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It has been nine years since we lurched into the financial crisis of 2008, the aftermath of which saw regulators change their approach to financial regulation. Financial institutions have been paying for their mistakes ever since. At the Cambridge International Symposium on Economic Crime, I was having this very conversation with a delegate and likened the treatment of financial institutions to a child who is learning how to walk. What good would it do that child if every time he or she attempted to walk and fell to the ground, they were reprimanded for falling?
Whilst initially regulators believed that changing their approach and hitting offending financial institutions in the pocket would send a stern message to their other institutions, years on the same approach is still being used. The most important element about reviewing these sanctions methods is to look at its effectiveness. If imposing financial penalties is an effective deterrence mechanism, should we not have seen a decrease in fines over the years as the industry would or should have learnt from the mistakes of others? On the contrary, in fact we have seen the same banks getting fined time and again with Bank of America the most fined institution. As of 2014, Bank of America had received the highest ever fine amounting to $16.65 billion, issued by the Department of Justice for knowingly selling toxic mortgages to investors. Only last year, Deustche Bank were fined $14 billion to settle allegations about the way they sold residential mortgage-backed securities (RMBS). Whether Deutsche can afford the bill levied against them is another matter. Over the past year, it has become common knowledge that Deutsche has been struggling and it is no doubt that a $14 billion fine would rattle its standing and affect it's shareholders, customers, clients and the list is endless.
So, then who suffers? The recent news on Deutsche Bank would also inevitably rattle consumer confidence and the same can be said for all the financial institutions who have previously been fined. If the aim of our central banks and regulators is to protect consumers and uphold consumer confidence, would these increasingly large fines not be doing almost the opposite? There is also the question of who truly foots the bill of these fines? The brunt of these fine are borne by shareholders, who are also consumers. As such, the current deterrence mechanism is in dire need of review. Of course, pursuing individuals for their contribution to some of these failings is and will be a challenge but as we drive and push for personal accountability, the idea of individual prosecution must not only be explored but should be tested! Secondly, directors must be aware of their fiduciary duties, take them seriously and if they are not adhered to, a tangible punishment can be the disqualification of directorship for the offending individual. Yet all we read daily is a blanket admonishment of the offending financial institutions.
Regulators must go back to the ‘drawing board’ and pan out how we can achieve a fair deterrence mechanism that does not harm the very people they seek to protect.