How Was Payment Protection Insurance Mis Sold

Published Date: 02 Nov 2017

By Nick Sadler

Contents

Introduction

What do we define as malpractice?

PPI

How was Payment Protection Insurance Mis-sold?

What was the extent of PPI mis-selling?

What was the effect of the PPI mis-selling?

The mis-selling of complex insurance products

How were these complex insurance products mis-sold?

What was the extent of the complex insurance products mis-selling?

What was the effect of the complex insurance products mis-selling?

The LIBOR Scandal

How was their malpractice within the LIBOR?

What was the extent of malpractice?

What was the effect of this malpractice

Money-laundering

What was the malpractice involved in Money-laundering

What was the extent of malpractice?

What was the effect of malpractice?

Source Evaluation

Conclusion

Bibliography

1. Introduction

Since the privatisation of financial institutions, there has always been an incentive to make profit to support the bank and pay dividends to the share holders. More recently banks have bent more and more standards of practice, because, as Gary Becker puts it, we have created "an unregulated banking industry … (akin to) Darwinian jungle, with bankers as predators and their customers (and each other) as prey " [1] . Due to the large risk-reward ratio, Banks are willing to skirt practices in order to maintain these profits; as people who often work in banks are motivated by the same thing. [2] 

In my project, I intend to first identify what constitutes as malpractice, and then identify the extent to which there is certifiable malpractice in my four chosen instances. I'll then be assessing the extent, measuring the volume of financial transactions altered in order to quantify it to the best I can, followed by analysing and evaluating the effects that they have in order to draw up a conclusion. I'll also be looking at sources I am using to identify whether the information is both reliable and accurate.

The four main areas I will be looking at are PPI, a type of insurance product aimed at the consumer, Complex insurance products,a type of insurance aimed at small firms, money-laundering, a stand alone issue, and LIBOR manipulation, the London Inter-Bank Offertory Rate. These are areas in which malpractice has had the greatest effect or the largest influence, which is why I think it is an excellent place to identify causes and consequences.

2. What do we define as Malpractice?

My extended project is an investigation into businesses malpractice, but what is malpractice or corruption when related to the financial system and what aspects of malpractice are relevant to this project.

Firstly, what is the definition of Malpractice? One definition describes malpractice as "Failure of a professional person to abide by established standards of practice. Malpractice can occur intentionally, through negligence, or because of ignorance. [3] It is usually compared to negligence, however in my case I think that negligence was not the reason for any of my chosen incidents, and therefore want to keep my definition clearer.

Corruption is another phrase used when describing the wrong-doings of the Financial sector, and its definition is as follows "Dishonest or fraudulent conduct by those in power, typically involving bribery" [4] . However, the only proper example of corruption that I have investigated is the conduct of derivative traders, manipulating the LIBOR brokers, and in some instances involved illegal payments. Therefore, I have determined that the definition of corruption does not adequate describe all instances that "malpractice" takes place and that malpractice is then a better overarching description. A definition that is appropriate to our project is when the law or commonly used standards of practice are broken by a bank that either lead to financial gain to the former or financial loss to a individual or a firm.

My reasons for this definition is that in the industry there have been standard protocols set forward as a way to operate that ensure that nobody is mistreated, and when these standards are breached for gain then I deem that malpractice. Regardless of the morality involved in being economical with the truth of consumers, when they stand to lose because of a decision that a bank is fully aware of the consequences of it and still decides upon it. I also stress financial loss; this is the most important for an economics based project.

3.1 The mis-selling of Payment Protection Insurance

How was Payment Protection Insurance Mis-sold?

Payment Protection Insurance or PPI for short is a financial product offered by consumer banks designed to cover loan or credit card repayments for up to a year if the borrower has faced circumstances that mean that he/she is unable to repay the debt, such as losing a job, becoming ill or disabled or even death. PPI is an overdraft product or an add-on to the loan. The problem with PPI was that consumer and even bank staff didn't fully understand the product that was being sold to such an extent that some consumers were actually unaware that they had been sold PPI [5] , but this was not just a few isolated cases since PPI brought in so much money for banks, such as Lloyd's Group which brought 14% of their profits with the selling of PPI [2] . Recorded cases include people who were exempt from being allowed to claim PPI being sold it, while others were lead to believe by sales staff that it was a compulsory product. Overall, 264,00 new cases appeared in 2011, showing the extent of the problem. The list of groups included in the PPI mis-selling scandal is huge as seen below:

* Alliance & Leicester

* Capital One

* Egg

* Eastern Western Motor Group Limited

* GE Capital Bank

* George White Motors Limited

* GK Group Limited

* Hadenglen Home Finance Plc

* HFC Bank

* Home and County Mortgages Limited

* Land of Leather

* Liverpool Victoria

* Lloyds Banking Group

* Loans.co.uk

* Park’s of Hamilton (Holdings) Limited

* Redcats Limited

* Regency Mortgage Corporation Limited

* Ringways Garages Limited

* Swinton Group Ltd [4] 

(List Courtesy of Cloud 9 Claims)

The major issue was the pressure on the sales staff to sell, even to customers who would never be able to claim it, raises implications of corruption in the banking system. This statement taken from a former Natwest employee in an interview with the Guardian demonstrates the pressure imposed by managers to maximise profits even though "In my role as a customer adviser I had to sell 10 loans a week with seven or eight having PPI – this was known as the penetration target." From an ethical point of view that act of 'disturbance techniques', making the customer feel anxious" is completely inappropriate and "that banks should be giving prudent advice relevant to customer needs, not based on selling expensive products" but who is to say that the banks shouldn't be allowed to maximise profits in this harsh economic climate. [5] However, there is no long any debate about whether PPI was mis-sold as proved by the British Bankers Association (BBA) deciding not to appeal the judgement set out and maintained by the 20th April 2011 rejection of the legal challenge previously made by the BBA. [6] Therefore, Corruption the British banking system has been proved in this instance therefore the next step is to quantify the extent.

3.2 Measuring the extent of the PPI misselling

Having established that indeed there was mis-selling of PPI, and this mis-selling can be attributed as a corrupt practice due to people being sold PPI that could never, in any circumstance, claim compensation, we must now measure the extent of the mis-selling using our predetermined measure, the volume of financial transactions affected by the mis-selling of PPI.

Since January 2011, the total amount of money of paid out to consumers who were mis-sold PPI was £8.05bn [6] . However, this is not the entire of the issue. Some consumers were unaware that they had been mis-sold PPI, while others have still not claimed yet, for whatever reason. Therefore, this amount is not an accurate representation of the full scale of the problem.

So what other options do we have? Well, banks have set aside 13bn [7] to pay for the PPI scandal. Therefore, we could say that therefore the total volume of financial transactions is £13bn but again there are some issues with this, mainly that only £8.05bn has been claimed and therefore potentially

this money may never be claimed. The main banks involved have pressured for a time limit to the claiming PPI but until then the potential amount of money claimed could be much higher than £13bn. [8] 

Overall, I think the best value to take is to assume the British Bankers Association convinces the FSA to place a time limit on when a consumer can claim PPI, and therefore the total volume is completed in 2014, but also taking into account that PPI complaints between January and June 2012 have increased by 129% [9] , We can estimate the total financial transactions affected by PPI to be around £10bn

3.3 Overall effect on the economy

Therefore, having determined the size of the PPI mis-selling, the effect on the economy becomes more clear. From a detached economic perspective, the effects of this mis-selling have had some advantages. As the Guardian notes, if PPI compensation reaches the worst case situation which is an estimate of £15bn, then potentially there could be an increase in GDP of 0.7% as consumers increase spending with their new-found wealth [10] . However, this benefit comes at the previous cost to consumers of paying extra for financial products they didn't need, so this seems more of an illusion as this growth could have come earlier when he had the money if this incident never took place.

As I am viewing this from an economic standpoint the ethics of deceiving consumers is irrelevant in this situation, however there are some negative economic effects of this crisis. It has shaken consumers and most importantly, their confidence, as it has become apparent to them that the banking sector is not working in their best interest [11] . It is clear that the majority of high-street banks base their success of the sell of the financial products and that the banks themselves can get away with much more than any other profession. For example, A Which? survey found that "Only 29% of consumers believe that bankers who breach industry codes of conduct would be removed from the profession compared to 78% who think Doctors would." [12] This represents the difference in attitude between both professions. Therefore, consumers can easily lose confidence in banks who take care of their money, which can have severe effects on the economy, which we can explore later.

What needs to be identified is the effect of the PPI mis-selling, both positive and negative. The positive was already mentioned earlier but on a more individual level we can see an increase in consumer spending as consumers use their extra cash to travel or fix one time expense problems such as repair work [13] . This extra spending translates into increased growth, however this is offset as banks find themselves with even less money for investment to small Business; the money has been set aside regardless. An important point to note is that the money largely went to people in debt, who will then go out to spend the money, rather than savers [14] .

Therefore, looking at the Net benefit to the economy it is clearly negative. Firstly, the increase in spending is coming from money consumers may have spent earlier, and so any benefit is assumed to have happened if PPI was missold. Another point is many of our banks are now government owned and taxpayer funded, so having the banks pay out £10 billion is, in all likelyhood, going to cause problems. Finally, the drop in confidence for many consumer banks has affected them greatly, as consumers worry whether something like this will happen again, and the FSA have had to step up regulations on the selling of PPI, likely to increase the cost for those who actually need it.

4.1 The Mis-selling of Complex insurance products to small firms.

On the 29th of June the FSA passed a ruling that it had found "serious failings" in the sale of complex financial products to small businesses, 28,000 of these being "interest rate hedging products" designed to protect a firm from a fluctuation in interest rates. A legitimate product, so an investigation is needed to determine what exactly happened in this situation. [15] 

Interest rate hedges are a range of products designed to protect their firms against interest rate related risk. When a business is making a small profit due to investments they have a sudden change in interest rate can leave them damaged or even out of business. What these products are designed to do is offer an optional product that can remove that risk at a cost. [16] 

These products come in four main categories.

-Swaps, a product designed to allow customers to fix their interest rate for a set time period

-Caps, a product that prevents fluctuation in their rate

-Collars, a product that prevents fluctuation beyond a limited range

-Structured collars, a more complex type of Collar

However the way that these were sold was often inappropriate, either for the needs of the company or the method of selling, something where complex information was abused to force a sale on a customer who didn't understand what they were buying. [17] Other issues involve extra monthly charges if interest rates did fall, while others complain about break costs that were not mentioned in the purchase. In some cases, similar to the PPI incidents, the sales were worded as if the product was necessary in the securing of loans. [18] 

However there is another aspect of this product that too an average consumer this would seem to be unfair. In hindsight, seeing as the interest rate never dropped, there was never any money paid out to the companies in possession

of these insurances [19] . It seems then, that these products are too unfairly sure of reward while providing only limited benefits.

4.2 The Extent of the Mis-selling of Complex Insurance products

An Article by the Guardian notes that nearly 90% of the cases show that a mis-selling occurred, encapsulating over 40,000 products. [20] The overall cost, declared in a statement by the BBC "Sandy Chen, from Cenkos Securities, estimated that the total cost to the banks collectively would be between £1.1bn to £1.4bn, with most of that falling on Barclays." The overall cost of the scandal is then much lower, than the PPI because it was aimed at a more select group, small businesses rather than consumers as a whole, although this threatened to have a larger and more damaging effect. They were sold by four banks, Barclays, HSBC, Lloyds and RBS. [21] The redress that has been decided is that banks are required to remunerate the financial position to what it was before the purchase of the product, although this is complicated, as insurance products vary greatly from value to length, and therefore it is harder to create a uniform solution [22] . From the governments perspective, the "need of cultural reform" is very much needed to prevent occurrences of these problems, because in this harsh economic climate, banks are looking for a quick profit and selling products that the consumers doesn't fully understand is just another way of taking advantage of the massive information gap. [23] 

Why were these products being sold outside of their conventional market? These swaps became major liabilities for any small business that bought them. The idea behind these products was to fix their rate of interest to insure the businesses if the interest rates they had taken loans out on. Due to the crash in interest-rates, many businesses were left paying excessive fees that also had stringent get out clauses. [24] 

4.3 The Effect of the Mis-selling of Complex Insurance products

40,000 products sold, and while some of them are legitimate, over 90% weren't and therefore 36,000 unfairly took income from businesses, which has the potential to cause damage. An article from Businesszone brings some very interesting points, namely that " their role as a trusted adviser – let alone a lender – has never been in such a worse state". When these businesses depend on banks to allow them to run, and they find themselves in situations like this, it is not unlikely that many have been dissuaded from expanding because they are scared, of what could happen. [25] Another aspect of this situation is the large sums of money that is being paid can easily derail a struggling firm.

Finally, a point from Phil Orford, chief executive of the Forum of Private Business again shows that a change in culture is necessary to avoid incidents like this, claiming that "It is more important than ever that government drives through change in our banks and sees them focus on customer support and lending, not aggressive sales machines." This is exactly the kind of aspect that can easily dissuade the expansion of UK small firms.

Another issue is what can happen now that this incident has occurred. There are different views on the matter. For example, Dermot Campbell, managing partner at Kuber Ventures states that "banks simply will not lend to those that are in desperate need of funding, a further obstacle in the road to stimulating the economy". He points out that now they cannot set these products at lower rates because they are unwilling to take the risk, they cannot offer the same loans as they previously did. However, it can be argued that this effect would have happened anyway. [26] Conversely, The chairman of Bully Banks, a group of small firms that had been the victim of the controversy, notes that he is "delighted to be vindicated that mis-selling his taken place on an extensive scale". Therefore, it could be argued that actually there will be more confidence now that an issue like this has been solved.

5.1 The LIBOR scandal

One of the main areas of obvious malpractice is the LIBOR rate fixing scandal

Firstly, what is LIBOR? LIBOR stands for the London Inter-bank offertory rate, one of the most important derivative in finance, capable of affecting up to $350 Trillion worth of financial transactions. In perspective, this is more than four and a half times the worlds global GDP. [27] Another aspect of LIBOR is that is it a measure of the confidence of the banks with each other and the health of the banks.

This rate is set by a group of banks setting rates for 10 currencies and 15 loans, ranging from one day to 12 months. These rates are what these banks would pay other banks to borrow money, however outside these banks, many financial institutions and mortgage lenders base their rates of those LIBOR rates. [28] 

Malpractice was brought into the LIBOR system because of two entities; The traders and Barclays bank. Firstly, a number of traders working for individual banks had been involved in attempting to influence a bank’s interest rate submissions in order to boost their own earnings. [29] 

One way this was achieved was when traders asked brokers to make false bids or offers to alter predictions of the cash borrowing rates. [30] These were individual situations and so not reflected institutionally on their respective banks, however, the second form was during the credit crisis was when Barclays artificially lowered their submission to remove unwanted speculation of the health of Barclays which had come about following a period of high submissions. Effectively, this made it appear to others that Barclays bank was stronger than it actually was because it was willing to take more risk. Furthermore, if Barclays was a net borrower, then they would have gained extra benefit from attempting to drop the LIBOR rates.

Whilst there is evidence of other manipulation of the LIBOR rates such as Deutsche Bank being implicated into the scandal, I am only interested in what happens in the UK. [31] 

5.2 The extent of LIBOR Malpractice

Having proved that there was malpractice involved with manipulation of the LIBOR rates, we must now ascertain the total volume of financial contracts are affected by the business malpractice. On the 6th of July, 2012, The UK's Serious Fraud Office began to investigate the manipulation of libel. This investigation spanned more banks than just Barclays, including RBS and others [2] 9. Outside of this almost 20 major banks have been named in investigations and court cases relevant to our investigation. [32] This further develops the widespread malpractice conducted by traders and banks.. As stated earlier the LIBOR has the potential to affect more than $300,000,000,000,000 worth of financial contracts, however over 800 trillion of securities and loans could potentially also be affected by a shift in LIBOR rates. [33] 

Examining the amount of money paid in fines by the major banks is another way to determine the full extent of the business malpractice. One of the bank's most involved in the LIBOR malpractice, Barclays paid $450,000,000,000 whereas UBS paid a combined 1.5 billion in fines, [34] RBS paid 612 million to settle.

These fines alone demonstrate that the LIBOR manipulation was the largest financial malpractice conducted by the UK's financial services, even if the entire blame cannot be attributed to them.

Due to the complexity and the scale, it is infeasible to be able to accurately measure the extent of the LIBOR scandal from the UK. The rates are so closely intertwined with other countries such as America, China, and Japan, all who conducted similar offenses, that the only accurate measure of the extent of the LIBOR malpractice would be the value of financial contracts effected, rather than the value of the manipulation done by UK traders and banks.

For the purpose of this investigation, I have taken the total volume of financial contracts affected to be $800 Trillion dollars, but there are several considerations to be made with this data. [35] Measuring the effect of LIBOR is going to be impossible, therefore the data given is an estimate and is not entirely accurate (although it is backed up by other figures). Secondly, The value given is not the amount that is lost from the LIBOR incident. As I will go into later, there are benefits to some consumers and businesses, but they do not out weigh the losses.

5.3 What are the consequences for the economy as a result of the LIBOR scandal?

With such a large system, the consequences are going to be colossal, but more important, far-reaching. Consumers will depend on these rates for any loans or savings, banks will depend on these rates to determine what they can borrow and whether they should lend to small businesses, and the UK government make decisions on financial policy based on the financial health of banks, and there are other consequences still. I have decided to separate the effects into the effects on UK consumers, UK banks and the economy/government.

Starting with the effect on consumers. Any consumers with a buy-to-let mortgage or a sub-prime loan will have the amount they had paid altered by the inaccurate LIBOR rates. The Guardian estimates that there are between 200,000 and 250,000 of these mortgages that are affected in this way. [36] However, this does not mean you have been over charged. In actual fact, since the LIBOR rates were altered to show a stronger financial position and therefore the end result was that they were averagely lower, then consumers enjoy a lower interest rate payment. Consumers were also fairly unaffected on their savings accounts, however large short term accounts were affected negatively, as they lost money. However, research done by Grant Shapps (UK Housing Minister) indicates that the LIBOR scandal could, in addition to other factors, have caused homeowners to have their homes repossessed, but this was denied by Barclays [37] . However, as being a homeowner is very popular compared to renting in the UK, and reporting artificially higher rates would lead to increased mortgage costs disregarding any change in risk of loan. [38] 

The effect on the banks cannot be ignored. Ignoring any fines which are supposed to cover the money gained by abusing the LIBOR rates, Share prices for Barclays dropped by 15%, worth about £3.2bn and leading to the resignation of CEO Bob Diamond. [39] However, Barclay’s is not suffering the consequences alone, as the majority of the LIBOR panel suffered hits to their stock. Consumers are quickly losing faith in high street banks that continue to seemingly take money off them again and again, and now that a proportion of the UK's banks are owned by the taxpayer it is likely that consumers will have the ability to do something. One of the benefits of the manipulation of the LIBOR meant that the prices of asset based financial products, securities and bond all inflate to higher prices than they should be, causing banks to appear to have a stronger health then they actually have. [40] 

How about the effect on the UK government and the UK economy as a whole?

Confidence in your financial sector is paramount to a stable economy, and what LIBOR demonstrates is that the banks are having to fake their rates in order to elevate their health. Once investors realize that this is going on, how much of the banks readings can they now trust and if they notice that banks need to create the illusion of financial health [41] . It becomes even worse when banks that are mostly owned by the UK government such as RBS suffers from the same problem, as consumers begin to question whether the problems go further. In the document sent by the FSA to Barclay they mention that "The integrity of benchmark reference rates such as LIBOR and EURIBOR is therefore of fundamental importance to both UK and international financial markets." [42] because they are the most "prevalent benchmark rates". When the most integral benchmark rates become corrupted, it casts a shadow of doubt on other derivatives.

However, It is unlikely that the effects of this can be fully realized, as well as whether any damage could be done. The charges brought by the FSA note that the artificial rates "could" have caused serious damage, rather than claiming that they have done damage [43] . This means that either the effect is just so complex it would be impossible to come up with a particular area where the LIBOR malpractice has caused serious damage, or rather the benefits are just mingled with the costs.

This is all underpinned by a reduction in trust in the capabilities of the FSA. They become vulnerable as people realize they haven't been able to prevent issues of this magnitude and therefore they become under pressure to "play down" the total extent of the problem to make it appear as if they have it under control. They in turn, are pressuring internal auditors for their failings in declaring the system to be risky and corrupted. [44] 

Regardless, The LIBOR has come under intense scrutiny and it has been decided that this method of setting rates, based off very little data, is just to inaccurate and easy to manipulate. Therefore, the LIBOR could be replaced altogether by another system, which again will change the value of rates produced. [45] The new system will be under increased regulation and government framework surrounding it and be based of actual trade data.

6.1 What was the malpractice to do with money laundering?

Accusations of UK banks money laundering, whether by accident or on purpose, have placed banks such as HSBC and Standared Charter at odds with US authorities. What happened with banks to cause this situation?

Firstly, what is money laundering? A term that is used to describe a situation where criminals disguise ownership of money to make it appear as if that money had been generated through legitimate means. However, this does not apply to our banks as they have not been making money illegal, but it appears that through lack of control they have been processing money and working with criminals that US law bans them from doing so. We need to examine the evidence for this. The charges brought include conducting business with clients in Cuba, Iran and Sudan as well as assisting these customers to help launder nearly $900 million dollars for drug cartels [46] . The difficulty becomes more obvious, these are US charges brought under US laws, and therefore to my project their importance becomes questionable, as I am looking at malpractice in the UK economy. However, I have determined that there is an effect and therefore it is relevant.

So how was this money laundered? Devlin Barrett, Wall street journal claims that while the 850 million was simply laundered drug proceeds, there is "vast pools of billion of dollars" which banks had simply no idea who they were dealing with, a "Basic Principe of know your customer". This is a severe case of negligence, which becomes expanded further as damming descriptions of malpractice emerge; Important bank officials routinely ignored warming that the system put in place to monitor the flow of money were inadequate and furthermore, it has also been noted that HSBC Mexico had a cripplingly understaffed compliance department which also lead to the increase of illicit traffic through HSBC as more criminals realized that HSBC was the way to conduct business . [47] Another interesting point is that HSBC ranked Mexico as "lowest risk, which allowed over $670" billion in transactions to go unmonitored. Mexico is typically a high risk place and this decision demonstrates HSBC's desire to cut costs and therefore maximize profit over safety and security. Furthermore, fresh allegations in Argentina say that they facilitated the money-laundering of a further 392m pesos and had helped clients evade taxes on a further 224m pesos. [48] 

Another instance of negligence, as previously mentioned, was the dealings with countries that had restrictions against them, such as North Korea, Burma and Iran, which HSBC circumvented. In some instances, up to $19.7bn was transferred involving Iran as well. However, this was not just a mistake, as HSBC affiliates removed any information that linked Iran to any of the deals. Furthermore, they were also found guilty of dealing with people and groups potentially linked to terrorist organizations, such as the Al Rajhj bank,

and continued to do business with them. Therefore, It is quite clear that negligence liable to cause the facilitation of illegal funds did take place and HSBC were responsible.

6.2 What was the extent of money laundering?

After having established that money-laundering took place, we must now examine the full extent of the problem. I have already established that the majority of the negligence was based in HSBC Mexico, but other instances occurred from places such as Iran and South Korea. The US fined HSBC $1.9bn in penalties, causing it to be the largest fine on any financial institution. [49] While it is a large penalty compared to the other crimes, it needs to be put in perspective. Money-laundering is a massive issue, amounting to approximately 2-5% of the UK's GDP (23-57 billion), whilst it accounts for 1.57% of the USA's GDP , about 110 billion in 2005 (2007 figures and 2005 figures respectively. [50] 51It seems then, an adequate response, especially when the international community is focused towards cutting down money-laundering wherever possible as money-laundering accounts for about 2-5% of the world's GDP. Bear in mind this data is all estimates, and when trying to measure the size of something as complex as money-laundering difficulties will be encountered. Also note that successful efforts to hide the money will make it incredibly hard to trace. Furthermore, attempts by the Financial Action Task Force to produce a reliable estimate that enough reliability and accuracy to be able to be used in policy-making failed. [52] 

When looking at the actions of HSBC, some conclusions can be drawn about the extent of the issue. The US government accused HSBC of "turning a blind eye" to the issue, which is a very important factor to take into account. On the 19th of March, new findings showed that HSBC had also conducted money-laundering, while rather small scale, in Argentina. The full extent of HSBC's crimes is still unclear but it does highlight the lack of tight controls in high risk countries, and whilst HSBC was forced to spend a further £430m on a "26 point know your customer plan" it seems that issues lie deeper in the organization than simply errors with the compliance department and failure of the HSBC staff.. [53] 54

Another of the more worrying issue is that it appears that HSBC simply do not care what type of money comes into the bank or even that there were identifiable issues that they were aware of, as in 2007 HSBC senior manager of group compliance wrote that he was "Quite concerned that the committee is not functioning properly". [55] This is really not surprising as previous examples have shown that major banks don't care about whether or not they facilitate money-laundering, rather whether they caught, due to the lack of culpability of high-ranking executives. Senate Investigators claimed that "ignored warnings" of "improper activities", and "waived anti-money laundering requirements". Whilst money-laundering is a crime, HSBC is simply too large to be shut down and its people too distanced to face legal claims. [56] 

6.3 What was the effect of money laundering?

Firstly, It is important that we cover the general economic effects of Money-laundering, as it is relevant because by the lax controls used by HSBC they have essentially facilitated money-laundering and therefore increased the prevalence and the success rate of it.

Firstly, a successful money-laundering venture creates an effect similar to the multiplier effect, where the successful venture creates an incentive to continue and increased the volume of money that is laundered, which increases the impact of the original effects. [57] In the case of HSBC word spread from individuals that HSBC was a safe and easy place to launder illegal assets, which convinced more criminals to launder more, which created a larger impact. [58] 

One impact is the loss of confidence in the bank and therefore the sudden withdrawal of funds from the bank on a large scale. If consumers become worried that the bank may face investigation and have its assets sized or its insurance revoked and therefore potentially lose their savings, they will be more likely to withdraw their money quickly, which the branch of HSBC may not be able to cope with. This however is unlikely as HSBC is a global organization and is "too big to fail", which would ensure support from the government. [59] 

There are some more wider effects such as the outrage into the culpability of individuals inside HSBC. Money-laundering is a crime; and as such it carries a prison sentence with it. An argument given by Federal authorities not to indict HSBC was the danger that the damage to the bank would be vast and damage the financial system, again another example of the "too big to fail" argument. [60] It may however have the opposite effect, as individuals become scared that their money is not secure and it doesn't have any impact on senior officials who only face the small issue of having to "partially rescinding their bonus". This gives investors and savers concern; if the senior officials in banks face very little consequences, they become more likely to continue the practice. Does this promote confidence? Remember, all of this is ignoring the huge ethical with facilitating money made of drugs and terrorism, which is a fundamentally huge issue. [61] 

Another consequences of money-laundering is a "depression of productivity", which occurs because laundered money is generally invested into "sterile" investments, such as houses, works of art and jewelry. [62] As such, it deprives funding to profit-maximizing firms which leads to decreased productivity and therefore is harmful to the economy. [63] 

Furthermore, the purpose of money-laundering is to create an obstacle that prevents the tracking of the beneficiaries of illegal activity. When HSBC helped facilitate this process, they help obscure from authorities criminal activity, which therefore means that the activity will continue to damage the economy, whether it is the sale of drugs in the US and UK or funding for gangs or criminal groups. [64] 

Finally, any country with a reputation for money-laundering will suffer from reduced foreign private investment, which impacts growth. In the case of the US, the money-laundering is unlikely affect the actual country, however its impacts will be faced by HSBC, with a reduction in their share price.

This chart shows HSBC's share price for the last 3 years. They suffered greatly from them money-laundering scandal, although it has recovered.

7.1 Source Evaluation

The instances of financial malpractice that I am investigating are relatively current occurrences and as such few papers have been published that offer an intellectual opinion. Therefore, the majority of my sources are either journalistic, personal opinion,or government publications and therefore are open to interpretation. In this section, I intend to analyse a selection of the sources and identify what issues there are and what potential bias there is.

Starting with my most common type of source, journalistic articles. The BBC and the Guardian both have a reputable business and economics writers with very little bias. The Guardian has a centre-left political alignment, and is said to be an "organ of the middle class", whilst the BBC aims to be politically neutral. [65] However, the stance a paper like the Guardian takes will be influenced by its readers, who tend to be middle class educated citizens, shown by their average print readers household income, around £30,500, £9500 higher than the UK average. [66] This will cause the Guardian to run more articles about economic incidents, but also due to the progressive nature of the readers allow it to pressure for more dramatic reforms and suggest bigger changes. On the whole, we can take information from the Guardian and the BBC to be both reliable and free of ulterior motives, however there is still an element of bias, which is mostly minimised.

Another frequent source I have used have been FSA documents. The FSA is the financial regulator for the UK, is independently funded, but are accountable to the Treasury. The FSA's official documents are a very good source, as they are free from bias-from the government and from firms that they regulate. However, an area they suffer from is that throughout my project, I have identified issues that the FSA have failed to deal with and have large potential consequences. Therefore, when the FSA respond to these issues they will present the information in such a way that would make it seem a smaller issue. Whilst the facts are correct, the way they are presented could be misleading, such as claiming that firms for the mis-selling of swaps and then excluding costs above £10m. [67] 

A final type of source are blogs, run and owned by companies or a group of people, but they are contributed to by individuals who may not share the same opinion as the name they upload themselves under. Usually, this is a bad thing, as these people may not be educated on the subject, or may not include evidence to support their arguments. Furthermore, it is up to the owner to make sure the articles it uploaded are peer reviewed and sometimes this is not the case. However, these opinions are very important to my EPQ especially when working out the effect on the consumer. Furthermore, facts and information from the blog are accurate; again it is the way the information is presented and what the author adds as his own personal opinion which is important. [68] However, they are highly subjective and caution has been used to minimize their negative impact.

8. Conclusion

Throughout this project we have encountered many instances of malpractice, some with larger impact on financial transactions, others that affect more members of society, and some that we don't fully know how deep these problems lie. In answer to the question, the extent of malpractice in the UK banking sector is widespread and underlying many every day transactions. Whether it ranges from abuse of information power, or simply allowing the movement of illicit funds, the majority of our banks have been involved in one form or the other, due to the current culture of banking [69] . This is a worrying statement and if it is further allowed to continue this way, then we as consumers will continue to be taken advantage of, but the effects are more widespread, damaging the economy, as recognised by Lord Turner, FSA chairman, who stated that the "effectiveness depends crucially on the integrity of those who operate in the system". [70] When the integrity is seen to be low, there's no incentive for any persons operating to start behaving integrally; nor is there any effectiveness in estimates, trust, or other reputation, and therefore consumers will doubt whether the bank has their best interests at heart.

Malpractice has grown due to the massive increase in activity and therefore the huge risk in reward, and it's few benefits clash with the damage done to both customers and trust, the overwhelming negative affects caused damage to the economy. Furthermore, if it isn't combated, then its prevalence will increase as other banks adopt these breaches in standards of practice, such as increased sales of pure exploitative products. It appears to the public, through the lack of criminal sanctions for individuals inside the firms, and the lack of regulations, coupled with the seemed inability of the FSA to with conduct of business regulation-related offences, as noted by the Treasury Select Committee chairman Andrew Tyrie . [71] This is the main reason why consumers will be put off from keeping their money in certain banks; they are worried that when they finally get caught, and when the government is no longer able to support them, they will lose their money. This will motivate them to take their assets elsewhere, which will damage the bank that they leave. Banks such as Barclay's have suffered so much to their reputation that one more major incident could cause irreversible damage. [72] 

In conclusion, the widespread malpractice in the UK banking system, due to the culture and industry underlying the financial sector, has and can further cause large losses of reputation and trust, whilst ensuring that the money of the average consumer is at risk.

The effects of some incidents, such as LIBOR, provide benefit to one party at the expense of the other, but all the incidents we have looked at have involved the banks benefiting at the expense of the consumer or firm, which is unhealthy for an economy.

9. Biblography