Regulators should make the punishments fit the crimes

Since 2010 Ofgem has fined energy companies £191M and imposed redress payments of £255M.  Redress payments are “made by companies either directly to consumers or to programmes and funds which would benefit them.” Fines are a form of taxation, i.e. paid to HM Treasury. Ofcom fined BT £32M and the Environment Agency’s prosecution for sewage pollution cost Thames Water £20M;

Biggest by far was the multi-billion fines on the big UK banks, by the UK, US, Hong Kong and Swiss authorities, for Libor rigging, money laundering, assisting tax evasion, sanctions busting, failing to keep proper accounts and mis-selling.  The directors of said banks, their auditors and the Bank of England were, we are told, unaware of the malpractice under their noses.  Amazing.

HBOS director Peter Cummings was fined £500,000 in 2012 and banned for life but he is an exception. Generally speaking, bank directors, auditors and the Bank of England emerge Scot free.  Companies, being legal persons, pay the penalties but this is fantasy. Companies do nothing wrong.  It is their directors, employees and auditors who do what they should not do, and cover them up.

Compounding the absurdity, those responsible who do lose their jobs receive pay-offs (cash bonuses, shares and, usually, pensions benefits) as if they were innocent parties being made redundant.  Their contractual terms, we are told, over-ride any culpability.  Sacking the seven seniors at HBOS, including Mr Cummings, cost the company, namely the taxpayers, nearly £1M. The Finance Director, Mike Ellis, arguably the most culpable, became Chairman of the Skipton Building Society Act two years later albeit at half his former salary.  Nine years later the financial regulators have woken up and are making threatening noises but it is too late to fine anyone.

Tesco is a classic case: the company inflated its profits by £326M in the year to August 2014.  The CEO, Phil Clarke, was sacked on contractual redundancy terms (18 months’ salary +) in July 2014 for declining profit forecasts.  He knew nothing about the false accounting and, as CEO, how could he?  The Serious Fraud Office fined Tesco £129M and are bringing criminal prosecutions against three other former directors, Chris Bush, Karl Rogberg and John Scouler, but not the Nelsonian Mr Clarke.  Note that the company is being fined, not the perpetrators who may well, given the SFO’s track record, get off. 

Regulators sometimes acknowledge the unfairness of the clearly innocent shareholders and customers ultimately bearing the cost of these fines.  But if they do not pick up the final tab and nor do the the directors and employees, who does?

Fining companies is a useful form of income for HM Treasury but it is really grandstanding.  Perhaps it damages reputation but it is debatable how much harm it does to companies like Thames Water and BT whose reputations are hardly lily-white anyway.  And fines which do not hurt those culpable are no deterrent. Sending my speeding fines to some distant person is not going to stop me speeding.

Regulators should stop fining companies and start penalising those individuals responsible for the malpractice and those who should have published the malpractice but failed to do so – typically the auditors and sometimes the regulators themselves, notably the late and unlamented Financial Standards Authority whose ability not to see the facts drawn to its attention is legendary.  Punishment should fit the crime. The courts have already established that directors can be personally liable and not hide behind the corporate veil – see.  However the law in this area is a bit of a mess.  It would be sensible for government, perhaps with a Statutory Instrument if Parliament is not bothered, to require regulators and the courts to fine individuals and to ensure they are not compensated by their employers or insurance.  Claiming not to know what they should have known should be no defence just as ignorance of the law is no defence.  Personal liability should mean personal liability just as it does for speeding fines.  And financial malpractice that goes unpublished for two years or more should result in personal fines levied on the senior auditors and even the regulators themselves.  Obviously regulators will not fine themselves bu the courts can and should.

As a starting point, I suggest that the fines are borne 50/50 by Chairman and CEO unless they can publish who the real culprits are.  This is akin to ministerial responsibility: Lord Carrington stepped down as Foreign Secretary even though he had no idea his diplomats were inciting Argentina to invade the Falklands.  High rewards should be justified by high risks.

Regulations are only going to work if everyone knows any punishment will fit the crime.