Grant Maclean: Ghosts of financial crisis past still haunt us

Lessons must be learned to avoid a repeat, writes Grant Maclean
The headquarters of Lehman Brothers on New York's Wall Street in 2006. Picture: APThe headquarters of Lehman Brothers on New York's Wall Street in 2006. Picture: AP
The headquarters of Lehman Brothers on New York's Wall Street in 2006. Picture: AP

The effects of the crisis are still being felt today. The Bank of England’s base rate remains at a record low of 0.5 per cent, the taxpayer still owns a sizeable chunk of shares in Royal Bank of Scotland and the teeth of austerity continue to bite .

The London Market – the international insurance market in the capital – is no exception. The fallout from the crisis has had a lasting effect on professional indemnity claim. Research by BLM and the Institute of Directors has revealed how changes in the market are affecting professionals working in the financial services, legal and property sectors.

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In financial services, the spate of manipulation and mis-selling cases has dented trust in banks and other institutions, with scandals surrounding payment protection insurance, interest rate swaps, and the fixing of foreign exchange rates and Libor.

It’s not just mis-selling scandals that have triggered increased claims. One of the effects of the crisis was a loss of talent from the financial services sector, with six per cent fewer people employed in March 2015 compared with September 2008. Fewer members of staff could mean more mistakes; and even if the loss of staff has led to an increase in automation, handing tasks over to computers without proper human oversight can in itself lead to new types of claims.

Philosopher George Santayana warned “those who cannot remember the past are condemned to repeat it”; his words were echoed in a recent English judgement by Justice Coulson, who was scathing of lenders for not learning lessons from the late-80s property crash, especially when it came to assuming house prices would rise and self-certification mortgages didn’t need income checks. “A system that puts such emphasis on speed and automation over detailed information was at the very least potentially flawed,” he scolded.

Reputational risk extends further than financial service firms. Research by BDO and the Quoted Companies’ Alliance found one-quarter of a business’s value can be attributed to its reputation, but 40 per cent of firms are unprepared for reputational risk, such as cyber-attacks or disgruntled customers venting spleen online.

At the height of the crisis, law firms were bombarded with professional indemnity claims from banks and other lenders. While this trend has now ebbed away, if interest rates were to begin to rise and the property market was to be put under pressure, mortgage providers might begin to again question the legal advice they have received.

If interest rates rise, property professionals will be in the eye of the storm. The Scottish Government’s draft budget predicts a 15 per cent increase in property transactions by 2020-21 and many commentators warn of another property bubble. If the UK and Scottish governments follow through on their pledges to build more homes, the balance of supply and demand will shift, which could lead to rental incomes falling. Coupled with a rise in interest rates and ensuing increase in the number of people unable to pay their mortgages, banks and property investors could begin casting an eye over the legal and property advice they have received.

The effects of the 2008 financial crisis are still with us.

• Grant Maclean is a Partner with BLM