The London School of Economics has been concerned about conduct costs – which are an important phenomenon in the financial markets – for some time and the numbers are getting bigger and bigger. In the above video, Professor Roger McCormick, who is the Director of the Sustainable Finance Project, shares the Conduct Costs Project’s vision with the world.
The aggregate five-year figure for the ten banks in the project’s sample is a whopping £150 billion. Compare that to the annual budget for the National Health Service which is just over £100 billion (but please do note that the NHS is the world’s fourth largest employer). So since everyone – the banks, the regulators and the public – has a stake in the future of (sustainable) banking in the post-LIBOR scandal era, Roger would like to encourage people to post constructive articles on the LSE’s Conduct Costs Project Blog.
More information about the project is set out below.
(1) What is this project about?
At its simplest, it’s about finding important numbers, adding them up and then presenting them to the public. But it also explores ways of objectively measuring the success of an important aspect of legal risk management and provokes ideas as to how legal risk managers might develop tools for such measurement and more effective accountability within financial organisations. The project will be rolled out on a five-year basis. Please do see the project’s overview here.
(2) What kind of numbers?
Various kinds. They all relate, in one way or another, to bank behaviour. So the numbers include the amounts banks have been paying out in fines (for example, for LIBOR manipulation) or to settle regulatory proceedings against them and also amounts that relate to sums payable for mis-selling products like PPI and swaps. All the numbers represent money. The expression “conduct costs” is now frequently used to describe them (or some of them). They are being complied, initially, for the five-year period that ended on 31 December 2012. We expect to publish findings towards the end of 2013.
(3) You say that the project is about “finding” these numbers. Are they hard to find? Don’t the banks have to publish them already?
Some of the numbers are easy to find but some are much more difficult. Some of them tend to get tucked away in obscure parts of lengthy accounts, for example. And you never see them published in a way that helps you compare one bank with another. You certainly won’t find the data presented coherently in banks’ “sustainability reports”.
(4) Why are these numbers important?
In the first place, they tell us something important about banks. Banks keep telling us that they want to “restore public trust”. They also tell us that they are determined to improve their “culture”, be more ethical in their behaviour and adopt a more sustainable business model. We should take these statements seriously – but not at face value. It’s important to try to develop methods of testing how successful banks are in these efforts (and many have noted that such efforts include the recruitment of many more compliance staff).
This project just one fairly simple system of testing that takes the data on fines etc, as relevant indicators of ethics and culture. The publication by a bank of a new code of ethics or the setting up of a new bank committee on ethical conduct does not, by itself, really tell us very much about how it actually behaves. These numbers will tell us something about how each of the banks covered behaved in the period up to the end of 2012. They may not be conclusive but they are certainly indicators…in that high numbers will tell a story of “ethical under-performance” whereas low numbers will at least suggest that a bank is on a sounder ethical footing. (Obviously, there may be banks who have behaved badly but not yet been found out: the exercise cannot really cater for the as yet undiscovered miscreant).
And the numbers are based on facts, not subjective opinions.
Some banks might say that the period up to 2012 is all in the past – legacy issues. “Let’s move on!” But when we put out the numbers for the period up to the end of 2013, they will give us some indication of whether improvements are taking place. Then, we will repeat the exercise for the period up to 2014. And so on.
It should be said, however, that the numbers will not only tell a story about banks. They will also tell us something about the approach that different countries take to regulatory discipline; whether some are heavier on fines whereas others seem to be more easy-going, whether some are relatively transparent with the information made available to the public whereas others seem to be quite secretive etc…
(5) How many banks are being covered?
Initially, 10. All household names … from the UK, the USA and continental Europe.
(6) How many countries are being covered?
We are trying to cover all the main jurisdictions where these banks do business. That will include the UK, the USA and various parts of the EU apart from the UK. Other jurisdictions may be covered if a significant event has occurred there.
(7) This project used to be called the ICLR project. ICLR stands for International Comparative Legal Risk. Where did that name come from?
Legal risk is a many-headed beast but it certainly includes the risk of being taken to task for manipulating LIBOR, mis-selling products and other regulatory breaches. The project is comparative in four ways. Banks are compared with each other. Jurisdictions are compared with each other. The data will also show which kinds of problem areas (e.g. PPI, or payment protection insurance, mis-selling) are more prominent than others (and in which countries and for which banks).
Finally, we will get a year on year comparison. “International” speaks for itself. It should be said, however, that although we have started this project at LSE, we already have teams being put together in other universities in other countries to enable the scope of the project to be broadened. This project will be international not just in relation to what it covers but also as to who is involved in it.
(8) Are all the numbers in the same currency?
As we find them, the numbers will, of course, be in a range of currencies. We will convert everything to sterling, using pre-established exchange rates for all the numbers. It’s rough and ready but the important thing is that the system will be consistently applied.
(9) Who is doing the work?
The initial core research team comprised five researchers …. masters students, former masters students, PhD students etc. Some also have professional qualifications. There are also senior academics from LSE and at least three other UK universities assisting in various ways. Two of the team’s leaders are former partners in legal practice with collective experience of over 50 years in commercial/financial law. The team’s director, Roger McCormick, is the author of the book, Legal Risk in the Financial Markets (now in its second edition (2010), published by Oxford University Press).
(10) How will the work be verified?
All of the data come from the public domain, so we will keep files that enable us to check sources. In addition, we will invite each bank to comment on the data that relate to it. They will be given a chance to correct any errors.
(11) Is anyone else doing anything like this?
We don’t think so. In the UK, data relating to consumer complaints against banks are published every six months and the media usually convert them into league tables. That is useful as far as it goes. The Conduct Costs Project goes much further, however.
(12) How are you funded?
We have support from the Higher Education Innovation Fund at LSE and, also, from the LSE’s Law and Financial Markets Project. Needless, to say, we could always use a little more!
(13) Where can one get more information about the project ?
It has a website at LSE. Otherwise, get in touch with Roger McCormick (Email: R.S.McCormick@lse.ac.uk). Some of the background on what led to the formation of the project is set out in Roger’s article (published mid-2012), What Makes a Bank a Sustainable Bank?.
(14) How would you assess the importance of the project? Why are you doing it?
The project produces data that are important for banks’ risk management systems and which can be customised by banks in-house if they wish to look at costs of this kind on a holistic and consistent basis (which is what they should do if they wish to get the costs down).
The project is important for the public because it provides more accessible information on a matter of key public importance: how well-behaved are our banks? Are they getting better? The question is of course directly related to how safe they are. Can we trust them with our money? Although individual members of the public (at least in the UK) have some protection against banks going bust, if they do go bust, we may all end up suffering, as taxpayers . As we have, of course, found out with the rescues of two of our biggest high street banks.
It has been just a bit too easy for banks to “ride” some of the criticisms raised when the target has just been “banks” as a group. They will refer to, for example, mis-selling as an “industry problem”, implying that it would be wrong to single out any one bank for criticism. This project enables us to compare banks with each other. That is crucially important.
Also, it surely is important for us to have a better “feel” for how different countries have fared in relation to the phenomena we are covering. If, for example, PPI is mainly a UK phenomenon, why is that the case? Why do some countries seem to be much harsher with fine levels than others? Why is it (apparently) much easier to get hold of the data in the first place in some countries than in others?
The project will promote discussion of these issues. However, it should be stressed that the Conduct Costs project is, at its core, largely an “opinion-free zone”. Our job is, essentially, to track the information down and then present it in an accessible form. It will then be for others to comment and explain. We will, of course, be happy to facilitate that.