Lord Turner - Chairman, Financial Services Authority, UK (2008- 2013) HARDtalk

Now on BBC News it's time for Welcome to HARDtalk. Five years ago

the western world's banking system was spiralling into crisis. How

confident can we be that the fundamental flaws exposed then have

really been fixed? Lord Turner has just ended a heavily scrutinised

term at the head of Britain's Financial Services Authority. Have

the bankers and the regulators learned the right lessons from the

Welcome to HARDtalk. You have just ended for Pipe five-year term as

Britain's financial services regulator. -- 2.5. The UK banking

system is in a much better shape than it was in 2008. We have much

higher levels of capital. The reserve of Cup proper letter to the

size of the balance sheet. We have more liquid balance sheet. I think

we are in a very different position them that which led to the crisis.

There are two problems that we still have. I do not think we are

being radical enough. The faults in the system before the crisis were

very profound. There were the product of 50 years of policy

mistakes. We are still struggling with the aftermath of the crisis.

The fact that once we have a large financial crisis, you create an

economic depression. Even if you get your banking system into shape,

people are very worried and wary of borrowing money. That is one of our

fundamental problems. That is exactly where I wanted to pick up

with you. Polls suggest that trust in the banks are still no. Much

lower than other business and industrial sectors. It is fair to

say that people look at the fat profits made by banks today, the

pale Sudhir been given to the senior bankers themselves, and then

they look at the fact that it is still very difficult for small and

medium enterprises to borrow money. They think this system is as

dysfunctional as it ever was. have to break those points apart.

There are very good reasons why people became very distressed for.

Not just that the banking system, but other bits of the financial

system. There are two reasons for that. They were told a story that

this development of complicated, global finance was in some

mysterious way making the whole world economy much more efficient

and growing. That turned out to be untrue. We now find us to get too

big and banks to leverage. And it's the thing blew up. They are also

right to be distrustful to the fact that in very particular products,

products like payment protection insurance, banks were guilty of

selling things that were not in the customer's interest. That mistrust

will take many years to come back. The air was a very powerful phrase

you coroner to describe much of what the banks have been up to in

the run-up of 2008 maybe even beyond. And that was socially

useless. Do you think the banks are still making a lot of money by the

sorts of business operations that are socially useless? Far less. And

lot of what I was talking about, quite a lot of that, has been

shaken out of the banking system. Quite a lot of it has shocked out.

A lot of it has to do with the way some mortgages in the US were

packaged up in these incredibly complicated Securities. We still

have those. We still have very complex financial vehicles that I

barely understand. We had much fewer of them. We had derivatives.

Corrected designed. They can be a useful part in hedging risk. The

basic idea was not a bad idea. It was taken to absurd excess. People

were creating a new creditors for the sole purpose of being able to

bet against them. We allow that to occur. The central bankers, the

regulators, the people are right the laws. We allow the banks to do

these activities with far too little capital resources. We are

halfway to fixing back. It is about the period before you took over.

That is about the period to the run-up. Let's have a look at your

record, post 2008, in charge of the financial services a priority. If

we look at a few issues, the get things wrong? Why didn't you go

after the individuals who had failed to run their banks

responsibly? We looked very carefully. We looked at the issue

as to where there were cases that we could bring which had a chance

of success, under the existing set of rules and laws, against

individuals for malpractice or recklessness. There were a number

of cases that we brought, in relation to an end did -- and

individual... You can name many more who have made the most

terrible, irresponsible, encumber the decisions and they are still,

some of them, still working in the financial sector. You have to judge

this according to the law but existed at the time. The law does

not draw a distinction between being an added -- a director of a

bank and the director of a hotel company. In those other sectors of

the economy, we quite rightly say that if you make bad business

decisions, that is for your shareholders to sack you. It is not

for the state or the law to prosecute you. I believe banking is

different. We should draw a distinction between the law but

relates to the directors of banks and back which relates to the

directors in other sectors of the economy. When you brought up in

banks, you do not just have a problem for the individual company.

Ukraine a' problem for the economy. But an enforcement agency has to

enforce the law but parliament has written. We have to change it.

antimony easy were hamstrung by having to work within the laws that

were inadequate for the problems he faced. Important point to establish.

In the future, which are echoed the words: In future, we would love to

see bankers to make the sort of decisions to be put in prison since

and locked away. I am not convinced that the way forward is to create a

criminal offence. I did not think it will be used. I do not think

will be enforced. If you create a criminal offence, the processes of

natural law, the ability to appeal, will say if this is a criminal case,

it has to be subject to the degree of proof that says you individually

were directly responsible. That will be a burden of proof which is

very difficult to make. I do not think that is the way to go. I

propose a different way of going. A proposes 2.5 years ago. I think we

should define that when you are the director of a bank, we wanted to

take a different trade off between risk and return. That is perfectly

legitimate in other sectors of the economy. You should know if that

bike fails, you will both be banned from operating from a bank and the

rest of the financial services sector there after, and you should

be forced to put a large amount of your director's fees into an

account which you should totally lose. You should use it

automatically, unless, reversing the burden of proof, you can prove

you were one of the good guys. That, I think, is the way to go. If you

criminalise it, and given the burden of proof, which is always

legitimately acquired in criminal cases, you'll end of not having

prosecutions. The essence of the issue is these people make

decisions, had they been hi-tech companies, people would have said

this is part of capitalism. You are meant to take risks. What we wonder,

is an approach to banking which is different from the approached which

is applicable to other sectors of the economy. A lot of this is about

accountability and public trust. In that spirit, believing that

accountability and public trust is so important, why did June try and

sit on the report and not released the findings to the public? We did

not sit on it at all. You please -- he released a one-page statement.

That is completely untrue. You went through -- we went through a legal

process which generates hundreds and hundreds of files. Those are

subject to the normal processes of, the French -- confidentiality. If

deposited in a boaties goes through, investigates an individual and

decides that in the end there is not a good enough case to bring a

prosecution case against them, we do not say we will release all of

the evidence into the public domain. If we suggested it, you would be St

what an extraordinary breach of the normal confidentiality of somebody

who deposited in a pretty decided not to prosecute. If he did not put

up -- presented as a legal document, and simply as a trail of evidence...

What we should have done and what Parliament should have suggested

was that parallel to our legal process, which is bound to be

subject to confidentiality, we should have launched an inquiry

which was going to produce a public report. We suggested that that is

what we should do. The idea but we should do a really deep report and

that it should cover the actions of the FS a came specifically from me.

I know people rewrite history, it did not come from other people.

want to test whether you, over a deal for years at the top job,

really can put hand on heart and say bet you did your utmost to

write some of the runs inside of the system. There's talk about the

LIBOR manipulation. Big banks were manipulating the interest rate at

which they lend to each other. There was a huge knock-on effect.

It affected interest rates, cracker cars. Because of an internal order,

there were at least 26 letters informing you of what was going on.

Your own report acknowledged that you were too narrowly focused to

respond effectively. Why did he There was enough information by May

of 2009 to set alarm bells ringing. When the alarm bells were not

ringing. By that time we were doing the investigation. I was first told

about this in autumn 2009. I knew there was an investigation into

libel. As the chairman, you are like the Home Secretary being told

the Director of Public Prosecutions and now doing a detailed

investigation. That is when I was told. I said to get on with it.

Those things take years to come to fruition. Taking one random example

of a bank - but police have was fined �59 million as a result --

Barclays. That represents a tiny few days of corporate profits. In

the US were find it more. This is much weaker than what we see in the

US. He has been transformed in the last five for six years. If you

look over that five you period, are the size of the fines imposed, at...

In the last few days, we have had at Lloyds bailed out by the public,

announcing a quarterly profit, Barclays also. They have restored

their balance sheet in a significant way by winning comes to

punishment, it is a pinprick. could argue they could be bigger

fines. As I say, the FSA has been steadily increasing these overtime.

They were -- they are much finer than before. You can always debate

how far down that path you should go. The scale of fine and public

notice does make the bankers concentrate on this which was not

true five or ten years ago. Renumeration - it is interesting to

me that it is the European Union moving fast this in try to control

and damp down the renumeration packages that banks seem to come up

with. There were European Parliament proposals that required

banks and other companies to limit bonuses up to 100% of salaries. The

British government proposes that measure. Do you support it? I am

not convinced it is the best way to go. We in the FSA, along with the

Swiss and the Americans and the French, were forced or in I doing

in 2009 for a new set of rules on a renumeration. They will most then

forced by us and the French but not the Americans. It is not for us to

regulate how much people are paid but regulate how they are paid. We

said that in equity. I do not think we got it quite right. If we were

to return to this issue, rather than the one for one cat which the

European Parliament has gone before, we should have insisted on a longer

period and when we have the feral, and what people should be paid is

subordinated debt which loses all its value if the bank fails. It is

coming - it looks like the European Council will pass it. The question

for you as an experience analyst of the City of London, is it going to

have a materially damaging effect on London's position as a global

financial centre? 90% of this measure will be in London according

to some. It would be a major complicating effect for some of the

big global banks operating in London, Singapore, Hong Kong. Their

competitors will not enforce these. Like those things, it would be a

less beach effect meant people initially think. It is not an

entirely beneficial effect. We will see an increase in people's base

salaries. What is being limited is the ratio of the bonus. That is an

interesting comment. The culture, if I can put it there this way, the

Greek culture, is still there. The Archbishop of Canterbury has said

recently there is still an entrenched culture of entitlement

amongst the bankers in London? Where does the money come from.

That is what you need to return to. Some of this activity we do not

need. If we have a regulatory system, a set of capital regimes

and rules which allow people to make money out of things that do

not need to insist, quite a lot of that is going to stick to the

employees. The most important thing to be doing is get the renumeration

of capital right. We are only halfway there, in particular in

regards to the trading activity. It is too easy to do trading activity

of might capital bases. If that is the case, there is activity going

on which is not needed and some of the money sticking to people who do

not needed. Quick fire. Fencing of banks - consumer base activities,

looking after depositors money as opposed to the casino banking. Some

wanted a complete separation of those separation and for banks to

be broken up. It is not going to happen. Are you happy? A ring-

fencing along with extra capital will make a difference. It gives

the resolution authority the ability to distinguish in a crisis

between the bit of you really need to keep going for - the basic real

economy - what people call the casino activity. Banks will still

be too big to fail - Yass? And that is a fundamental problem? Winter

much higher capital departments. Everything else, including these

offences, these are inadequate second best compared to what we

need to do which is to have the extra capital but more. Interesting.

OK. Before we finish, on the wider environment - we can talk about

different rules and regulations about how the City of London can be

run by we cannot ignore Europe. If there is sustained financial crisis

in the eurozone, it will have a destabilising effect in London

whether we like it or not. What is urinalysis? Do you believe this

ability of banks in Europe is still fundamentally compromised? I think

Europe is fundamentally compromised by the fact that the eurozone

structure as being a single currency without an adequate degree

of fiscal union is a dangerous structure. This is what I do admit

my own fault. Because you're a supporter going into the euro...

was a supporter. Now you are suggesting it is dysfunctional.

underestimated the degree of fiscal union which was required to deal

with... In interesting point which even those who are you against the

euro did not really understand - this crucial issue of how the

banking works in a single currency without a fiscal union. That has to

be fixed. As long as you don't fix it will be a potentially unstable

system. They need to go all the way down the line to a banking union

and underpin that with fiscal resources so that if a bank in

Spain is in trouble, it can be bailed out with the resources from

the centre not from the Spanish government. It is a fundamental

problem. A manner you are associated with says Dairies their

European Treasury with a power to tact to biros well - are you going

down the same track? -- to borrow as well? Mario Draghi was pretty

close to saying that as well. that is not going to happen. That

is the implication. You are saying we have to live with fundamental

instability and dysfunction for an awful long time to calm? I fear

from a combination of the extraordinary excesses of pre-

crisis finance in the US, UK in particular, plus the problems of

the eurozone, I think we are long way from being out of the crisis. I

fear we are, for many years, we are subject to economic performance.

The have soared excesses of Anglo- Saxon finance and the misty sign of

the eurozone. Incredibly important, alongside the justifiable anger of

individual bankers - that is important, we need to put that

system right - but it is the overall system that we have a wrong.

We have allowed fine as to get out of control. Us and worse with the