Have we learnt the lessons from the Financial Crash of 2008?

Most people are familiar with George Santayana’s famous remark that “Those who cannot remember the past are condemned to repeat it” and, with the ten year anniversary of Lehman Brothers filing for bankruptcy looming large on the horizon (15th September, 2008), now seems like a good time to cast minds back to the fevered period of the global financial crash and ask just how likely we are to repeat those events.

On the one hand, there are good reasons to think we have learnt the lessons of the crash and taken appropriate steps to make recurrence less likely. So, for instance, regulation post-crisis placed more stringent capital requirements on banks and reformed the remuneration structure around bonuses, capping the amounts that can be paid and tying payments more closely to the long-term performance of an institution (and providing greater clawback capacities where necessary). In the UK, banks have been required to hive off riskier investment arms from lower-risk, more mundane banking activities, while in the US the 2010 Dodd-Frank Act limited the ability of big banks to undertake proprietary trading. The UK has also seen the introduction of the Senior Managers and Certification Regime (SMCR, March 2016), whereby managers are held more explicitly responsible for the actions of those working under them – though they may delegate tasks, senior managers cannot delegate responsibility for the conduct of their staff. And regulators seem to be getting serious about enforcing individual responsibility in the sector: in January 2019 the case against four senior staff from Barclays (including John Varley, the bank’s former CEO), all of whom have been charged with fraud for events relating to fundraising Barclay’s undertook in 2008, will finally reach trial.

On the other hand, though, taking a cold, hard look at the current state of play in global financial markets might be enough to cause anyone significant unease. Levels of personal debt – a major factor in the housing crash that was such a catalyst for events in 2007-8 – have been creeping back up and, according to a recent report by the Office for National Statistics, in the UK is now back up to levels not seen since the nineteen eighties. While shares in the US have repeatedly hit new highs, leading some to warn that financial markets today look rather worryingly like they did just before the crash (as Barclays CEO Jes Stanley said in an interview with CNBC at Davos this year: “This feels a little bit like 2006”). And evidence of misbehaviour in the sector continues to surface with worrying regularity, from scandals around mis-selling to colluding to fix the LIBOR inter-bank lending rate.

So what more could and should we do to prevent another global financial crisis? I’d argue that two areas worth exploring.

First, we should be clear that the current system of imposing ever-increasing levels of financial penalties as the primary sanction for serious misbehaviour isn’t, on its own, working. The damage fines do to a firm’s reputation doesn’t seem to be sufficiently motivating at a time when public trust in financial institutions is already strikingly low and fines increasingly seem to be seen as simply part of the cost of doing business. A significant problem with the current system is that once a fine is levied that is the end of the story – the money disappears into Treasury coffers and business apparently goes on just as before. We need to make payment of the fine only half the story, with the work that that financial penalty then does providing the closing chapters. We need a public debate about what relevant work should be underpinned by these ‘windfall’ fines, but two promising areas are, first, requiring firms to pay for remedial exercises where staff are enabled and encouraged to reflect on the regulatory rules in place, exploring the reasons those rules exist and assessing the true cost to society of flouting them. Secondly, we could ringfence money to help to provide basic financial education and impartial financial advice to the poorest sectors of society, in order to ensure that financial knowledge and understanding are improved in society at large. If the public could see not only that firms were being fined when they broke the rules, but also that money raised in this way was being used positively to improve the future behaviour of large financial institutions this would, I suggest, help in re-establishing warranted public trust in the sector.

Related to this, we need much more clarity on what the financial services sector is for, asking what corporate purpose means in this sector and how it can be used to create effective and fundamental behavioural change. The reciprocal goods that corporations enjoy (including things like access to a well-educated workforce, a properly functioning healthcare system, the protections of the law, proper transport links, etc) ground a general constraint on their operation, requiring corporations to meet certain general social goods as a cost of doing business within society. Furthermore, banks have a special relationship with the societies they serve, for instance being granted licenses to take and hold deposits, and, in some circumstances, having the state step in as lender of last resort. I’d argue that all this social support generates a ‘social license’, the terms of which place constraints on the operations of banks (and indeed other corporations). For instance, requiring that firms do not act to aggressively minimise their tax liabilities, but rather accept that they need to make reasonable contributions to the income from taxation of the societies in which they operate. (Of course, there would be room for debate here, contesting what counts as ‘aggressive avoidance’ and ‘reasonable contribution’, but viewing the requirement as one of the terms of a firm’s social licence at least places these debates in a coherent and transparent framework). Against this, opponents might point out that pursuit of shareholder value as the primary objective of corporations is written in to law, so that corporations have no choice but to pursue profit above all else. However, legislative frameworks do recognise the existence of secondary duties in line with what I am here terming ‘social license’ (see, for instance, Section 172 of the UK Companies Act 2006, which notes that company directors must have regard to the interests of employees, suppliers, customers and the environment) and one way to create substantial change, I’d contend, would be for regulators to require firms to act in accordance with the conditions of a social licence.

As Lord Darling wrote (The Guardian, 5th August 2017), “Everything that’s happening in the world just now – UK included – has to be seen in the light of the backwash of what happened with the economic crash that followed the banking crash”. From the politics of austerity in the UK, to the crisis in Eurozone countries such as Greece and Spain, to political upheavals like Brexit, the election of Trump in the US, and the rise of far-right parties in countries like Hungary, all can be argued to have their roots in the chaos that rocked the world during the financial crisis. Yet despite the ubiquitous effects of the economic crash, it’s not obvious that we as a society are properly remembering the questions that it raised.

— Emma Borg is Professor of Philosophy at the University of Reading and Director of the Reading Centre for Cognition Research. She is also an Associate Fellow on the British Academy ‘Future of the Corporation’ programme and co-author (with Prof. Brad Hooker) of ‘Epistemic virtues vs. ethical values in the financial services sector’, Journal of Business Ethics 2017.


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