Banks are capable of crimes far worse than heists

The Clydesdale Bank is being fined £20.7m for the serious failings in its handling of complaints about its mis-selling of payment protection insurance

At least 70 safety deposit boxes were raided at Hatton Garden Safe Deposit Ltd (EPA)

Let’s call it the establishment’s favourite get-out clause. The banks make regular use of it; indeed, HSBC recently relied upon it when it was discovered to have been helping its customers to avoid paying tax. It states that nobody in a senior position has any idea at all what crimes their staff are committing under their noses, so they cannot be blamed when malpractice is discovered. It is as simple as ABC.

This noxious formula has turned up again this week, with the Clydesdale Bank the culprits. The Financial Conduct Authority is fining it a record amount – some £20.7m – for serious failings in its handling of complaints about its mis-selling of payment protection insurance (PPI) between May 2011 and July 2013. PPI is supposed to help bank customers if they find that they can no longer cover their loan, mortgage or credit card repayments because of, say, redundancy or illness.

PPI was very good business for the banks. Holding mortgages, loans or a credit cards with the bank, as they did, customers were very vulnerable to sales pitches for payment protection. The mis-selling arose because customers were often not told that the protection was optional; they were wrongly led to believe that buying PPI would increase their chances of obtaining credit; they weren’t always informed that if they were self-employed or had pre-existing medical conditions the policy wouldn’t pay out; and, sometimes even, the policy was added to a customer’s loan without his or her knowledge so that, unwittingly, they were paying interest on the insurance premiums. In total, some hundreds of millions of pounds of these policies were mis-sold by the banks to their customers.

This crime, for crime it is, far exceeds in seriousness, for instance, the spectacular heist of safe boxes in Hatton Garden, London, recently. Part of the wrongdoing arose from a change in policy which meant that relevant documents were not taken into account in the handling of complaints.

And, just to add to the horror, it turns out that Clydesdale knowingly provided false information to the Financial Ombudsman Service in response to requests for details of the records Clydesdale held. Yes, some of the bank’s staff regularly lied to the statutory body that supervises the handling of complaints in the financial markets. But, the regulator soothingly assures us, “these practices were not known to or authorised by Clydesdale’s PPI leadership team or more senior management”. This is implausible.

The Clydesdale staff had been trying to reduce the cost of compensating customers for mis-selling PPI by pretending that they no longer had sufficient records to investigate particular complaints. The Financial Ombudsman Service rightly became suspicious of this tactic because in its own work it sometimes came across the missing documents. So the Ombudsman started to ask Clydesdale to supply it with screen prints showing that searches had been undertaken to confirm that loan documentation could not be located. Problem for Clydesdale staff: what to do? Well, try forgery. Search under an incorrect loan account number to produce a system print stating that no records had been found and send that off to the Ombudsman. Or physically replace the actual results with a print out from another customer file that conveniently stated that no relevant documentation existed.

There are a number of comments one can make about this shocking story. A Clydesdale spokesman refused to say if the staff behind the worst practices had been sacked, saying only that they had been “subject to disciplinary action”. But the directors of a bank and the senior staff of a City regulator both have a clear duty to report the matter to the police when they have reason to believe a crime has been committed. In the absence of any statement, we can only assume that neither the bank nor the regulator have done that. They should do so.

Then there is the plausibility of the get-out clause to consider. I have personal knowledge here. I was the first chair of the Financial Ombudsman Service, having been responsible for setting it up. And until recently I had a non-executive supervisory position with a large financial institution – much bigger than the Clydesdale Bank – that brought me into regular contact with compliance teams.

You have to ask what would be the incentive for a compliance team to take the dangerous step of supplying fraudulent material (screen shots) to the Financial Ombudsman Service. It’s possible they might want to deceive an important institution if their pay depended upon, say, reducing the Clydesdale Bank’s huge mis-selling costs. But it seems highly unlikely that such an arrangement existed. Or did they fear that they would be blamed for the loss of documents? Possibly, but the “missing” documents are quite old and are likely to have been dealt with originally by people who have since left the bank or gone on to do other jobs. My guess is that they would not be held responsible for failing to unearth old PPI documents.

Instead, the most likely explanation is that in trying to prevent the Financial Ombudsman Service from arriving at the truth, they thought they were doing what management required.

In fact, the regulator does lay some blame on the managers of the compliance teams. In a statement that lacks clarity, and thus indicates internal confusion, the regulator states that “the tone and example set by Clydesdale’s PPI leadership team in some of its communications with the ombudsman service, particularly the lack of transparency surrounding Clydesdale’s loan and credit card policies and the ability to provide screen prints, as described above, is likely to have contributed to the FOS PPI team implementing these practices.” It also states: “Clydesdale did not carry out any quality assurance or other monitoring of the information and documents provided … to the Ombudsman Service which might have revealed that false information was being provided in some cases”.

Is this an example of the old rule that you should not ask questions when you might not like the answers? Frankly I doubt that Clydesdale managers were in the dark. Something made the bank’s foot soldiers act in a reckless fashion.