World’s biggest banks face £264bn bill for poor conduct

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Costs for 20 financial institutions for the five years to 2016 are higher than in the previous period, with RBS and Lloyds in top five

Fines, legal bills and the cost of compensating mistreated customers reached £264bn for 20 of the world’s biggest banks over the five years to 2016, according to new research that raises doubts about efforts by the major financial services players to restore trust in the sector.

This figure is higher than in the previous five-year period – when the costs amounted to £252bn – and is up 32% on the period 2008-12, the first time the data was collated by the CCP Research Foundation, one of the few bodies that analyses the “conduct costs” of banks.

The report said the data showed that 10 years on from the onset of the financial crisis, the consequences of misconduct continue to hang over the banking sector.

The latest analysis shows that in 2016 the total amount put aside by the banks surveyed rose to more than £28.6bn – higher than in the previous year when there had been a fall from a peak of £63bn in 2014.

Chris Stears, research director of the foundation, writes in the latest report: “Trust in, and the trustworthiness of, the banks must surely correlate to, and be conditional on, banks’ conduct costs. And persistent level of conduct cost provisioning is worrying.

“It remains to be seen whether or not the provisions will crystallise in 2017 [or later] and what effect this will have on the aggregated level of conduct costs.”

Two UK high street banks – Royal Bank of Scotland and Lloyds Banking Group – are in the top five of banks with the biggest conduct costs.

RBS set aside extra provisions for fines and legal costs largely related to a forthcoming penalty from the US Department of Justice for mis-selling toxic bonds in the run-up to the financial crisis.

That residential mortgage bond securitisation mis-selling scandal is responsible for £66bn of the costs incurred during the five-year period and the single largest factor, according to the foundation.

The payment protection insurance scandal, which is the main reason Lloyds Banking Group is in the list, caused the banks to set aside £27bn during the period. Lloyds has set aside more than £17bn to tackle the mis-selling of PPI.

Roger McCormick, managing director of the foundation, said: “It’s reasonable to assume that the long-running sorry tale of payments and provisions for PPI must come to an end eventually although UK banks made additional provisions for PPI mis-selling of more than £1.5bn midway through 2017.”

The foundation uses five-year rolling periods to try to provide a long-term analysis of the costs that banks face to rectify past mistakes, a major theme of the last 10 years, when they were also hit by penalties for rigging foreign exchange markets and interest rates (Libor).

“As has been the case since the first table, we find ourselves wondering when, if ever, the level of conduct costs will start to decrease,” said McCormick.

He noted that the 2016 figures showed a rapid decline in fines from the Financial Conduct Authority, which issued fines worth £819m in the first six months of 2015 alone, as a result of the market-rigging scandals.

Top of the table are major US banks Bank of America, which dominates the table because of its previous bill for the toxic bond mis-selling scandal, JP Morgan and Morgan Stanley.

The figures include money set aside for future penalties by the 20 banks and fines and other costs they have incurred to tackle regulatory and legal claims.

Stears said there would not be zero conduct costs but added: “The question is at what average level will these costs settle? And, moreover, is that level acceptable to the banks, their shareholders and the public?”



RBS raises offer to settle 2008 cash call lawsuit

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Royal Bank of Scotland (RBS.L) has nudged up an offer to settle the last of five damages claims by investors over its record 12 billion pound ($15 billion) emergency cash call in 2008, two sources familiar with the situation said on Tuesday.

Hoping to avoid a trial that will rake over its near collapse and state bailout, the Edinburgh-based bank is raising its offer to the RBoS Shareholder Action Group, which includes 27,000 private investors, former and current RBS staff and about 100 institutions, by 2 pence per share to 43.5 pence.

One source said the increase, designed to help cushion the group’s added legal costs after four other investor parties settled separate cases against the bank, would raise the cash on the table by just under 10 million pounds to about 170 million.

The offer is set at a fraction of the shareholder group’s original 1.2 billion pound claim, including interest and costs. Claimants bought into the cash call at 200 to 230 pence per share.

But with a costly trial set for May, a move by RBS to raise the stakes could split more pragmatic institutional investors, which include Bank of America Merrill Lynch, Axa and Aberdeen Asset Management and small shareholders, who saw personal funds decimated in the wake of the rights issue.

RBS last year set aside 800 million pounds to settle claims totaling around 4 billion pounds from five investor groups in an unprecedented lawsuit over alleged omissions and misrepresentations about its financial strength when the bank launched the rights issue as the credit crises raged.

Four investor parties accepted their share of the out-of-court offer settlement last December. But the RBoS Shareholder Action Group pledged to see the bank and former top executives, including former CEO Fred Goodwin, in court.

Reuters reported two weeks ago that lawyers for both sides had held fresh tentative settlement talks but that some private investors in the vast RBoS claimant group remained determined to take the case to trial.

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