THE bank reporting season came to a close last week, with a pretty resilient performance from the majors. Royal Bank of Scotland surprised all with a profit of £2.65 billion – £1bn greater than anyone was expecting. Lloyds’ underlying profits jumped a third to £3.8bn, with a restored dividend on the cards in the second half, while HSBC and Barclays also benefited from the UK economic recovery.
But anyone thinking that the industry still tarnished by the financial crash of 2008 is out of the woods would be sorely mistaken. The major banks remain braced for a host of ongoing regulatory and criminal investigations – from rigging the Libor rate to major charges for previous mis-selling scandals such as payment protection insurance (PPI) and a magisterial rebuke from the governor of the Bank of England (BoE) for Lloyds, in particular.
The latter came after the Financial Conduct Authority (FCA) recently fined Lloyds £70 million for trying to rig rates governing how much the bank would have to pay the BoE for using its financial life support scheme in the crash.
An embarrassed Lloyds, still 24 per cent owned by the taxpayer, had to pay the central bank £7.6m in compensation, but that has not stopped governor Mark Carney raising the spectre of further criminal action against the traders and managers involved.
Writing to Lloyds’ chairman Lord Blackwell, Carney said: “Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved.” The Serious Fraud Office (SFO) has confirmed it is looking at the affair.
It didn’t help that at its interim results, Lloyds chief executive Antonio Horta-Osorio also had to admit the bank was taking a further £600m hit for PPI mis-selling. It took the bank’s spiralling bill for the scandal to £10.5bn, easily the biggest provision of any of the main banks, while the industry’s total set aside for the mis-selling stands at an eye-watering £23bn.
The SFO is also busy elsewhere. Its probe is continuing into manipulation of the Libor rate at which banks lend to each other, and which underpins trillions of pounds worth of financial contracts, including credit card bills and mortgages.
Twelve traders, including staff at Barclays, UBS and Icap have been charged by the SFO, with the trial of the first due to start on 5 January. So far, international regulators have fined Royal Bank of Scotland £390m for Libor manipulation, Barclays £290m and Lloyds £148m.
Separately, the SFO confirmed last month that it had opened a criminal investigation into allegations bankers tried to rig the foreign exchange market.
One City analyst commented: “If the banks could just put to bed these legacy issues of rate-rigging and product mis-selling their underlying trading looks positive. They are all benefiting from the recovering UK economy, but the steady drip-drip of bad news and reputational damage goes on.
“It is really difficult to know when the trading numbers from the banks will not be distorted at the statutory level by provisions and fines.”
Long shadows loom elsewhere for the sector as well. The FCA is due to publish its findings on its investigation into the catastrophic failure of HBOS by the end of this year, whose bailout by Lloyds in 2008 led the latter into a £20bn taxpayer bailout.
That probe was launched at the end of 2012 after an earlier report by the FCA’s predecessor, the Financial Services Authority, castigated the culture of HBOS’s commercial lending policy. That report banned the head of the division, Peter Cummings, from working in the City again.
The FCA is also working on its report into the near-collapse of Co-op Bank after a £1.5bn hole was found in its balance sheet, which scuppered the self-styled ethical bank’s attempts to buy more than 600 branches from Lloyds. The Co-op Bank’s salvation has only been achieved by handing majority control over to hedge funds.
One fund manager said: “It is certain that the FCA’s investigation into what went wrong at the Co-op, including the complex relationship between the banking arm and the parent company, will not make pretty reading. And that is bound to keep the banking industry’s currently unsavoury reputation very much in the public eye. It’s almost as if no bank, even a so-called ethical one, is totally untainted by the practices that have gone on.”
Early next year RBS will be in the regulatory cross-hairs again, when the FCA publishes its report into the workings of the bank’s controversial global restructuring group (GRG) – which it announced it was closing down on Friday.
The probe stems from allegations made by Lawrence Tomlinson, a multi-millionaire adviser to Vince Cable’s Department of Business, that accused GRG of manipulating companies into financial distress so the bank could buy assets at rock-bottom prices.
As if all these storm clouds were not enough, there is the provisional decision by the Competition and Markets Authority (CMA) to launch a formal inquiry into whether there is enough competition in the personal current accounts and small business lending markets. Two recent reports by the CMA found that those “essential parts of the UK retail banking sector lack effective competition and do not meet the needs of personal consumers or small and medium-sized enterprises”.
A final decision will be made in the autumn, and the CMA has suggested any probe would last 18 months. That timescale would ensure the uncertainties over significant slices of the UK domestic banking market – including the possibility of a recommendation of breaking up some banks – would hang over the embattled industry for quite some time yet.
Amount the UK banks have so far set aside for mis-selling pension protection insurance (PPI): £23 billion. They have paid out £15.5bn.
Libor fines imposed by UK and US regulators: UBS £940m; RBS £390m; Barclays £290m; Lloyds £148m; Icap £55m; Radobank £662m; RP Martin £630,000.
Financial Conduct Authority ongoing investigations: collapse of HBOS; near-collapse of Co-op Bank after failure of Project Verde bid for 600-plus Lloyds branches; RBS’s Global Restructuring Group’s treatment of small businesses.
Serious Fraud Office: bringing 12 traders to trial for manipulating Libor; investigating allegations of attempts to fix forex markets.