The trouble is that the Kirkcaldy and Cowdenbeath MP’s “comprehensive bank rescue plan” (he didn’t like calling it a bailout) may have ensured the banks’ survival, but it did not do enough to reform them. It let the bankers off scot-free, saving them from the consequences of their own folly, mismanagement, and greed. Instead of triggering some much needed soul-searching, the bailout encouraged them to get back to business as usual, as quickly as possible – which essentially meant acting as if they were above the law.

In the process it hard-wired risk and moral hazard into the UK financial system, and made the banks no less likely to trigger another financial crisis.

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Ten years on from the crash, the most important banking reform has still not been enacted

By Liam Halligan

The overall cost of Brown’s rescue plan was £1.3 trillion. This included the world’s costliest bailout – the injection of £45.5 billion of taxpayers’ money into the insolvent Royal bank of Scotland, of which at least £26 billion has been lost forever. It was the collapse of RBS, plus those of the former building societies Northern Rock, Alliance and Leicester, Bradford and Bingley and HBOS, that fuelled the UK’s longest and deepest recession since the Second World War. The property market reeled, the FTSE-100 sank to 3,665.2 (almost half its value today) and UK unemployment soared to nearly 2.5 million. During 2009 there was even talk we might be on the cusp of a 1930s-style slump.

In the throes of this economic carnage, I was expecting the UK government and its regulators to propose radical reforms to ensure that the UK’s corrupt and broken financial system did not get back to its old tricks of inflating unsustainable asset price bubbles and taking customers for a ride. Possible themes for reform might have included breaking up the UK’s five or so ‘too big to fail’ banks, forcing banks to retain much higher levels of capital, driving greater diversity of ownership in the banking and financial sector, and, perhaps most importantly, removing the flawed incentives.

Instead, Brown’s Government appeared to have zero appetite for substantive reform, failing to attach any meaningful conditions to the bailouts of 2007-9. Perhaps, having championed a bank-friendly ‘light touch’ regulatory regime for years, and having imagined that in their unfettered Nietzschean state the banks would bring a ‘new golden age’ to the UK, Brown was simply too shell-shocked to lead any campaign for reform. Rather than the nirvana he envisaged, his policies had brought nothing but economic carnage and social disaster.

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Do you know where money really comes from?

By Peter Franklin

The banks’ failure to grasp the need to change their behaviour was revealed in the shocking scandals – including Libor rigging, foreign exchange market rigging, and the trashing of business customers by RBS’s global restructuring group – which carried on long after the crash.

We had to wait until the arrival of David Cameron as prime minister in May 2010 before any real attempts at reform were made. Cameron’s first stab at it was the Independent Commission on Banking, led by Sir John Vickers. From the Government’s perspective this handily kicked the problem of what to do about the banks into the long grass. Amid all the furore over bankers’ bonuses and Fred Goodwin’s pension, it meant that whenever Cameron, George Osborne or cabinet colleagues were asked what they were doing about the banks, they could respond that they were awaiting Vickers’s findings.

In the end the ICB’s main recommendation – that each relevant bank erect a “ringfence” between its “utility” businesses (its supposedly lower risk, high-street and commercial banking operations) and its “casino” businesses (investment banking activities, including gambling complex and opaque derivatives on global financial markets) – was a good idea in theory, but in practice it has been a let-down.

The proposal was watered down following lobbying by the banking sector. The deadline for putting in place the ringfence was last month, but there is a risk that the division will end up being rather porous – meaning capital, liquidity and assets can flow through it – at times of extreme financial stress. It has turned out to be an elegant but costly fudge that’s unlikely to make a huge difference to the culture or behaviour inside the UK banking sector.

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The cancer at the heart of Australian banking

By Daniel Ziffer

At least one of the reforms that were pushed through by the former Chancellor of the Exchequer George Osborne has, however, had some success. Following what is called a ‘twin peaks’ approach to regulation, Osborne split the Financial Services Authority (the failed regulator that Tony Blair’s Government had launched in 2001) in two. A new Prudential Regulation Authority (PRA) become part of the Bank of England, taking charge of high level and systemic issues, and a new Financial Conduct Authority (FCA) was formed to take care of misconduct in the finance sector.

So far, the PRA has been a hundred times more effective at monitoring and addressing systemic weaknesses (such as identifying and forcing banks to replenish a capital hole) than the previous regime was.

The FCA, however, is showing dangerous signs of being ‘captured’ by the sector it purports to regulate, just as its predecessor was. It doesn’t help that its inaugural chairman was the former boss of KPMG in Europe, and its current chairman, Charles Randell, was a ‘magic circle’ lawyer who has been involved with a dodgy tax avoidance scheme.

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Time's up for the Big Four

By Liam Halligan

Some experts think we’re in an even more precarious position now than pre-crash. Kevin Dowd, professor of finance and economics at the University of Durham, recently told me that while the post-crisis policies including the bailouts and QE held the system together in the short term, they have done so “at the expense of aggravating the underlying problems, including regulatory inducements to excessive risk-taking. These policy responses make a new crisis inevitable.”

The macroprudential approach to systemic issues that’s been adopted by the PRA, he told me, “unwisely presumes that policymakers have the incentive and the ability to time the economic cycle”. He also said that because leverage in the banking sector is, in market value terms, even higher than it was in 2007, banks are even more vulnerable than they were then.

“I am fairly confident that the next crisis will be worse than the last: banks are weaker, debt levels higher, there is more hidden risk, policymakers have less room to move than they had before, etc.” Not very reassuring then.

Steve Keen, professor of economics at Kingston University London, said the post-crisis reforms are bound to fail because the policymakers, regulators and economists who put them together “fundamentally misunderstand the role of credit in an economy”. He believes they still equate credit with the “lubricating oil inside an engine” and invariably regarded the crisis as “the engine seizing up because it ran out of lubricant”.

In fact, he said, they should view credit as fuel, and recognise that sudden increases or decreases in supply tend to prove disastrous. It is a fundamental misunderstanding that has driven deeply flawed remedies, argues Keen.

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Nomi Prins: The central banking heist has put the world at risk

By Liam Halligan

If anyone was serious about ensuring there is no rerun of the crisis of 2008, they would have urgently reformed the accountancy sector. One of the things that fuelled the banking collapses of 2008 was that the banks were basing their accounts on International Financial Reporting Standards, introduced in January 2005. But these numbers flattered their balance sheets in myriad ways and meant that some banks believed they were solvent when in fact they were bust – they were flying through a thunder storm with faulty instruments.

Yet the pace of change in the accountancy profession has been glacial. The now disbanded regulator the Financial Reporting Council refused for years even to look at bank audits – like KPMG’s audits of failed Edinburgh-based banking giant HBOS – largely because it didn’t want to open a can of worms. In a recent submission to the Business, Innovation and Skills committee’s ‘Future of Audit’ inquiry, Tim Bush and Alan MacDougall of Pensions & Investment Research Consultants said there remains “a cartel” in the audit market in which “pervasive conflicts” are undermining auditors’ scepticism.

There have been some post-crisis tweaks to the accounting rules, but these have been insufficient to ensure investors can get a clear picture of banks’ balance sheets and capital ratios. Financial Times City editor Jonathan Ford recently wrote that behind the confident façades presented by banks’ directors, auditors and regulators, the sector remains an impenetrable black box. “Accounting is supposed to paint a picture that allows investors to assess the current valuation of a company. But in the topsy-turvy world of banks, it can conceal more than it reveals ”. In short, banks’ balance sheets are no less opaque than they were in 2008.

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Time to put the fat cats of capitalism on a diet

By Charlotte Pickles

Perhaps most galling for taxpayers is the lack of punishment of those responsible for the unprecedented tide of financial crimes committed from the early 1990s to the mid-2010s. There have been a string of massive penalties, including ‘no fault’ out-of-court settlements with regulators and deferred prosecution agreements with the US Department of Justice – including a $4.9 billion settlement for state-rescued RBS over the “misselling” of about $32 billion worth of toxic mortgage backed securities. But the trouble with such deals is it is the shareholders, not individual bankers, who bear the cost.

Increasingly it seems the banks treat fines as a cost of doing business, a bit like a speeding motorist treats a speeding ticket. They pay the fine, accept the points on their licence, then quickly get back to doing 110 mph. If you really want to punish and deter bad behaviour inside a bank or corporation, you should be penalising the individuals who committed it.

One of the sensible reforms introduced since May 2010, the Senior Managers Regime, was supposed to address precisely this issue by making it easier to hold individuals to account for wrongdoing that occurs on their watch. It seeks to eliminate the time-honoured ‘Murder on the Orient Express’ defence in which bankers erect an accountability firewall by claiming they ‘all did it’. The senior managers’ regime also ushered in the new criminal offence of reckless mismanagement of a bank, for which the maximum sentence is seven years in jail.

Pathetically, the FCA said it was unable to really do much, as commercial lending was “outside the perimeter of our regulatory powers”. It seems a spurious excuse, not least because the FCA has imposed hundreds of millions of pounds in fines on British and international banks for Libor rigging, which is also an unregulated activity.

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How banking is still making Britain poorer

By Catherine Colebrook and Carys Roberts

Speaking at the Finance Watch conference in 2015 Robert Jenkins, ex-member of the Bank of England’s Financial Policy Committee and adjunct professor at London Business School, said it’s no surprise that the public has lost trust in finance. “If wrongdoing is left unpunished, much less rewarded, then we deserve what we get.”

He added, “without better behaviour we cannot have faith in the market that underpins it. Without penalising the perpetrators and their seniors we will not get better behaviour. And without greater courage from policymakers and regulators, we will get none of the above and more of the same. When timidity triumphs, the taxpayer pays. Alas, timidity is the order of the day.”

David Cameron’s “we’re all in this together” has a hollow ring to it, given that the Government was involved in RBS’s 2008-2013 campaign to lay waste to many of its SME clients.

By focusing on rescue rather than cure, the Labour government missed an unprecedented opportunity to force through change but it instead entrenched bad habits. The financial system, says Mervyn King in The End of Alchemy, published 2016, even after all these reform efforts, remains wired so that a handful of well-connected people capture the benefits from risk-taking, while society as a whole bears the cost.

Even as it has surfed commodity price waves for the raw ingredients it exports to the world – most notably the iron ore that has put steel in China’s explosive expansion – Australia has remained a safe, if not particularly dynamic, economy.

Much of the that success is put down to the stability and power of its ‘Big Four’ banks: in order of size, the Commonwealth Bank, Westpac, ANZ and NAB.

As a share of gross domestic product (GDP) Australia’s banks are the most profitable in the world. Their share is 2.9% of everything the nation produces: only China (2.8%) and Sweden (2.6%) come close. The share in the US is 1.2%, and in the UK it’s 0.9%. Figures from ‘The Banker’ put it just as starkly. Even though Australia is the 13th largest economy in the world, with a population of just 25-million people, its banks rank 6th for pre-tax profit.

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Has a Davos backlash begun?

By Nomi Prins

These figures should add up to sunny days for bankers. But the release of the final report from a year-long inquisition into the culture and practices of the banks has capped a sorry saga of greed, flagrant law-breaking and contempt for customers.

Propelled by a series of scandals at Australia’s largest bank, the conservative Government was forced by its own backbenchers and Coalition partners to cave to Opposition demands for an inquiry. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, launched in December 2017, was given a tight timeline, but extraordinary powers to compel witnesses, extract documents and find answers.

After more than 50-previous probes in recent years, few expected findings that would ruffle the stability of the cosy system.

But retired High Court judge Kenneth Hayne was canny, using jaw-dropping personal stories to illustrate a systemic sickness in Australian banking.

English roofer David Harris developed a gambling problem, and started betting with funds on the first credit card he’d ever been given. When he reached this $10,000 limit, second and third cards came. Offered a credit limit increase to $32,000, he told the bank about his problem and begged them to stop. The bank continued to present him with offers of more credit.

At least he was alive to deal with his problem. Not even death could stop the Commonwealth Bank taking fees from customers – charges it wasn’t entitled to even if they’d been alive. Deceased customers were charged fees for personal adviser services, in one case for more than a decade. The bank received complaints for four years, then sat on internal and external reports about the practice for two more years, before finally informing the regulator of its wrong-doing.

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Time to put the fat cats of capitalism on a diet

By Charlotte Pickles

The public already had a dim view of the banks’ rapaciousness; the scandal plumbed their reputation further. It was a morbid angle on a broader ‘fees for no service’ scandal that, exposed in 2016 as a A$178 million problem, has now been revealed to have led to customers being wrongly charged A$1 billion.

The problem wasn’t ‘bad apples’ – or “pockets of poor culture” as the Commonwealth Bank’s initial submission said. The issue was systemic across the big banks – all of which had excellent systems to check the fees were being taken for ‘services’, but little concern for checking if any service was actually provided.

These stories – like the recording of a call-centre worker badgering a man with Down Syndrome to purchase worthless insurance – have aired almost on a loop on TV news programmes and websites, as the Commission has moved around the country taking evidence.

I’ve followed the Royal Commission’s hearings for a year. The shock hasn’t been just in the traumatic stories from aggrieved customers, but from the chillingly calm emails, meeting notes and evidence from bank executives discussing how to deal with behaviour that takes money from customers to enrich themselves.

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By Liam Halligan

Take AMP. A financial firm with interests in wealth management, mortgages, pensions and insurance that has been in business since 1848. People are now discussing how long it can survive.

One day’s worth of disarmingly-honest testimony from a senior executive revealed how the company ripped off its own customers by charging them service fees but provided nothing in return. AMP repeatedly misled regulators about the company’s deliberate business decisions to keep the ill-gotten funds and maintain the corrupt practices from which they profited. Most notably, the chair intervened in a supposedly ‘independent’ report on the scandal being sent by the company’s law firm to the regulator in order to remove the name of the CEO from a list of staff interviewed, and insert a paragraph clearing him of any knowledge of it.

The revelations of meddling and dishonesty exploded. Suddenly the Government, which had resisted the inquiry throughout, was now proposing legislation to increase fine and jail terms for criminal executives. The CEO’s planned resignation became immediate. The chair and almost half the board resigned. The annual general meeting ended in a shareholder revolt.

But the culture of the company they’d presided over was infected. An internal AMP report said letting customers know they were paying fees for no service could lead to calls for compensation. Taking the money was okay, but informing them “would be a very negative customer experience”. Even after they’d been forced to pay bank customers, they couldn’t stop forcing their staff to lie. A call centre script showed workers were told to tell customers, if they asked about the refunded fees, it was an “administrative error”.

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How banking is still making Britain poorer

By Catherine Colebrook and Carys Roberts

The regulators got a hiding from the Commission as well. Their timidity was key to lax standards, and to companies walking down paths they knew were legally fraught.

Australia’s competition regulator escaped largely unscathed. But the conduct watchdog, the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) that focuses on the overall stability of the financial system, were savaged over their weak enforcement, paltry fines and preference for negotiating settlements rather than prosecuting them in public view.

Both have vowed to ‘muscle up’, with ASIC’s chair James Shipton noting its starting point with enforcement is now: “Why not litigate?”.

That will mean changing the habits of a lifetime. ASIC and APRA – who’ve barely seen the inside of a court-room in a decade – have just received referrals for civil and criminal prosecution for 24 institutions, and unnamed individuals, exposed at the Royal Commission.

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Ten years on from the crash, the most important banking reform has still not been enacted

By Liam Halligan

The Commissioner’s report was brutally simple: “Why did it happen? Too often, the answer seems to be greed”.

Selling became the focus of institutions attention. From the top floor to the shop floor, everyone was being measured and incentivised to sell without considering how appropriate or useful a product was to the person paying for it. The Commission’s recommendations are focused on ending that: it’s good news for customers; bitter medicine for the banks.

Commissions will effectively be killed off in financial services. Mortgage brokers – who arrange more than half the home loans in Australia – will be forced to accept a ‘best interests’ obligation: they’ll have to do the right thing for the customer, all the time. Car dealers will be subject to the same responsible lending laws as all other credit providers, killing off a ‘point of sale’ loophole that trapped thousands in bad loans. And financial planners will have to contact clients annually and get their on-going agreement about the fees they charge.

Institutions and as yet un-named individuals have been referred to regulators to prepare a case for criminal charges. While the regulators have a limp record of taking matters to court, even a few prosecutions will have an immediate and chilling effect on borderline conduct at big institutions. And such long overdue action might just help rebuild faith in our financial sector.

The final report prescribes a cure for the heart of Australian banking. But the year-long probe did as much good in just diagnosing the sickness. De-regulation, super-charged by weak enforcement of admitted misconduct, fed an atmosphere of bullet-proof risk taking. The system wasn’t broken. For the banks it was working perfectly.