As measured by the CCP Research Foundation, in the aftermath of the collapse of Lehman Brothers seven years ago, global “conduct costs” are approaching stratospheric levels and are presently estimated to be $300 billion. But none of the data reflected in the final sum can be traced to Pakistan – a market economy whose legal system closely resembles the English legal system, despite the politically retrograde Islamisation of the 1980s – in clear and unambiguous terms. This blog is written with the ambition of articulating a conduct costs’ model in Pakistan, a developing country which is in need of such analysis so that its 192 million people are put in a position to make informed choices about banking and financial services.
In constitutional terms, a sound basis for the study of conduct costs can be found in Articles 37 and 38 of the Constitution of Pakistan 1973. Laid down in Part II: Fundamental Rights and Principles of Policy, Chapter 2: Principles of Policy of the Constitution, Article 37 requires the state to promote social justice and Article 38 imposes on the state a duty to promote the people’s social and economic well-being. On an alternative level, in The End of Alchemy, Professor Mervyn King relies on all his experience as a central banker to explain the wider dynamics of the global economy. He invites us to embrace the underlying theoretical argument that banks are “the Achilles heel of capitalism”. This attractive proposition is as advantageous a place to begin a study of the banks in Pakistan as it is in the west.
In a country which is plagued by corruption and ranks poorly in that regard – i.e. 126 out of 174 on Transparency International’s Corruption Perceptions Index 2014 – it is more than arguable that the promotion of social justice and economic well-being require an analysis which reveals the exact nature of “bad” bank behaviour to the public. Indeed, strong grounds exists for constitutional justice to be imparted to the people of Pakistan by allowing them access to a “league table” for banking for their country. It will serve towards their empowerment and the bare bones of such a study can be identified in the activities of the regulatory bodies discussed below.
Of course, so as to ensure that the exercise does not descend into bank bashing, “good” behaviour (if any) to help the environment or other inequalities in Pakistan, which is mostly poor, can also be factored into our analysis. For example, a press release from 2014 informs us that:
As part of its commitment to education and social welfare in the MENA region, Deutsche Bank’s Middle East Foundation is partnering with The Citizens Foundation in Pakistan to set up its third “Deutsche Bank Campus” in the rural area of Razi Dero, Gambat, District Khairpur.
This new secondary unit will be equipped to teach graduates from three primary campuses of The Citizens Foundation which are located at very close proximity to the new campus.
As a starting point on the ground, the following regulatory framework is relevant in bringing Pakistan within the scope of a conduct costs study. First, the State Bank of Pakistan is the banking regulator. Some people may argue that, in contrast to the UK and the US for example, Pakistan does not as yet have the specialist law enforcement agencies such as the British Serious Fraud Office, Financial Conduct Authority or Prudential Regulation Authority or the American Commodities Future Trading Commission, New York Department of Financial Services etc.
But, on any view, the framework for oversight is distinctly Anglo-American and some other regulators and law enforcement agencies include the Securities and Exchange Commission of Pakistan, the Banking Ombudsman and the Federal Investigation Agency (which is the equivalent of the British National Crime Agency and the American Federal Bureau of Investigation).
Perhaps potential also exists for the Competition Commission of Pakistan to play a part in the proposed research; it is an independent quasi-regulatory, quasi-judicial body that helps ensure healthy competition between companies for the benefit of the economy and serves to promote fair trade in the market.
Moreover, any remaining regulatory and law enforcement lacunae may potentially be filled by the national corruption watchdog, i.e. the National Accountability Bureau, but we must not shirk from accepting that the corrupt nature of law enforcement agencies in Pakistan means that as analysts of governance indulging in the monitoring of bank behaviour it would be futile for us to rely on the state to put things right.
The Ombudsman’s annual reports show that sanctions are imposed on banks for wrongdoing. The reports are quite detailed about the type of complaints made and catalogue the thanks and gratitude of those who have been provided redress by the Ombudsman whose core values are responsiveness, compassion, flexibility, trustworthiness and transparency.
The complaints detailed in the reports provide a good building block to study conduct costs but are “limited” in the sense that they concerned mostly with everyday consumer issues such as ATMs and credit cards rather. Yet complaints involving fraud, corruption, inefficiency and dereliction of duty are also lodged and resolved by the Ombudsman and in 2014 there were 4506 complaints, an increase from 4,238 complaints the year before. Since 2005, there have been 33,064 complaints of which 11,120 were “formal complaints” and 21,944 were “informal complaints”. The difference between the two types of complaints is that the former are not in the form prescribed by the Banking Companies Ordinance 1962 whereas the latter are in the prescribed form.
It is an internationally known fact that over the past five years, the major banks have paid more than $15 billion for breaching sanctions against countries such as Pakistan’s neighbour Iran. In that regard, Standard Chartered’s share is $669 million and other figures for fines imposed include: BNP Paribas $8.9 billion, HSBC $1.9 billion, Commerzbank $1.45 billion, Crédit Agricole $787 million, ING $619 million and Credit Suisse $536 million.
Taking the case of Standard Chartered, which partially originates in Kolkata (India), in relation to Pakistan it is obvious from the bank’s annual report 2015 that it does not consciously self-report any misconduct which may be attributable to it and the words “conduct”, “ethics”, “transparency” do not appear in its report. However, on page 65 of the 2015 report we can see that the SBP imposed penalties of 40,725,000 rupees (£270,547) on the bank; which is a big increase from only 835,000 rupees (£5,550) in 2014. These costs are clearly conduct costs. The CCP Research Foundation’s 2015 results show that internationally Standard Chartered incurred £.96 billion in conduct costs during 2010-2014. Though arguably “insignificant”, the figures from Pakistan are in fact reflected in that sum. Moreover, the same is true for conduct costs incurred by Deutsche bank which – for the same period – amount to £6 billion and involve things such as benchmark rigging.
The reason that these Pakistani fines are included is that where liability has been determined by judgment, settlement or award – as opposed to a provision for a prospective, albeit quantifiable, liability – it is intended to include all conduct costs, wherever incurred. This is because the methodology used takes account of the figure for conduct costs incurred as disclosed by the bank in its consolidated accounts (at group level). The CCP Research Foundation therefore aims to identify this figure in the accounts (or rather the best available proxy to a “total conduct costs” figure as it can ascertain given the lack of specific disclosure (and tendency to aggregate with other, irrelevant, expenses)).
The Pakistani fine would therefore fall, in principle, for inclusion within the group level disclosure. But, of course, despite this inclusion we have no conduct costs analysis for Pakistan individually as a country and one is quite desperately needed to make sense of the banks operating in this large and vibrant society.
Just to be absolutely sure of what we are discussing, as defined by the CCP Research Foundation, conduct costs are all costs borne by a Bank in connection with any of the following:
(i) regulatory proceedings, specifically (but not exhaustively):
(a) fines or comparable financial penalties imposed on the Bank by any Regulator;
(b) any sum paid to a Regulator or at the direction of a Regulator in settlement of proceedings of any kind;
(c) any sum paid to, or set aside to be paid to, any third party or parties to the extent required by any Regulator; and
(d) any sum paid, or set aside, for the purchase (or exchange) of securities or other assets to the extent required by a Regulator and (if such information is available) to the extent such sum exceeds the open market value of such securities or other assets as at the date of purchase;
(ii) any costs, losses or expenses which are directly related to an event or series of events or conduct or behaviour of the Bank or a group of individuals employed by the Bank for which any fine or comparable penalty has been imposed or any censure issued by a Regulator;
(iii) any sum that has become payable as a result of, or in connection with, any breach of any code of conduct or similar document entered into, or committed to, at the request of, or required to be entered into or committed to by, any Regulator or any public, trade or professional body;
(iv) any loss of income or other financial loss attributable to a requirement imposed by a Regulator to place money on deposit with a central bank or other institution at below the market rate of interest, being a requirement imposed in connection with a breach of law or Regulatory requirement;
(v) any sum paid in connection with any litigation (whether ordered to be paid by a court or tribunal or in settlement of proceedings) where the litigation involved allegations of material wrongdoing or misconduct by senior officers or employees of an institution which were not refuted;
(vi) any other sum, cost or expense, not falling within any of (i) to (v) above that is paid pursuant to an order or requirement of a Regulator and which is a result of any breach of any regulatory requirement or law.
Overall, using the above building blocks it is quite possible to produce high-level analysis in Pakistan using the foundation provided by the CCP Research Foundation, though the exact mechanics may need to be modified to fit the challenges posed by the fact that Pakistan is a developing country. In addition to the international banks identified above, there are many other smaller banks from the Middle East and Asia as well; below is a full list of banks in Pakistan whose systematic study will provide rewards as the country develops and embraces “full-blown” capitalism in the years to come.
In private banking, players can be listed as Allied Bank Limited, Askari Bank, Bank Alfalah, Bank AL Habib, Faysal Bank, HBL, Habib Metropolitan Bank, JS Bank, MCB Bank Limited, NIB Bank, Samba Bank Limited, Silk Bank Limited, Soneri Bank, Summit Bank and United Bank Limited.
There are also a dozen microfinance banks, namely Khushhali Bank Limited, The First Microfinance Bank Limited, NRSP Microfinance Bank, Tameer Microfinance Bank Limited, Apna Microfinance Bank Limited, FINCA Microfinance Bank, Pak-Oman Microfinance Bank Limited, Tameer Microfinance Bank Limited, The First MicroFinanceBank Limited, The Punjab Provincial Cooperative Bank Limited, U Microfinance Bank Limited and Waseela Microfinance Bank.
Using the above as a foundation, along with friends in the CCP Research Foundation, I hope to etch out a fuller existence for Pakistan in the important area of conduct costs. I think that a league table for banking and financial services can only be a boon for Pakistan and benefit the country in the long run.