By: Calvin Benedict

Abstract: Following the Global Financial Crisis, the banking sector has faced an unparalleled level of regulatory fines and court settlements. This form of financial liability has been broadly termed as ‘conduct costs’. The article looks at this phenomenon analyzing the implications of conduct costs, JP Morgan’s recent settlements and the ‘Conduct Costs Project’ research initiative led by London School of Economics Visiting Professor Roger McCormick. Several insights into the meaning behind the conduct costs figures as offered, as well as a discussion on the future of such costs and regulatory actions of the European Commission. The article concludes with a call for continued research into this area to further assess the ethical performance of banks, and draw verifiable comparisons between the different banks and regulatory regimes.

Introduction

Last year, Chancellor George Osbourne made an impassioned pledge to “reset [the] banking system”.[1] The onslaught of fines, lawsuits and settlements which have followed are clear indications of regulators as well as politicians seeking to placate public opinion through compensatory justice for current and past misdeeds by financial institutions. Indeed, a Financial Times article in December 2013 eloquently captured the renewed vigour in which banks are now fined: “Another day, another set of big regulatory fines…. Barely a week goes by without one or the other being chastised over past sins”.[2]

Conduct costs

To perhaps account for this crescendo in regulatory and litigious action towards banks, the term ‘conduct costs’ has recently surfaced into the lexicon of the banking sector.  In essence, conduct costs relate to money that banks pay out in the form of fines to regulators or ‘redress’ required by regulators.[3] They may also include other forms of payments, for instance:[4]

“a) sums paid in settlement of regulatory proceedings (whether or not there is any ‘admission of wrongdoing’)

b) sums paid in settlement, or at the conclusion, of litigation that is based on an allegation of a bank’s misconduct or that of its officers (although it is not intended to cover all litigation costs, whatever the nature of the claim)

c) sums paid for the repurchase of securities from the market (because they were mis-sold) at the behest of regulators

d) egregious losses caused by a bank employee’s serious misconduct and/or attributable to poor risk management.”

In this way, practices like mis-selling payment protection insurance, benchmark manipulation and breaching money laundering rules fall under the purview of conduct costs.

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