By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Originally published at New Economic Perspectives
Bank Whistleblowers United (BWU) makes its non-coveted Lemon award to the United Kingdom (UK) for actions harming whistleblowers and the world. BWU’s three principals are highly experienced financial experts with combined practical and academic experience of over 120 years. We are each unemployable in finance because we warned internally at are places of work and then externally about grave misconduct by the most senior financial and regulatory leaders that would (and did) produce terrible losses.
Liam Vaughan of Bloomberg wrote the article that prompted this award. The UK’s City of London is one of the world’s two largest financial centers. The City “won” the financial regulatory race to the bottom – barely nosing out Wall Street at the wire. This explains why the City is the epicenter of so many of the largest scandals in the recent crisis, even those at large Wall Street banks (e.g., JPMorgan’s London “whale”). The UK financial regulators failed routinely, consistently, and abjectly. The only bright spot was whistleblowers, including the workers at many of the UK banks whose managers coerced them to sell obscenely abusive products such as Payment Protection Insurance (PPI) to their customers.
The UK parliamentary inquiry into their crisis found that it was common for UK banks to retaliate against whistleblowers – and that there was no case in which the banking regulators even tried to prevent that retaliation. BWU members know from personal experience and academic studies that it senior financial whistleblowers will lose their jobs and will be unemployable in the industry – even after it is inescapable that their warnings were correct and that they represented the banks’ most exemplary officers. None of us received compensation from the government for blowing the whistle, but we strongly favor such compensation given the horrific financial price whistleblowers pay.
The U.S. had long taken the lead in providing at least partial compensation and, with the passage of Dodd-Frank, actual rewards. Liam’s article errs in dating this effort from 2011. The truth is that the passage of the False Claims Act in our Civil War represented the beginning of providing substantial awards to whistleblowers in cases where the federal government suffered losses. Liam’s article is correct, however, in noting that Dodd-Frank’s financial incentives have led to a substantial increase in well-founded warnings from whistleblowers to the SEC.
The UK knows about U.S. practices. The UK politicians and regulators are aware that the U.S. programs substantially increase the effectiveness of whistleblowers in protecting the public. As a result, the UK officials have ensured that the UK will not provide effective protection of whistleblowers, meaningful compensation, or actual rewards. Notice how the whistleblowers become the evil people in the UK financial regulators’ explanation for refusing to emulate U.S. policies they know have proven highly effective.
But in 2014 the FCA published a report with the Bank of England rejecting financial incentives for whistleblowers. The study said such a program would be too costly and complex and would create a “moral hazard” by giving rogue employees an incentive to fabricate misdeeds.
The UK banking regulators’ claims are entirely dishonest pretexts. It is vastly cheaper to get warnings from whistleblowers and act on those warnings to prevent the elite frauds, cartels, and unconscionable predation on customers that have characterized the City for nearly three decades. Financial frauds are fiendishly complex, so if complexity daunts UK financial regulators their only hope of avoiding disaster is to do everything possible to encourage whistleblowers. As to “moral hazard,” the City’s financial institutions routinely and massively craft “incentives” for their officers and employees to commit crimes and predate on their customers. The UK has refused to cut off compensation for bank officers and employees on that basis. The UK’s compensation reforms for senior bank executives are slightly stronger to the pathetic U.S. non-reforms, but they are still exceptionally weak. “Rogue employees” played no meaningful role in causing the financial crisis and the epidemics of fraud, cartels, and predation that dominated the City. Senior bank leaders created the perverse incentives. Rank-and-file officers that did what (almost) everyone else did in response to those perverse incentives were the problem
The UK response is also dishonest in imagining this specter of rogue whistleblowers – with no evidence – and implying that they could make millions by “fabricat[ing] misdeeds.” The second part is absurd. Whistleblowers have to prove their case to receive rewards. They are paid only if their warnings prove reliable. It is exceptionally difficult for a faux whistleblower to “fabricate” a corporate fraud, cartel, or program of predation such as PPI.
Economists always urge us to pay attention to “revealed preferences.” It is not what CEOs and regulatory leaders say that counts – it is what they actually do that reveals their true preferences. We know that financial CEOs refuse to hire whistleblowers with records of total integrity, correct predictions, and the courage to speak truth to power. We know that UK financial regulators are actively hostile to the reforms that would best encourage whistleblowers and protected the public. BWU bestows its Lemon award to the UK’s financial regulators with an unfavorable mention to the City of London financial leaders whose propaganda created the phantom “rogue employees” with an incentive “to fabricate misdeeds.” The City’s regulators and financial leaders have revealed that their great fear is not elite fraud, cartels, and predation by bank CEOs. Their real fear is the City’s most ethical, competent, and courageous officers and employees will blow the whistle on elite crime and predation.
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The whole thing is a scandal. I know of one WB who did the right thing, has been unemployable in the City ever since.
The lack of Whistle-blower protection should be viewed through a keyhole of the UK’S class system.
Of us vs them, where us is an elite class, and them is a lower class.
One cannot escape one’s history.
It continues to baffle my mind that people working with crooks just acquiesce. Says a lot about our morals.
I wish it were different but morals don’t trump feeding your family. I had to do that once very long ago. I have recently thought about that situation and know that I would make to same choice again, regretfully.
I sometimes agree with you, perpetualWAR. I think that other people don’t see the moral dilemma oftentimes but just maybe they are like me.
The crooks of Wall Street devistated the entire globe, foreclosed unlawfully upon 19 million Americans, left millions homeless, exported their crimes to other countries. I couldnt stay to feed my family with that blood money. There’s always another way, maybe not as easy, but there’s always an option in front of you. I hope you change your mind.
“Rogue employees” indeed – the City’s problem is with Rogue Employers.
Osborne took Wheatley from the Hong Kong Regulator where he was doing sterling work and employed him in London until it transpired that he was opposed to commercial crime and had to be sacked. That showed us all that the Treasury and BoE are in the cheating with the City up to their necks.
The City has a marvelous system for avoidance of detection. First they make no statements or comments that might hint at what they’re up to; second they have persuaded those silly people in Westminster that their work must be secret to prevent foreigners learning our clever ways; third they have their own political administration with aldermen and common council under the Lord Mayor and finally they have a spy sitting in the Commons who listens to the representatives and advises his bosses appropriately.
These City gents are unfit to regulate themselves. They need a long period of orderly government to bring them back to the land of decency and fairness. If government is in a hurry to control them, waterboarding should produce the detailed evidence of their secrets in early course.
Lloyd Blankfein famously declared in exonerating Goldman Sachs, himself, other company officers and so on down the line, of any unethical behaviour whatsoever:- “We are not fiduciaries” (on another occasion he boasted “We are doing God’s work”, ROFL).
Any child knows intuitively that mouthings – once rendered into plain English – like “not fiduciaries”, “doing God’s work” and caveat emptor are the refuge of the scoundrel. Our laws have been expressly designed to shield company officers and employees from culpability for unethical behaviour ostensibly engaged-in not in their own interests (Ha!) but in those of the body corporate, which our law has had the fatuity to classify as a person. Therein lies the core of the problem; change that and you have at least some chance of stamping-out a whole lot of the abuses that Black et al rightly inveigh against.
Doubtless all their criticisms of the City of London and what are laughingly termed its regulators are richly (quite so!) deserved, but as a Brit I can only with enormous difficulty be persuaded to look upon the USA as an exemplar, considering that the behaviour criticised is the product above all of the “bonus culture” and the executive remuneration practices which we imported from – where? You guessed it:- the good ole United States. Perhaps you ought to examine the beam that is in your own eye before excoriating the derivative (pun intended) beam that’s in ours. The whole business-culture of both is rotten to the core but ours got there in the first place during the pell-mell rush to install self-serving schemes of employee remuneration the wholly predictable – and predicted – outcome of which was to corrupt virtually everyone exposed to them, from the highest to the lowest – as brilliantly exemplified in microcosm by the author of “Glengarry Glenross”. If you incentivise the basest traits in human nature that’s what you’ll end up being on the receiving-end of, in spades. You might have anyway, but on an immeasurably less societally-damaging scale.
Least of all can I look upon the USA as an exemplar currently, with Dodd Frank (its few virtues along with its considerable shortcomings) about to be repealed under the aegis of a president plainly lacking any personal moral compass whatsoever who in default of that looks upon “business” as offering the best guide to policy (which tells you all you need to know about his ethical standards: think Goldman Sucks (sorry!) Sachs, the Koch brothers, Walmart, Monsanto, Big Oil, Big Pharma, Big IT, Big you-name-it…). The corporate sector and, especially its FIRE component, is out of control on both sides of the pond and talking-shops like this one (however estimable its aims, which they are in my opinion) isn’t going to change that. Only a truly radical, morally-impelled reform programme followed-up by draconian enforcement (NOT by your paramilitary police-service though – God preserve you from that) will.
And what are the chances of that happening in the USA? Under a Trump administration? Ever…? (It won’t of course happen here either, but that’s of considerably less moment).
So the FCA, like the SEC, is just another pseudo-regulator whose real brief is to maintain the status quo for the good of People Who Matter. Who knew?