settle such cases, because they do not want legal precedents to be set and for the floodgates to open for yet more new claims.