Moral hazard: the ghosts of bail-outs past

September 2nd, 2014

The bailout of Espirito Santo Bank brings back unwelcome memories of the events of the last financial crisis and raises the spectre of moral hazard returning to the financial services industry both in the UK and abroad.  But how far have we really come since those dark days of 2008 and the collapse of Lehman Brothers and how far do we still have to go? A quick look at recent events gives us a good indication, writes Aamir Khan.

Firstly, the Competition and Markets Authority announced a new investigation into the retail banking industry, which may lead to further break-ups of the major players and the possible end of “free banking” with the objective of increasing competition. The concerns around a lack of competition remain, notwithstanding the fact that there have been several recent entrants in the UK banking sector as well as the spin off of TSB Bank from Lloyds Banking Group.  Then the Serious Fraud Office announced that it will begin criminal investigations and prosecutions into the fixing of foreign exchange rates. At the same time, the Financial Conduct Authority announced that the time limit to bring claims against individuals would increase from three to six years, bringing those timelines into line with civil claims.

Then the payday lender Wonga.com was reprimanded by the FCA for sending misleading letters to customers from two “fake” law firms that did not exist and ordered to pay its customers £2.6 million in compensation to some 45,000 customers. However, the attention soon shifted to the retail banks and their own practices of using their in-house litigation teams to send out law firm branded letters. It has been argued by commentators in the media and politicians alike that this basically amounts to the same sharp practice adopted by Wonga.com. A closer look actually suggested that the use of a law firm brand name on a letter sent out by an employed lawyer of a company is a practice accepted by the Solicitors Regulation Authority as legitimate and one the SRA has known about for many years and approved.

Read the full article in Banking Technology here.