The age of impunity

Jonathan Watson

‘Governor of the Bank of England Mark Carney once said optimistically ‘the age of irresponsibility is over’. Recent events suggest otherwise, with financial institutions yet to face the kind of reckoning that forces fundamental shifts in culture.

Fred Goodwin’s got away with it again. That was the widespread reaction when, in June, Royal Bank of Scotland (RBS) reached a £200m ($260m) settlement with investors who claimed they’d been deceived into handing £12bn to RBS in 2008.

The RBS Shareholder Action Group, which represents about 9,000 retail investors, said it had accepted the bank’s offer of 82p ($1.06) per share on behalf of its members. This spared the disgraced former chief executive of RBS and other senior colleagues from having to appear in court to answer questions about one of the most significant episodes of the financial crisis. Having bailed out the bank to the tune of £45bn of taxpayersmoney at the height of the financial crisis in 2008, the United Kingdom government still owns over 70 per cent of RBS, which is heading for its tenth consecutive annual loss.

Shareholders alleged that RBS misrepresented the state of the bank’s health at the time of the rights issue. The bank required the UK’s largest ever bailout just a few months later, and those who took part in the fundraising lost most of their investment. ‘It would have been interesting for the case to go to court, just to set a precedent,’ says Clive Zietman, Head of Commercial Litigation at complex disputes specialists Stewarts Law.

Zietman acted for another group of RBS shareholders who decided to settle with the bank late last year. ‘We were arguing that the prospectus provided by RBS contained material omissions and misstatements,’ he says. ‘Lots of new law would have been created – it could have set the tone for future cases.’

It would have been interesting for the case to go to court, just to set a precedent

Clive Zietman
Head of Commercial Litigation, Stewarts Law

RBS Chief Executive Ross McEwan says settlements like this are ‘a stark reminder of what happened to this bank before the financial crisis, and the heavy price paid for its pursuit of global ambitions’.

Wrong… wrong… wrong… wrong

Coincidentally, the settlement was reached soon after the tenth anniversary of the launch of an RBS-led consortium’s $113.8bn takeover offer for ABN Amro. Philip Hampton, who took over as Chairman of RBS in early 2009, later described this as ‘the wrong price, the wrong way to pay, at the wrong time and the wrong deal’.

Deals made in 2008 were in the spotlight again in June when the UK’s Serious Fraud Office (SFO) charged former Barclays Chief Executive John Varley and three other former executives with fraud relating to two fundraising deals with Qatar that allowed Barclays to avoid a government bailout during the 2008 crisis. The executives are alleged to have not appropriately disclosed side deals in which the Qatari investors received money and loans from Barclays. Lawyers representing them said their clients will contest the charges.

Barclays says it is ‘considering its position in relation to these developments and awaiting further details of the charges’.

The bank has already landed itself in trouble this year following revelations about its Chief Executive Jes Staley’s unorthodox view of the firm’s whistleblowing policy (see box: The Barclays Way).

Though the RBS case has been settled, it seems likely to lead to a flurry of similar actions. ‘This is already happening,’ says Jonathan Kitchin, a partner at Michelmores. ‘For example, a group action is being brought by approximately 150 retailers, bookmakers, restaurants, pubs and clubs against Visa and MasterCard for overcharging fees. These claims are being brought on the back of a European Commission finding from 2007, upheld in 2014, that elements of these companies’ fees restricted competition and inflated costs for card payments.’

Inevitably, then, Brexit is likely to play a part in determining how many cases emerge. ‘If the ability to bring competition or antitrust-based claims in England and Wales after Brexit looks likely to be curtailed, that could encourage people to issue claims more quickly,’ says Kitchin.

Zietman is more sceptical. ‘Cases like RBS are few and far between,’ he says. ‘They take an enormous amount of resource and they have to be very strong claims. However, this is the first time that one has seen this sort of claim in the UK, as opposed to the United States, where the legislation and culture are very different. We might see more of them in the future.’

Stewarts is also involved in a similar case where supermarket giant Tesco is facing legal claims from investors after an accounting scandal in 2014. This involved Tesco admitting it had overstated its first-half profit by £263m ($420m). The SFO has also brought charges against the former Tesco UK managing director, finance director and commercial director. They are due to face trial in September.

Tesco Group Chief Executive Dave Lewis addressed the issue in March when announcing that the company had reached a deferred prosecution agreement with the SFO. ‘What happened is a huge source of regret to all of us at Tesco, but we are a different business now,’ he said.

The shareholders’ case is based on section 90A of the Financial Services and Markets Act (FSMA) 2000, which imposes strict liability for misleading statements or dishonest omissions in certain published information relating to securities (as opposed to the listing particulars or prospectuses). ‘All these cases show that the court infrastructure and third party funding is in place for US-style class actions to be brought in England and Wales,’ says Kitchin.

Tesco’s former auditors PwC did not face official censure over the scandal, after the UK’s accountancy watchdog the Financial Reporting Council (FRC) closed its investigation into its approval of the flawed financial statements. PwC had been auditing Tesco’s accounts since 1983 (European Union rules now require companies to retender their audit contract every ten years). The FRC concluded that there was ‘not a realistic prospect that a Tribunal would make an Adverse Finding against PwC... in respect of the matters within the scope of the investigation’.

PwC said: ‘We cooperated fully during the FRC’s thorough investigation and are pleased that the FRC has closed it without any further action.’

Fundamentally, people within banks have to realise that they need a more sustainable way of doing business without being so attached to short-term, money-driven incentives

Martijn Scheltema
Chair, IBA Corporate Social Responsibility Committee

Other group litigation cases with more obvious similarities to RBS are already in the pipeline. A case against Lloyds Banking Group (which had, until May, also been in government ownership following the financial crisis) is due to commence in October. It is being brought by thousands of investors who are complaining about the bank’s rescue of the beleaguered HBOS in 2008.

Investors allege they lost about £400m ($519m) as a result of the deal and that HBOS shares were ‘valueless’ at the time. They claim they were misled into approving the HBOS merger as key information over the true financial health of the bank was withheld. A Lloyds spokesman says: ‘The group’s position remains that we do not consider there to be any merit to these claims and we will robustly contest this legal action.’

Lloyds is also dealing with another case arising from a fraud at its branch in Reading in the UK, whereby small business customers had their operations looted by bankers working with a corrupt so-called ‘turnaround consultant’. Six individuals, including two former employees, were convicted of fraud in February and Lloyds has set aside £100m ($130m) to cover compensation for the victims. However, many of those victims have lost faith in the scheme since they discovered that the independent reviewer appointed to oversee it had undisclosed business links to Lloyds.

The launch of a group action against financial institutions for damages arising out of forex manipulation is also anticipated.

Culture clashes

Martijn Scheltema, dispute resolution expert at Pels Rijcken & Droogleever Fortuijn and Chair of the IBA Corporate Social Responsibility (CSR) Committee, believes shareholder suits can help to change the culture of banking. ‘We need intrinsic motivation within banks to change culture,’ he says. ‘If shareholders would demand such change, and maybe even enforce it in court, that might help. But, fundamentally, people within banks have to realise that they need a more sustainable way
of doing business without being so attached to short-term, money-driven incentives.’

Zietman doesn’t foresee a rise in shareholder action against banks in the UK anytime soon, though, due to the limited opportunities compared to the US. ‘Generally in America, if you lose, you don’t pay the other side’s costs,’ he says. ‘They also have jury trials, and members of the jury can have a negative attitude towards big corporations. They have legislation going back to the 1930s that says, if a company screws up in any way, the shareholders have a claim. The circumstances in which you can sue in the UK are much more limited. Sections 90 and 90A of the FSMA are avenues, but they are nothing like the legislation that exists in the US. And there is no political will to change that at the moment.’

Are regulators more relaxed?

The number and total amount of fines levied by UK regulator the Financial Conduct Authority (FCA) fell sharply in the 2016/17 financial year. The FCA said it had applied 15 penalties during the year, which added up to a total of £181m ($233m). This compares with 34 fines worth £885m ($1.14bn) in 2015/16 and 43 worth £1.4bn ($1.8bn) in 2014/15.

The FCA says the figures from preceding years were skewed by the aftermath of the Libor and forex rigging scandals. But, research from NERA Economic Consulting shows that, even after adjusting for those huge penalties, FCA fines have now fallen to levels seen in the years before the financial crisis. This was an era when the sector was regulated by the FCA’s predecessor, the Financial Services Authority, which has since been axed after severe criticism.

Shareholder suits aren’t launched with the aim of improving an organisation’s ethical behaviour, of course. One recent shareholder suit in the Netherlands sought to get a court to take action against paints company Akzo Nobel over its rejection of a €25bn ($28.5bn) takeover bid by US rival PPG. The hedge fund Elliott Advisors had asked the court to order an extraordinary shareholders’ meeting to consider a motion to dismiss the chairman over the company’s decision to reject the bid. ‘The shareholders accused Akzo Nobel of reducing shareholder value by investing too much in sustainability and CSR initiatives, and that was part of the reason why they wanted the takeover offer to be considered,’ says Scheltema. ‘Many of them said too much sustainability costs too much money.’

The Barclays Way

The second chief executive hired to restore the bank’s reputation after Libor has damaged it further

‘All of us at Barclays are united by a common Purpose and set of Values, wherever we sit in the organisation and whatever role we perform,’ said the bank’s Chief Executive Jes Staley in a document entitled The Barclays Way, published in August 2016. ‘We also have a responsibility to call out behaviours, actions or decisions that fall short of these standards or are inconsistent with our Values,’ he added.

Those are the words of a man who is now being investigated by financial regulators and faces a significant cut to his pay after admitting trying to unmask a whistleblower who made allegations about a long-term associate he had brought to the bank.

Staley twice attempted to use Barclays’ internal security team to identify the authors of two anonymous letters sent to the board and a senior executive at the bank in June 2016. On the second occasion, the security team got help from a US law enforcement agency, but did not succeed in tracking down the whistleblowers.

UK regulators the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority are currently investigating Staley and the bank over this. New York’s Department of Financial Services is also looking into the matter. The FCA investigation is expected to be completed later this year.

‘The obvious point here is that it’s not enough just to have the right policies and procedures – people also need to believe in them’ says David Lewis, Professor of Employment Law at Middlesex University and convener of the International Whistleblowing Research Network. ‘Whistleblowers have to be certain they will be safe if they speak up. Jes Staley has made it clear that there is no buy-in at the top for Barclays’ policies and procedures – this means they are worthless.’

The document that outlines ‘The Barclays Way’ encourages whistleblowers to make themselves heard. ‘If you believe something is not right – like misconduct, fraud or illegal activity – or if you feel that our standards aren’t being met, it is really important that you speak up,’ it says. ‘Any concerns you may have can be raised in confidence.’

Few are now likely to believe that and it will be difficult for Barclays to restore faith in its approach.

‘The damage came from the top, so the recovery also has to come from the top,’ says Lewis.

‘It is hard to see how any organisation can be seen as creating an open culture – with employees feeling confident to speak out – when its CEO instructs his internal security team to identify the author of a whistleblowing letter,’ adds Leo Martin, Managing Director of business ethics consultancy GoodCorporation. ‘With all that has been said about reforming behaviour in the banking sector, it seems clear that this is still a work in progress.’

Ironically, the financial sector as a whole has actually been making good progress in protecting whistleblowers. The FCA has placed an increasing emphasis on the importance of internal complaints, including requiring firms to nominate an individual to the role of ‘whistleblowing champion’ under the terms of new rules that came into force in September 2016. The new rules are due to be extended to UK branches of foreign banks from September 2017. ‘What’s so disappointing is that individual institutions like Barclays can end up falling behind in a sector that is actually doing quite well,’ says Lewis.

There is perhaps a way to view the affair in a positive light. ‘The thing that struck me was the apparent strong consensus among observers and participants that he was in the wrong,’ says A J Brown, Professor of Public Policy and Law at Griffith University in Australia. ‘It is not long ago that everyone would have presumed that the CEO of any large company was entitled to hunt out information on whoever he wanted in his employ.’

Brown sees this consensus as an important sign of growing recognition that whistleblowing plays a vital role in organisations. ‘Institutions work if they have good checks and balances, and whistleblowing (including having the right people and processes to manage and protect the whistleblowing process) is part of that integrity system.’

Brown recently co-authored a report that includes an initial benchmarking of 699 organisations in Australia on the strength of their whistleblowing processes. It’s the first ever survey to collect data on whistleblowing processes in a consistent way across organisations from a full diversity of sectors. One of its key conclusions is that ‘the question is no longer whether, but how organisations will ensure they have strong whistleblowing processes that meet their public and regulatory commitments’.

Political backing for the protection of whistleblowers seems to be growing in a number of countries. The European Parliament has been vocal in its support of whistleblowers for many years – Green Members in the European Parliament in particular – and the European Commission held a consultation on the issue earlier this year with a view to assessing the need for further action at EU level.

Many whistleblowing initiatives focus on anti-competitive behaviour. In March, for example, the Commission launched a new tool intended to make it easier for individuals to alert it about secret cartels and other antitrust violations while maintaining their anonymity. Germany’s Federal Cartel Office has been using a similar tool since 2012 and says it is working well. Poland’s Office of Competition and Consumer Protection has also just started a pilot whistleblowing programme.

In Sweden, a new law intended to protect workers who point out irregularities in their workplace came into force on New Year’s Day. And in France, a new transparency and anti-corruption law has recently been adopted in a bid to bring cohesion to the country’s fragmented system for whistleblowing rules and procedures.

Before this law, France – unlike many other countries – did not have an overall framework for whistleblowing procedures. ‘Even the word “whistleblower” was unknown before the emergence of the Sarbanes-Oxley Act,’ says Sophie Pélicier-Loevenbruck, a partner in the Paris office of Littler Mendelson. ‘Its French equivalent (“lanceur d’alerte”) has only been recently coined.’ The new framework introduces a definition of whistleblower and includes provisions on whistleblowing alert procedures applicable to companies with 50 or more employees.

However, the fate of other whistleblowers can still act as a strong deterrent to those who are considering speaking out. In March, the LuxLeaks whistleblowers were convicted again by Luxembourg’s Court of Appeal (although with reduced sentences compared to the first verdict). Antoine Deltour, a former PwC employee who leaked documents showing how the company helped multinational companies to evade tax in Luxembourg, was given a six-month suspended sentence and fined €1,500. Raphael Halet, another PwC employee who had helped Deltour, was fined €1,000. ‘That’s just wholly wrong,’ says Lewis. ‘These people did the right thing.’

The Libor scandal has not gone away

RBS, Lloyds, Barclays and many other major banks have all of course been implicated in the Libor scandal, the full extent of which first became evident in 2012. Barclays became the first bank to reach a settlement with authorities around the world, admitting to rigging the Libor rate – a measure of how much it costs banks to borrow from each other, setting a benchmark for mortgages and loans for ordinary customers. Barclays agreed to pay a (then) record £290m ($355m) in fines. The bank avoided criminal charges by cooperating extensively with the investigation.

Libor has undergone significant reforms since 2012, but that has not stopped an industry body convened by the US government recently choosing a new benchmark interest rate to replace the US dollar Libor rate. The Alternative Reference Rates Committee, set up in 2014 with representatives from 15 big banks, has recommended a new broad treasuries ‘repo’ rate, which will reflect the cost of borrowing cash secured against US government debt.

If the ability to bring competition or antitrust-based claims in England and Wales after Brexit looks likely to be curtailed, that could encourage people to issue claims more quickly

Jonathan Kitchin

In the UK, the Bank of England-backed Working Group on Sterling Risk-Free Reference Rates –a group of major dealers active in sterling interest rate swap markets –has backed SONIA (Sterling Overnight Index Average), a measure of the price at which banks and building societies lend to each other, as its preferred alternative to sterling Libor.

These may be positive developments, but the Libor scandal, like many others, still leaves a lingering sense that the UK and many other countries have never had a proper reckoning for the conduct of their banks and their employees over the last ten years. Banks may have paid some huge fines and changed their executive teams, but very few have faced real sanction.

Tom Hayes is one of the few who has. The former UBS and Citigroup trader was sentenced to 14 years in prison for Libor rigging in 2015. He has since had his sentence reduced to 11 years and is now to have his conviction investigated by the Criminal Cases Review Commission, the UK’s independent criminal review body. This could pave the way for a fresh appeal if officials believe he could have been the victim of a miscarriage of justice.

In addition, lawyers for former Barclays traders convicted of rigging Libor are attacking the credibility of an expert witness for the prosecution, who texted friends during breaks in his testimony for help in describing banking terms. In April, two other former Barclays traders were acquitted by a jury of manipulating Libor.

After the financial crisis, many in the financial sector claimed they were sorry and had learned their lesson. They said the sector had accepted that it had to do a much better job of holding people to account for behaviour that betrays the trust of customers and investors. And yet, ten years on, whenever a new (or old) issue emerges, the industry response always seems to be inspired by the Vicomte de Valmont, the serial betrayer of women in Choderlos de Laclos’ novel Les liaisons dangereuses: ‘ce nest pas ma faute’.

The age of irresponsibility may or may not be over, but the age of impunity certainly is not.

Jonathan Watson is a journalist specialising in European business, legal and regulatory developments. He can be contacted by email at