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Bank fines – what should be done with the money?

It was widely report in the press at the weekend that millions of pounds is to be spent on improving Wi-Fi on commuter trains across England and Wales. The total investment was suggested to be around £90m. And where is the government finding this amount? Simple, from the fines that the Office of Rail Regulation have levied on Network Rail for failings that resulted in poor customer outcomes. Many critics have historically questioned the logic in fining an organisation such as Network Rail as any fine simply takes cash, which could have been used to improve customer service, away from the firm. So the thinking behind this government announcement is rather neat – punish the firm that has failed, but put the money towards improving the service customers receive.

Banks benefited from their fines!

There are parallels in the financial service industry. Historically, until April 2002, bank fines went into a ‘pot’ to help pay for the running of the regulator. As firms paid a membership fee to cover the regulators running costs the fines effectively reduced the future membership fees that they had to pay. Perversely banks benefitted from their fines! Since April 2002 the money has gone to the Treasury and from there into what is termed a ‘consolidated fund’. Where the money goes to from here is not specifically defined as the consolidated fund covers the general expenditure of government.

Bank’s fines are: Big sums!

In recent years the amounts that this fund would have benefitted from are substantial, by any measure. Financial Conduct Authority data shows that fines of £474,138,738 were made in 2013. The 2014 figure, for the first six months to the end of June, already total £135,855,700. Only in the last few months the following fines were issued. Yorkshire Building Society was been fined £1,429,000 for failing to ensure that financial promotions surrounding a particular product were clear, fair and not misleading. Barclays Bank plc was fined £26,003,500 for failing to adequately manage conflicts between itself and its customers as well as systems and controls failings in relation to Gold Fixing. Santander plc was fined £12,377,800 for failing to ensure it gave suitable advice to its customers and failing to ensure that its financial promotions and communications with customers were clear, fair and not misleading. Big sums!

Another flaw in the current thinking

In recent times, the Treasury has specifically announced that fines from the LIBOR scandal will go to military charities. Although some large sums have been allocated which will undoubtedly benefit the recipient organisations, and many worthy causes have benefited from the money, the future strategy is not ‘written in tablets of stone’. Future chancellors, or even this one, may revert to the previous system and simply let the sums support general government expenditure. Another flaw in the current thinking is the amounts ‘earmarked’ only relate to LIBOR fines. As shown in the paragraph above other fines are also significant. On that basis, the announcement from the rail regulator should be welcomed. Customers directly benefitting from the misdemeanours of the firms they deal with sounds rather appealing!

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