Roger McCormick: We can’t have big, unruly banks that are out of control

Ever-larger fines for bank misconduct have made headlines around the world, leading the London School of Economics and Political Science‘s Conduct Costs Project to estimate total costs between 2009 and 2013 for 10 major global banks at nearly £100 billion, plus a further £58 billion put aside in provisions at 2013-end. Roger McCormick of the LSE led the project, and he set up and now runs the CCP Research Foundation to build on its efforts. A former partner at law firm Freshfields Bruckhaus Deringer, he spoke with SNL Financial on the sidelines of the British Bankers’ Association annual conference in London about the purpose of fines.

This interview was published on the Conduct Costs Project Research Foundation website and has been republished here with permission and thanks.

By Christian Wuestner

SNL Financial: New U.K. regulations aim to increase accountability of senior managers at banks for failures, including introducing a new criminal offense. Is this a good idea?

Roger McCormick: I am pretty much on exactly the same ground as [Bank of England Governor] Mark Carney on that. I am sympathetic to the concerns it raises for people who are not used to the new regime, but you have to put it in context. Twenty-five years ago, there was a famous legal case in England called the Hammersmith and Fulham Case, sometimes called the Swaps Case, where a lot of banks entered into swaps contracts with English local authorities. The auditors of those authorities challenged the contracts, took it to the courts and won because the contracts were invalid. So the banks could not enforce those contracts. And they all complained to the Bank of England and other people: “We didn’t know about the legal risks involved in these contracts.”

London School of Economics: Lunchtime Workshop on Benchmarking and Metrics for Bank Ethics and Behaviour

The Conduct Costs Project of the London School of Economics (LSE) is hosting its first Lunchtime Workshop on Benchmarking and Metrics for Bank Ethics and Behaviour on Wednesday 14^th May 2014. Confirmed Speakers include Tom Sleigh (Banking Standards Review), James Palmer (Herbert Smith Freehills LLP) and Tania Duarte (LSE Conduct Costs Project). Professor Roger McCormick – Director of the LSE’s Conduct Costs Project – will chair the event. Attendance at the Lunchtime Workshop is free of charge, but attendees must please book a place by sending an email to T.M.Maia-Campos-Duarte@lse.ac.uk no later than 2^nd May. The event shall take place at the LSE, New Academic Building, The Wolfson Theatre. Attendance is free. However, if you are interested in helping to fund the Project’s activities please get in touch with the Project Director Professor Roger McCormick at r.s.mccormick@lse.ac.uk or by telephone on 07802 604 316.

Tom Sleigh, Banking Standard Review

Tom works for Lloyds Banking Group (LBG), where he spent two years as Chief of Staff to the Managing Director for retail and wealth customer products. On joining he oversaw the expansion of the team to include Intermediary distribution, Halifax Share Dealing, Scottish Widows Bank and the Customer Insights research team, to become 3,000 staff strong across multiple UK sites.

Prior to this Tom was Chief Advisor to the COO at the BBC, and began his career at strategic consultancy Booz Allen Hamilton.

LBG seconded Tom to the Banking Standards Review, working for Sir Richard Lambert, with the goal of establishing a new body to raise standards of competency and conduct in UK banking.

Roger McCormick: Book Review: Market-Based Banking and the International Financial Crisis, edited by Iain Hardie and David Howarth

Economics and political economy lack the analytical tools to explain the differing impact of the recent international financial crisis that erupted in 2007 on developed economies. The principal aim of this edited volume is to offer a ‘market-based banking’ framework which transcends the dominant dichotomous understanding of financial systems in terms of credit-based and capital-based. Market-Based Banking & the International Financial Crisis, Iain Hardie and David Howarth (eds.), Oxford University Press, August 2013, attempts to provide a framework that is more reflective of banking in modern financial systems; one that provides a more successful explanation of the differential impact of the recent financial crisis. Reviewed by Roger McCormick.

This book is based on a collection of papers written by political economists and derived from three workshops held in the period 2009-2012 in Edinburgh and Victoria, British Columbia. (The Editors both have connections with the University of Edinburgh). The financial systems of, and the experience of the Crisis in, eleven different countries are considered: UK, USA, Canada, Belgium, France, Germany, Italy, Spain, Greece, Holland and Japan.

Conduct Costs Project Launch Event

On 10 December 2013, the Conduct Costs Project publicly launched the project’s results at an open event at the London School of Economics. This was an opportunity for stakeholders from various backgrounds to hear the results from the project team face to face, following the publication of the project’s results on the project blog on 28 November 2013.

The presentations were chaired by the project’s director, Roger McCormick who introduced the audience to the members of the project team and the project’s context, history and scope. Roger highlighted the importance of accessible, consumer – friendly information, and the relevance of “restoring trust” in financial institutions.

It was vital, he stressed, that data was presented in a way that enabled the public to compare one bank with another, the media’s role in generating public awareness and debate being of crucial importance. He also encouraged banks and regulators to be more forthcoming with the public about why heavy conduct costs were still being incurred and what was being done to ensure that they start to go down.

Roger McCormick On Sustainable Banking

Workshop on the Financial Sustainability of Banks, Speaker: Professor Roger McCormick (London School of Economics) Chair: Professor Emilios Avgouleas (University of Edinburgh) held at UCL Faculty of Laws, Bentham House, Endsleigh Gardens, WC1H 0EG on Feb 6, 2013. 

A league table of Bad Banks might lead to improvements in the ethics of Banking, argued LSE’s Professor Roger McCormick at a UCL’s Centre for Ethics and Law event on Sustainable Banking. He drew on evidence to the Banking Standards Committee criticising the idea that what Banks needed were more lawyers and compliance staff. Doubting the efficacy of Codes of Conduct, he advocated a focus on steps that might genuinely influence banking conduct. If it is the case that codes and process measures can simply be worked round and recognising that basic values may be important it was necessary to find other techniques. Structures played a role: Professor McCormick pointed to the de-federalisation of Barclay as a positive sign that the Bank might be taking control of the compliance and ethics problems it faced, with reporting lines direct into the CEO.

But there was a profound need to realign the interests of boards who had often not been informed of illegalities and other problems in their Companies.

The Libor Scandal and “Soft Law”

The ideal of sustainability is key to all modes of human activity and the financial sphere is no different. Following the onset of the global financial crisis, the governance of banks and business entities emerged as a burning issue. The Libor scandal has only served to intensify calls for greater accountability and transparency. Like HSBC, Barclays and UBS which have already been fined, see post here, the Royal Bank of Scotland (RBS) has jumped on to the whirligig and it has been fined £390m ($610m) by UK and US regulators for its part in the Libor rate-fixing scandal. The Financial Services Authority has fined RBS £87.5m and £300m shall be paid to US regulators and the US Department of Justice.

A large body of opinion, myself included, advocates using criminal law punishments to bring about change and force banks and businesses to behave and become better citizens in the financial world. Key academics – like Professor Bainbridge and Barry Turner – have endorsed my views. However, on proper analysis, perhaps it was I who had unknowingly subscribed to such well-established positions. Yet, equally weighty reasons exist why “soft law” options may present more advantageous alternatives to solving the problems in the financial sphere. Last month, acclaimed lawyer and academic Professor Roger McCormick – author of the celebrated banking textbook Legal Risk in the Financial Markets and Director of the LSE’s Sustainable Finance Project – took the time explain to me why options other than criminal punishments needed exploration to tame the crises emerging in the financial world. And I remain extremely grateful to him.