Piracy on the high streets

The economic history of Britain is a story of the many ingenious ways in which our respected financial institutions have defrauded the public. After the South Sea Bubble, numerous nineteenth century bank crashes, the bankrupting of Lloyds names, the collapse of BCCI, and the mis-selling of insurance policies and investment bonds, we now have payment protection insurance (PPI). This has involved selling spurious insurance policies (with or without the consent of the purchaser) to people taking out loans and mortgages. The ostensible purpose of the insurance was to meet the cost of loan repayments should the purchaser fall ill or become unemployed. PPI proved a big earner for financial institutions: only 15% of income from PPI was paid out in claims. This was because insurance payouts were often refused. As with unregulated health insurance everywhere, liability for illness could be denied because of ‘pre-existing conditions’. Once this fraud was exposed, the banks fought a long campaign to block repayment. However, this seems to be coming to an end, as some are now making provision for repayment - £3.2 billion in the case of Lloyds and £1 billion for Barclays.

This raises the question of what are banks for? A conventional answer is that they are safe depositories for our cash which banks use to advance loans to individuals and businesses. These should be low-risk investments which are repaid with interest. Income from interest is in turn used to pay a smaller rate of interest on depositors’ accounts, a reasonable dividend for the banks’ shareholders, and to meet the staffing and other costs of the banks themselves.

If banks have tried to defraud their depositors, they have hardly been favourable to their other main stakeholders. Banks have lent £2 billion less to small and medium enterprises than the government target, and many small businesses have been forced into receivership or have been unable to borrow money to meet the costs of orders. Shareholders have hardly benefited either. RBS and Lloyds TSB have been partially nationalised, while Barclays’ shares are 35% of their peak value in January 2007. So who has benefited from the frauds perpetrated by our banks? The answer of course is their senior managers, who, despite the exposure of fraud, bankruptcy, and nationalisation, have continued to award themselves huge salaries and bonuses (£2 BILLION for Barclays alone this year). A British bank therefore resembles a galleon full of treasure that has been captured by pirates, who sail around the high seas robbing all they encounter.

There is a general lesson here. People who rise to the top, whether in business or politics, tend to be more egoistic, more ruthless, and less moral than the rest of us. This egoism can generate the energy to achieve great things, but it is essential that we regulate their actions and watch them carefully for our own protection. Of course, the senior managers of the banks argue that restricting their bonuses and regulating their activities would only encourage them to move their operations overseas. But this is an unconvincing threat - rather like the Mafia threatening to leave Italy.