Paying the price for banks’ mistakes

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The US authorities have always taken a tough line towards financial institutions found guilty of breaking the rules. Yet, even by their fierce standards, the settlements reached this week with HSBC and Standard Chartered, Britain’s two largest banks by market value, over money laundering allegations, stand out. They are the biggest fines ever meted out for wayward compliance.

True, neither HSBC’s $1.9bn fine nor the $667m settlement with Standard Chartered are big enough to make a meaningful dent in the two institutions. After all, the sums are only a fraction of their pre-tax earnings in the first half. But they come on top of a growing tide of fines and compensation claims against banks, whether for the Libor scandal or the mis-selling of payment protection insurance in the UK. These are starting to add up. A billion here, a billion there, and pretty soon you are talking serious money.

The charge against the banks is that they allowed their hunger for revenue to trump their compliance obligations. Punitive fines are therefore justified, insofar as they remind shareholders of the cost of not reining in management when it takes excessive risks. But it is important also that managers and executives should bear their share of the pain. Investors have only a limited ability to look over the shoulders of those they hire. For managers to escape with bonuses that were based on bogus revenues would create a perverse incentive.

Unfortunately, the ability of the two banks to target such retribution at the infractors is limited. Although banks now have the ability to claw back past bonuses, many of the offences in both cases occurred before such mechanisms were in place. Nonetheless, current management will shoulder its share. Dozens of HSBC managers will see their bonuses clawed back as a result of the settlement.

Finally, there are questions for the British regulator. Standard Chartered’s breaches are specific to the US sanction regime and would not be illegal in Britain. But the accusations against HSBC are broader and may point to a failure of the bank’s oversight of its foreign subsidiaries. The Financial Services Authority should look at who was responsible for the failings, both among current executives and those that have left.

Punitive fines send a powerful signal that rule-breaking will not be tolerated. But this message has to be reinforced by both regulators and shareholders, who should ensure that management is held to account.

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