:00:15. > :00:18.Now on BBC News it's time for Welcome to HARDtalk. Five years ago
:00:18. > :00:21.the western world's banking system was spiralling into crisis. How
:00:21. > :00:29.confident can we be that the fundamental flaws exposed then have
:00:29. > :00:32.really been fixed? Lord Turner has just ended a heavily scrutinised
:00:32. > :00:35.term at the head of Britain's Financial Services Authority. Have
:00:35. > :00:45.the bankers and the regulators learned the right lessons from the
:00:45. > :01:18.
:01:18. > :01:28.Welcome to HARDtalk. You have just ended for Pipe five-year term as
:01:28. > :01:30.
:01:30. > :01:36.Britain's financial services regulator. -- 2.5. The UK banking
:01:36. > :01:42.system is in a much better shape than it was in 2008. We have much
:01:42. > :01:49.higher levels of capital. The reserve of Cup proper letter to the
:01:49. > :01:54.size of the balance sheet. We have more liquid balance sheet. I think
:01:54. > :02:03.we are in a very different position them that which led to the crisis.
:02:03. > :02:08.There are two problems that we still have. I do not think we are
:02:08. > :02:12.being radical enough. The faults in the system before the crisis were
:02:12. > :02:16.very profound. There were the product of 50 years of policy
:02:16. > :02:21.mistakes. We are still struggling with the aftermath of the crisis.
:02:21. > :02:25.The fact that once we have a large financial crisis, you create an
:02:25. > :02:30.economic depression. Even if you get your banking system into shape,
:02:30. > :02:35.people are very worried and wary of borrowing money. That is one of our
:02:35. > :02:39.fundamental problems. That is exactly where I wanted to pick up
:02:39. > :02:44.with you. Polls suggest that trust in the banks are still no. Much
:02:44. > :02:49.lower than other business and industrial sectors. It is fair to
:02:49. > :02:53.say that people look at the fat profits made by banks today, the
:02:53. > :02:57.pale Sudhir been given to the senior bankers themselves, and then
:02:57. > :03:00.they look at the fact that it is still very difficult for small and
:03:00. > :03:05.medium enterprises to borrow money. They think this system is as
:03:05. > :03:10.dysfunctional as it ever was. have to break those points apart.
:03:10. > :03:14.There are very good reasons why people became very distressed for.
:03:14. > :03:22.Not just that the banking system, but other bits of the financial
:03:22. > :03:27.system. There are two reasons for that. They were told a story that
:03:27. > :03:30.this development of complicated, global finance was in some
:03:31. > :03:36.mysterious way making the whole world economy much more efficient
:03:36. > :03:46.and growing. That turned out to be untrue. We now find us to get too
:03:46. > :03:50.
:03:50. > :03:56.big and banks to leverage. And it's the thing blew up. They are also
:03:56. > :03:59.right to be distrustful to the fact that in very particular products,
:03:59. > :04:05.products like payment protection insurance, banks were guilty of
:04:05. > :04:11.selling things that were not in the customer's interest. That mistrust
:04:11. > :04:15.will take many years to come back. The air was a very powerful phrase
:04:15. > :04:20.you coroner to describe much of what the banks have been up to in
:04:20. > :04:28.the run-up of 2008 maybe even beyond. And that was socially
:04:28. > :04:32.useless. Do you think the banks are still making a lot of money by the
:04:32. > :04:36.sorts of business operations that are socially useless? Far less. And
:04:36. > :04:42.lot of what I was talking about, quite a lot of that, has been
:04:42. > :04:47.shaken out of the banking system. Quite a lot of it has shocked out.
:04:47. > :04:55.A lot of it has to do with the way some mortgages in the US were
:04:55. > :04:58.packaged up in these incredibly complicated Securities. We still
:04:58. > :05:04.have those. We still have very complex financial vehicles that I
:05:04. > :05:11.barely understand. We had much fewer of them. We had derivatives.
:05:11. > :05:20.Corrected designed. They can be a useful part in hedging risk. The
:05:20. > :05:24.basic idea was not a bad idea. It was taken to absurd excess. People
:05:24. > :05:30.were creating a new creditors for the sole purpose of being able to
:05:30. > :05:35.bet against them. We allow that to occur. The central bankers, the
:05:35. > :05:39.regulators, the people are right the laws. We allow the banks to do
:05:39. > :05:47.these activities with far too little capital resources. We are
:05:47. > :05:51.halfway to fixing back. It is about the period before you took over.
:05:51. > :05:57.That is about the period to the run-up. Let's have a look at your
:05:57. > :06:05.record, post 2008, in charge of the financial services a priority. If
:06:05. > :06:09.we look at a few issues, the get things wrong? Why didn't you go
:06:09. > :06:19.after the individuals who had failed to run their banks
:06:19. > :06:21.
:06:21. > :06:25.responsibly? We looked very carefully. We looked at the issue
:06:25. > :06:31.as to where there were cases that we could bring which had a chance
:06:31. > :06:35.of success, under the existing set of rules and laws, against
:06:35. > :06:39.individuals for malpractice or recklessness. There were a number
:06:39. > :06:48.of cases that we brought, in relation to an end did -- and
:06:48. > :06:52.individual... You can name many more who have made the most
:06:52. > :06:57.terrible, irresponsible, encumber the decisions and they are still,
:06:57. > :07:01.some of them, still working in the financial sector. You have to judge
:07:02. > :07:06.this according to the law but existed at the time. The law does
:07:06. > :07:12.not draw a distinction between being an added -- a director of a
:07:12. > :07:17.bank and the director of a hotel company. In those other sectors of
:07:17. > :07:21.the economy, we quite rightly say that if you make bad business
:07:21. > :07:26.decisions, that is for your shareholders to sack you. It is not
:07:26. > :07:29.for the state or the law to prosecute you. I believe banking is
:07:29. > :07:33.different. We should draw a distinction between the law but
:07:33. > :07:37.relates to the directors of banks and back which relates to the
:07:37. > :07:42.directors in other sectors of the economy. When you brought up in
:07:42. > :07:48.banks, you do not just have a problem for the individual company.
:07:48. > :07:55.Ukraine a' problem for the economy. But an enforcement agency has to
:07:56. > :07:59.enforce the law but parliament has written. We have to change it.
:07:59. > :08:03.antimony easy were hamstrung by having to work within the laws that
:08:03. > :08:12.were inadequate for the problems he faced. Important point to establish.
:08:12. > :08:22.In the future, which are echoed the words: In future, we would love to
:08:22. > :08:24.
:08:24. > :08:32.see bankers to make the sort of decisions to be put in prison since
:08:32. > :08:37.and locked away. I am not convinced that the way forward is to create a
:08:37. > :08:42.criminal offence. I did not think it will be used. I do not think
:08:42. > :08:48.will be enforced. If you create a criminal offence, the processes of
:08:48. > :08:53.natural law, the ability to appeal, will say if this is a criminal case,
:08:53. > :09:02.it has to be subject to the degree of proof that says you individually
:09:02. > :09:07.were directly responsible. That will be a burden of proof which is
:09:07. > :09:13.very difficult to make. I do not think that is the way to go. I
:09:13. > :09:18.propose a different way of going. A proposes 2.5 years ago. I think we
:09:18. > :09:22.should define that when you are the director of a bank, we wanted to
:09:22. > :09:27.take a different trade off between risk and return. That is perfectly
:09:27. > :09:33.legitimate in other sectors of the economy. You should know if that
:09:33. > :09:36.bike fails, you will both be banned from operating from a bank and the
:09:36. > :09:40.rest of the financial services sector there after, and you should
:09:40. > :09:45.be forced to put a large amount of your director's fees into an
:09:45. > :09:49.account which you should totally lose. You should use it
:09:49. > :09:59.automatically, unless, reversing the burden of proof, you can prove
:09:59. > :10:01.
:10:01. > :10:05.you were one of the good guys. That, I think, is the way to go. If you
:10:05. > :10:11.criminalise it, and given the burden of proof, which is always
:10:11. > :10:15.legitimately acquired in criminal cases, you'll end of not having
:10:15. > :10:19.prosecutions. The essence of the issue is these people make
:10:19. > :10:25.decisions, had they been hi-tech companies, people would have said
:10:25. > :10:29.this is part of capitalism. You are meant to take risks. What we wonder,
:10:29. > :10:34.is an approach to banking which is different from the approached which
:10:34. > :10:41.is applicable to other sectors of the economy. A lot of this is about
:10:41. > :10:51.accountability and public trust. In that spirit, believing that
:10:51. > :10:54.
:10:54. > :10:58.accountability and public trust is so important, why did June try and
:10:58. > :11:04.sit on the report and not released the findings to the public? We did
:11:04. > :11:09.not sit on it at all. You please -- he released a one-page statement.
:11:09. > :11:17.That is completely untrue. You went through -- we went through a legal
:11:17. > :11:21.process which generates hundreds and hundreds of files. Those are
:11:21. > :11:28.subject to the normal processes of, the French -- confidentiality. If
:11:28. > :11:32.deposited in a boaties goes through, investigates an individual and
:11:33. > :11:37.decides that in the end there is not a good enough case to bring a
:11:37. > :11:44.prosecution case against them, we do not say we will release all of
:11:45. > :11:49.the evidence into the public domain. If we suggested it, you would be St
:11:49. > :11:54.what an extraordinary breach of the normal confidentiality of somebody
:11:54. > :12:02.who deposited in a pretty decided not to prosecute. If he did not put
:12:02. > :12:09.up -- presented as a legal document, and simply as a trail of evidence...
:12:09. > :12:17.What we should have done and what Parliament should have suggested
:12:17. > :12:21.was that parallel to our legal process, which is bound to be
:12:21. > :12:29.subject to confidentiality, we should have launched an inquiry
:12:29. > :12:35.which was going to produce a public report. We suggested that that is
:12:35. > :12:45.what we should do. The idea but we should do a really deep report and
:12:45. > :12:46.
:12:46. > :12:52.that it should cover the actions of the FS a came specifically from me.
:12:52. > :12:57.I know people rewrite history, it did not come from other people.
:12:57. > :13:02.want to test whether you, over a deal for years at the top job,
:13:02. > :13:08.really can put hand on heart and say bet you did your utmost to
:13:08. > :13:15.write some of the runs inside of the system. There's talk about the
:13:15. > :13:19.LIBOR manipulation. Big banks were manipulating the interest rate at
:13:19. > :13:26.which they lend to each other. There was a huge knock-on effect.
:13:26. > :13:32.It affected interest rates, cracker cars. Because of an internal order,
:13:32. > :13:36.there were at least 26 letters informing you of what was going on.
:13:36. > :13:46.Your own report acknowledged that you were too narrowly focused to
:13:46. > :14:20.
:14:20. > :14:25.respond effectively. Why did he There was enough information by May
:14:25. > :14:32.of 2009 to set alarm bells ringing. When the alarm bells were not
:14:32. > :14:38.ringing. By that time we were doing the investigation. I was first told
:14:38. > :14:43.about this in autumn 2009. I knew there was an investigation into
:14:44. > :14:48.libel. As the chairman, you are like the Home Secretary being told
:14:48. > :14:54.the Director of Public Prosecutions and now doing a detailed
:14:54. > :15:00.investigation. That is when I was told. I said to get on with it.
:15:00. > :15:10.Those things take years to come to fruition. Taking one random example
:15:10. > :15:12.
:15:12. > :15:17.of a bank - but police have was fined �59 million as a result --
:15:17. > :15:27.Barclays. That represents a tiny few days of corporate profits. In
:15:27. > :15:27.
:15:27. > :15:37.the US were find it more. This is much weaker than what we see in the
:15:37. > :15:39.
:15:39. > :15:49.US. He has been transformed in the last five for six years. If you
:15:49. > :15:52.
:15:52. > :15:58.look over that five you period, are the size of the fines imposed, at...
:15:58. > :16:07.In the last few days, we have had at Lloyds bailed out by the public,
:16:07. > :16:10.announcing a quarterly profit, Barclays also. They have restored
:16:10. > :16:15.their balance sheet in a significant way by winning comes to
:16:15. > :16:23.punishment, it is a pinprick. could argue they could be bigger
:16:24. > :16:29.fines. As I say, the FSA has been steadily increasing these overtime.
:16:29. > :16:34.They were -- they are much finer than before. You can always debate
:16:34. > :16:40.how far down that path you should go. The scale of fine and public
:16:41. > :16:46.notice does make the bankers concentrate on this which was not
:16:46. > :16:51.true five or ten years ago. Renumeration - it is interesting to
:16:51. > :16:56.me that it is the European Union moving fast this in try to control
:16:56. > :17:01.and damp down the renumeration packages that banks seem to come up
:17:02. > :17:09.with. There were European Parliament proposals that required
:17:09. > :17:13.banks and other companies to limit bonuses up to 100% of salaries. The
:17:13. > :17:20.British government proposes that measure. Do you support it? I am
:17:21. > :17:26.not convinced it is the best way to go. We in the FSA, along with the
:17:26. > :17:36.Swiss and the Americans and the French, were forced or in I doing
:17:36. > :17:36.
:17:36. > :17:42.in 2009 for a new set of rules on a renumeration. They will most then
:17:42. > :17:49.forced by us and the French but not the Americans. It is not for us to
:17:49. > :17:54.regulate how much people are paid but regulate how they are paid. We
:17:54. > :17:59.said that in equity. I do not think we got it quite right. If we were
:18:00. > :18:04.to return to this issue, rather than the one for one cat which the
:18:04. > :18:09.European Parliament has gone before, we should have insisted on a longer
:18:09. > :18:14.period and when we have the feral, and what people should be paid is
:18:14. > :18:21.subordinated debt which loses all its value if the bank fails. It is
:18:21. > :18:27.coming - it looks like the European Council will pass it. The question
:18:27. > :18:33.for you as an experience analyst of the City of London, is it going to
:18:33. > :18:37.have a materially damaging effect on London's position as a global
:18:37. > :18:43.financial centre? 90% of this measure will be in London according
:18:43. > :18:52.to some. It would be a major complicating effect for some of the
:18:52. > :18:57.big global banks operating in London, Singapore, Hong Kong. Their
:18:58. > :19:04.competitors will not enforce these. Like those things, it would be a
:19:04. > :19:09.less beach effect meant people initially think. It is not an
:19:09. > :19:15.entirely beneficial effect. We will see an increase in people's base
:19:15. > :19:23.salaries. What is being limited is the ratio of the bonus. That is an
:19:23. > :19:28.interesting comment. The culture, if I can put it there this way, the
:19:28. > :19:31.Greek culture, is still there. The Archbishop of Canterbury has said
:19:31. > :19:36.recently there is still an entrenched culture of entitlement
:19:37. > :19:41.amongst the bankers in London? Where does the money come from.
:19:41. > :19:46.That is what you need to return to. Some of this activity we do not
:19:46. > :19:52.need. If we have a regulatory system, a set of capital regimes
:19:52. > :19:56.and rules which allow people to make money out of things that do
:19:56. > :20:02.not need to insist, quite a lot of that is going to stick to the
:20:02. > :20:07.employees. The most important thing to be doing is get the renumeration
:20:07. > :20:12.of capital right. We are only halfway there, in particular in
:20:12. > :20:16.regards to the trading activity. It is too easy to do trading activity
:20:16. > :20:20.of might capital bases. If that is the case, there is activity going
:20:20. > :20:30.on which is not needed and some of the money sticking to people who do
:20:30. > :20:31.
:20:31. > :20:35.not needed. Quick fire. Fencing of banks - consumer base activities,
:20:35. > :20:39.looking after depositors money as opposed to the casino banking. Some
:20:39. > :20:45.wanted a complete separation of those separation and for banks to
:20:45. > :20:50.be broken up. It is not going to happen. Are you happy? A ring-
:20:50. > :20:54.fencing along with extra capital will make a difference. It gives
:20:54. > :20:59.the resolution authority the ability to distinguish in a crisis
:20:59. > :21:04.between the bit of you really need to keep going for - the basic real
:21:04. > :21:11.economy - what people call the casino activity. Banks will still
:21:11. > :21:16.be too big to fail - Yass? And that is a fundamental problem? Winter
:21:16. > :21:19.much higher capital departments. Everything else, including these
:21:19. > :21:24.offences, these are inadequate second best compared to what we
:21:24. > :21:31.need to do which is to have the extra capital but more. Interesting.
:21:31. > :21:35.OK. Before we finish, on the wider environment - we can talk about
:21:35. > :21:41.different rules and regulations about how the City of London can be
:21:41. > :21:44.run by we cannot ignore Europe. If there is sustained financial crisis
:21:44. > :21:49.in the eurozone, it will have a destabilising effect in London
:21:49. > :21:55.whether we like it or not. What is urinalysis? Do you believe this
:21:55. > :22:00.ability of banks in Europe is still fundamentally compromised? I think
:22:00. > :22:05.Europe is fundamentally compromised by the fact that the eurozone
:22:05. > :22:10.structure as being a single currency without an adequate degree
:22:10. > :22:15.of fiscal union is a dangerous structure. This is what I do admit
:22:15. > :22:20.my own fault. Because you're a supporter going into the euro...
:22:20. > :22:26.was a supporter. Now you are suggesting it is dysfunctional.
:22:26. > :22:29.underestimated the degree of fiscal union which was required to deal
:22:29. > :22:34.with... In interesting point which even those who are you against the
:22:34. > :22:38.euro did not really understand - this crucial issue of how the
:22:38. > :22:44.banking works in a single currency without a fiscal union. That has to
:22:44. > :22:49.be fixed. As long as you don't fix it will be a potentially unstable
:22:49. > :22:53.system. They need to go all the way down the line to a banking union
:22:53. > :22:57.and underpin that with fiscal resources so that if a bank in
:22:57. > :23:01.Spain is in trouble, it can be bailed out with the resources from
:23:01. > :23:11.the centre not from the Spanish government. It is a fundamental
:23:11. > :23:12.
:23:12. > :23:16.problem. A manner you are associated with says Dairies their
:23:16. > :23:24.European Treasury with a power to tact to biros well - are you going
:23:24. > :23:28.down the same track? -- to borrow as well? Mario Draghi was pretty
:23:28. > :23:33.close to saying that as well. that is not going to happen. That
:23:33. > :23:36.is the implication. You are saying we have to live with fundamental
:23:36. > :23:40.instability and dysfunction for an awful long time to calm? I fear
:23:40. > :23:46.from a combination of the extraordinary excesses of pre-
:23:46. > :23:52.crisis finance in the US, UK in particular, plus the problems of
:23:52. > :23:57.the eurozone, I think we are long way from being out of the crisis. I
:23:57. > :24:05.fear we are, for many years, we are subject to economic performance.
:24:05. > :24:11.The have soared excesses of Anglo- Saxon finance and the misty sign of
:24:11. > :24:16.the eurozone. Incredibly important, alongside the justifiable anger of
:24:16. > :24:21.individual bankers - that is important, we need to put that
:24:21. > :24:25.system right - but it is the overall system that we have a wrong.
:24:25. > :24:29.We have allowed fine as to get out of control. Us and worse with the