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CONDUCT COSTS PROJECT REPORT 2017 - SUMMARY*-

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© 2017 CCP Research Foundation C.I.C and/or their licensors and affiliates.

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About the CCP Research Foundation CIC

CCP Research Foundation is an ‘umbrella’ organisation that works to procure funding for, and provides academic and expert consultancy support to, Associated Research Projects and undertakes other related activities in furtherance of its mission to champion research and best practice in ‘conduct risk’, ‘ethics-led’ decision-making and governance and related questions that impact on ‘public trust’ in the way organisations are run.

The Foundation serves the wider public interest by virtue of its social mission and is held to account through the academic output of the Associated Research Projects, the related activities that it supports and its annual regulatory returns. It is a company limited by guarantee and does not pay dividends.

*The report appearing below is in summary form, for general publication. The full Conduct Costs Project Report 2017 is available by subscription. Those interested in obtaining a copy of the full report should not hesitate to contact the Project team. The data underlying the results – covering in excess of c1600 Conduct Costs events across the 20 banks - is not included within the full report but is available to members of the Project Association.


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The Conduct Costs Project Report 2017 This year's international conduct costs table is the fifth we have published and its publication coincides with the 10th anniversary of the start of the Global Financial Crisis. As has been the case since the first table, we find ourselves wondering when, if ever, the level of conduct costs will start to decrease. The new table tells us this has not happened yet, at least when the five-year period ending 2016 is compared with the preceding five year period. There has, in fact, been a 5.2% increase. (The figures, of course, include provisions as at the end of 2016).

There are perhaps some reasons for cautious optimism. The FCA figures for fines (not all conduct costs) for the year 2016 show a rapid falling off (in fact, to zero). It's also reasonable to assume that the long running sorry tale of payments and provisions for PPI mis-selling must come to an end eventually although UK banks made additional provisions for PPI mis-selling of more than £1.5 billion midway through 2017. The ongoing "Qatar affair" affecting Barclays will no doubt continue for some time, causing further reputational damage, but, in this case at least, the alleged conduct in question (and we must remember that the criminal case is still to be heard in

court) did occur some years ago and there have been significant changes in the bank's senior management in the meantime. All of which raises the question on which "the jury is still out": has bank conduct really started to improve? We must hope that it has and that the efforts banks say they have been making to make changes for the better are bearing fruit...and that there is more to "restoring trust" than a mere PR exercise. It is a little disappointing that so little has been done to implement a market-wide "standards" agenda in retail banking, as suggested by Sir Richard Lambert in his May 2014 Review but perhaps we will find, as the conduct cost figures for future periods become available, that banks are, one way or another, able to adopt and comply with standards appropriate to an industry that would like to be seen as a "profession". Time will tell.

Roger McCormick

Managing Director, CCP Research Foundation and Director of the Conduct Costs Project

Ten years on from the financial crisis, five years into the Conduct Costs Project and the numbers are still striking: GBP264 billion in ‘conduct costs’ (inclusive of provisions) for the 20 banks listed on the international results table for the five-year period ending 31 December 2016. This is a 5% increase on the previous five-year period. While we might have expected conduct costs to have increased over the period - 2016 was, after all, a significant year as cross-jurisdictional regulatory enforcement actions and various private suits settled and costs crystallised - we would not have expected the level of provisions to remain largely unchanged. If we are to look for an indicator of the effectiveness of the industry’s efforts in changing its culture, promoting good behaviour through appropriate incentives and standards and in managing conduct risk, this Report’s findings make for illuminating reading. Trust in, and the trustworthiness of, the banks must surely correlate to (and be conditional on) banks’ conduct costs. And, the persistent level of conduct cost provisioning is concerning. It remains to be seen whether or not the provisions will crystallise in 2017 (and/or beyond) and what effect this will have on the aggregated level of conduct costs. Since the heights of 2013-14, conduct costs looked to be tracking down (if we assume - perhaps unwisely - that 2016 was an exception to this otherwise commendable direction of travel). However, the target, of course, is not zero; there will always be conduct costs. The question is at what average level will these costs

settle? And, moreover, is that level ‘acceptable’; to the banks, their shareholders, the public?

Finally, I would add that the identification of conduct costs (and in particular, provisions) remains a challenge where there lacks any intelligible reporting on these costs (and on related provisions - even on an aggregated basis that would reflect the uncertainties and sensitivities inherent in such figures). The Project has, for a number of years, applied a methodology to the identification of conduct costs, and through its annual report, made such costs public. Its work on the development of metrics such as ‘cause’, ‘cost’ and ‘culpability’ codes has sought to further enhance the analysis of the raw data and offer new insight into the figures (and perhaps an answer to the question over an ‘acceptable level’), and it does so on a comparative basis.

The report published below is a complimentary summary of the Project’s findings and analysis. The full report and underlying data are available by subscription and we invite those interested to contact the Project team.

The Foundation also welcomes expressions of interest in its broader research programme and enquiries for commissioned research.

Chris Stears

Research Director, CCP Research Foundation


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The Conduct Costs Project Report 2017 marks the 5th year of this differentiating project, aimed at shining a light on the level of the conduct costs of the world’s 20 leading banks and contributing to the discussion on what these costs mean.

The Conduct Costs Project involves a continuous process of research into, and validation of, conduct costs identified from information available in the public domain. Events that meet the definition of ‘conduct costs’ are recorded against multiple fields. This provides the opportunity to subject the ‘numbers’ to, particularly comparative, analysis. The Project’s report is the culmination of this process. A critical condition for data capture is that it can be traced to publicly available information from not only credible third party sources, but also from the banks themselves. The quality of banks’ disclosures of conduct performance – in the form of conduct costs – is of relevance to questions of risk management, as well as transparency and accountability and the effect that this has on its conduct, culture and people.

The Project’s objective of providing an analytical tool and methodology to enable a comparative assessment of banks’ conduct performance is underpinned by a very comprehensive database and covering conduct events from 2008 to 2016. These events provide notable insight into

bank’s' conduct risk and can be queried for analysis by jurisdiction, year(s), regulator, as well as by event ‘Cause’, ‘Cost’ and ‘Culpability’ - three metrics developed by the Project that enable the identification of specific risk areas, regulatory risk and accountability insight).

Findings from the latest 5-year period (2012-2016), including provisions at the end of the period, reveal a total amount of cGBP 264Bn. This represents an increase of c32.0% when compared with the 1st research period (2008-2012). These results highlight that, even 10 years after the start of the global financial crisis, the financial consequences of misconduct remain evident and material.

The summary data presented in this report are complemented with additional features and analysis within the Full Report – including historical data for comparative performance, an overview of the Project’s metrics and a dedicated section on the UK banks, alongside further high-level analysis. Tânia Duarte

Operations Director, CCP Research Foundation and Project Manager of the Conduct Costs Project


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Contents

About the CCP Research Foundation CIC .......................................................................... 2

The Conduct Costs Project Report 2017 ............................................................................... 3

Part 1 –The Conduct Costs Project: 5 years on .................................................................... 6 Introduction ................................................................................................................................................................ 6 The working definition of ‘Conduct Costs’ ....................................................................................................... 8

Part 2 - International Table and Results .............................................................................. 9 Results Overview ....................................................................................................................................................... 9

Part 3 – Conduct Costs Project Metrics ............................................................................. 14 Introduction ......................................................................................................................................................... 14 The CCP Cause Code ....................................................................................................................................... 14 The CCP Cost Code .......................................................................................................................................... 16 The CCP Culpability Code .............................................................................................................................. 17


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Part 1 –The Conduct Costs Project: 5 years on

Introduction

The Conduct Cost Project (‘the Project’), an Associated Research Project of the CCP Research Foundation CIC, is now into its fifth year and, having started life at LSE, has created a proprietary dataset evidencing (on the basis of publicly available information) the financial consequences of bank misconduct.

The Global Financial Crisis was widely believed as a consequence of the risk-taking culture of the banks. After 10 years since the GFC, the recovering remains halting. The need of a ‘big picture’ of the banks’ accountability and ability to reassure the public that these problems are now behind, could not be more urgent. The Project has started in 2012 and went back to 2008 for the 20 world’s leading banks to learn and present the progress on their cultural and conduct risk agendas.

The Project has been focusing on what are likely to be amongst the most relevant, objective and “concrete” indicators of a bank’s culture: a bank’s ‘conduct costs’. The core objective of the Project was to research conduct costs and present them in as comprehensive and comprehensible a format as possible. The research provided data that is related to the disciplinary record of banks, which allow the comparative assessments of banks’ performance and of the practices of financial regulators in the principal market jurisdictions. Additionally, alongside the quantitative results, the Project’s findings provide an insight into the state of conduct costs disclosure more generally.

In November 2013, the Project published the first International Results Table and detailed supporting data of conduct costs for 10 major banks over a period of five years ending December 2012. In the following years, the Project has updated the data to include figures for 2013, 2014, 2015 and 2016. During this process, additional banks were also included in the exercise as the years progressed. Currently, the Project publishes the International Results Table for 20 major banks, from various jurisdictions, and provides analysis of the Cause, Cost and Culpability Codes that reflect the circumstances which gave rise to the Conduct Costs.

The Project involves the calculation, compilation and analysis of banks’ conduct costs with a view to allow making comparative assessments of bank’s performance on cultural / ethical issues. The Conduct Costs tell us a story about a banks’ conduct and the comparison year-by-year tells us how well a bank is progressing with its “culture change” agenda. Beyond this ‘cultural’ indicator, of course, are the risk management benefits from this data. When leveraged with banks’ internal metrics, the comparative nature of the Project’s data presents the opportunity to defend a bank’s risk profile, its conduct risk management, culture and, potentially, its regulatory capital requirements.


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"The work of...the CCP Research Foundation...could provide a framework for further development in relation to industry-wide performance measures relating to conduct.”1

Fair and Effective Markets Review, 2015

The Project’s findings have been referred several times by a wide range of stakeholders, from media to conferences, specialised journals in banking and financial market issues, consultancies and the Bank of England.2

This year the report focuses on the five-year period 2012-2016 and, it includes, for comparative purposes, the ‘Conduct Costs’ results for all 20 banks for the previous periods (2008-2012, 2009-2013, 2010-2014, 2011-2015).

For more details, please visit http://conductcosts.ccpresearchfoundation.com.

1 See, ‘Fair and Effective Markets Review’ Final Report June 2015 page 72-73 (available at http://www.bankofengland.co.uk/markets/Documents/femrjun15.pdf), and Consultation document October 2014, page 7, 43 (available at http://www.bankofengland.co.uk/markets/Documents/femr/consultation271014.pdf). 2 The Conduct Costs Project is also referred by Investopedia on the conduct costs definition now available on their website.


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The working definition of ‘Conduct Costs’

Over the past five years, the Project has built a database that tracks the costs of misconduct in the finance sector and, every year, publishes a table comparing the results of the banks under review. The methodology for the identification and attribution of these costs (Conduct Costs) to a bank and against a particular year is available on the project website. The Project has adopted the following working definition of Conduct Costs3:

Conduct Costs means 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.

In summary, conduct costs are ‘attached’ to the date on which a liability ‘crystallises’ (by judgement, settlement or award). Additionally, and to present the fullest account possible of a bank's conduct costs (and risk) over the period, the project records the bank’s provisions (and contingent liabilities) for the final year.

3 This definition of Conduct Costs is also published online (at http://conductcosts.ccpresearchfoundation.com/conduct-costs-definition)


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Part 2 - International Table and Results Results Overview

The latest results are presented below4 (Exhibit 1), in the form of an update to the International Table and covers the period 2012 to 2016. The Project produces data on the basis of ‘rolling’ five year periods. For comparative purposes, the results, per bank, for the periods 2008-2012, 2009-2013, 2010-2014 and 2011-2015 are also included, as is the position of each bank relative to the 2011-2015 results. The findings are underpinned by data that are continually the subject of identification and verification as further (and/or better) information is available in the public domain.

Exhibit 1 – International Results Table5 for the 20 banks6.

Conduct Costs (plus associated provisions at the end of the period) have increased to cGBP264.0Bn for the latest five-year period (2012-2016)7. This represents an increase of c5.2% when compared to the previous five-year period (2011-2015) and an increase of c32.0% when compared with the period (2008-2012) - no doubt reflecting the maturing of legal/prosecutorial action against the banks for pre-crisis misconduct (and latterly, benchmark / market manipulation and mortgage market mis-selling). Exhibit 2 (overleaf) shows this movement in total conduct costs, at a per bank level, for the four five-year periods covered by the project. 4The Results are also published on the Project’s website, available at http://conductcosts.ccpresearchfoundation.com/ 5 These figures should be read subject to the points made under "Notes on Interpretation”, which can be found at http://conductcosts.ccpresearchfoundation.com/notes-on-interpretation. The figures for each individual bank are rounded to two decimal points. With regards to NAB, the figures reflect the provisions as at 30 September of 2016. 6BAC – Bank of America; BARC – Barclays; BNP PA – BNP Paribas; CBK – Commerzbank AG; CITI – Citigroup; CS - Credit Suisse; DB –Deutsche Bank; GS – Goldman Sachs; HSBC; ING – ING Group; JPMC – JP Morgan & Chase; LBG – Lloyds Banking Group, Inc.; MS – Morgan Stanley; NAB – National Australia Bank Group; RBS – The Royal Bank of Scotland; SAN – Santander; SOC. GEN. – Société Générale; UBS; WFC – Wells Fargo & Company. 7The amounts originally denominated in non - GBP were converted using the exchange rate as at 31 December of each year. For more details, see http://conductcosts.ccpresearchfoundation.com/notes-on-interpretation.


Exhibit 2 - Overview by bank.8

8BAC – Bank of America; BARC – Barclays; BNP PA – BNP Paribas; CBK – Commerzbank AG; CITI – Citigroup; CS - Credit Suisse; DB –Deutsche Bank;GS – Goldman Sachs; HSBC; ING – ING Group; JPMC – JP Morgan & Chase; LBG – Lloyds Banking Group, Inc.; MS – Morgan Stanley; NAB – National Australia Bank Group; RBS – The Royal Bank of Scotland; SAN – Santander; SOC. GEN. – Société Générale; UBS; WFC – Wells Fargo & Company.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

BAC BARC BNP PA CBK CITI CS DB GS HSBC ING JPMC LBG MS NAB RBS SAN SCB SOC. GEN.

UBS WFC

Grand Total 2008-2012 [GBP Bn] Grand Total 2009-2013 [GBP Bn] Grand Total 2010-2014 [GBP Bn] Grand Total 2011-2015 [GBP Bn] Grand Total 2012-2016 [GBP Bn]


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Exhibit 3 illustrates the relationship between the Grand Total of Conduct Costs for a given period (i.e. costs crystallised during the period, plus Provisions as at 31 December of the final year) and the Provision sums for that period9.

Exhibit 3 - Overview by period.

While the amount of Conduct Costs across all 20 banks has increased over the five (five-year) periods, this does not appear to have resulted in a correlative reduction in Provisions, which have remained steady throughout. The percentage that Provisions bears to the Grand Total for a given period has fluctuated as follows: 31.5% (2008-2012); 36.0% (2009-2013); 24.0% (2010-2014); 24.2% (2011-2015) and 24.0% (2012-2016).

The observation below in relation to provision levels, taken from the 2016 report, remains true to the results for the latest period (2012-2016):

“This may simply be due to the raising and utilisation of Provisions over time - as misconduct claims/enforcement/prosecutions manifests themselves and liability becomes reasonably likely (and quantifiable) in accordance with accounting standards. It may also provide an insight into the difficulties in anticipating Conduct Cost liability – resulting in short-term provisioning or the raising of extraordinary provisions to meet a specific liability (such as that required of BNP Paribas in 2014 in respect of US sanctions violations). Although of course, there is an argument that, in order to maintain a behavioural deterrent effect, prospective Conduct Costs should not be too easily identified as this risks firms ‘pricing’ in misconduct - and regulatory fines, for example, becoming a ‘cost of doing business’. But equally, is it appropriate that shareholders risk having to account for extraordinary/significant provisions against conduct costs?”

Over the 5-year periods a gradual increase in Total Conduct Costs is evident (see Exhibit 3). However, this is not reflected in a comparative trend on a bank by bank basis. Exhibit 4 (overleaf) shows the movement in conduct costs, at a per year and per bank level, for the five-year period 2012-2016 covered by the Project.

9 Given the difficulty of tracing through provision-adjustments year-on-year and the risk of double-counting within the rolling five-

year period, only the financial Provisions for the end of the period (last year of the period) are recorded.

199.97 210.93

246.01 250.94264.03

62.9976.00

59.04 60.71 63.37

2008/2012 2009/2013 2010/2014 2011/2015 2012/2016

Grand Total [GBP Bn] Provisions at the end of the period [GBP Bn]


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Exhibit 4 – International Table Results per year, for the period 2012-201610.

The five-year rolling total for 2012-2016 has increased more than GBP13Bn when compared to the previous (2011-2015) period, and, as Exhibit 4 shows, 2016 marks an uptick in Conduct Costs vs 2015 – although the provision sums remain comparable and significant.

Exhibit 5(overleaf) provides a ‘per-bank’ illustration of the provision movements over the five periods. That is, the Conduct Costs-related provisions held by each bank as at 2012, 2013, 2014, 2015 and 2016. Leaving aside the clear differences in the provision totals across the 20 banks, the data show fluctuations year-on-year which are significant in some cases. Over the majority of banks, the data show an upward trend in provision totals (notwithstanding the fact that the aggregated total of Conduct Costs (excluding Provisions) having slightly increased from cGBP27.9Bn in 2015 to cGBP30.0Bn in 2016 – see Exhibit 4). The fluctuations in Conduct costs on a per annum basis that are illustrated by Exhibit 4, together with the provisions trends, underlines the importance and value in tracking Conduct Cost performance on a rolling five-year basis. It allows for a better account of the nature of Conduct Cost events and for the time lag issues inherent in this risk-type.

10

The figures are based solely on data available in the public domain. The Project extends an open invitation to the banks to respond to the data. For more details about the Project Methodology, see http://conductcosts.ccpresearchfoundation.com/notes-on-interpretation.


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Exhibit 5 - Overview by bank11 - Comparison of the proportion of PVN at the end of the periods 2012, 2013, 2014, 2015, 2016.

11BAC – Bank of America; BARC – Barclays; BNP PA – BNP Paribas; CBK – Commerzbank AG; CITI – Citigroup; CS - Credit Suisse; DB –Deutsche Bank;GS – Goldman Sachs; HSBC; ING – ING Group; JPMC – JP Morgan & Chase; LBG – Lloyds Banking Group, Inc.; MS – Morgan Stanley; NAB – National Australia Bank Group; RBS – The Royal Bank of Scotland; SAN – Santander; SOC. GEN. – Société Générale; UBS; WFC – Wells Fargo & Company.

0.00

5.00

10.00

15.00

20.00

25.00

30.00

BAC BARC BNP PA CBK CITI CS DB GS HSBC ING JPMC LBG MS NAB RBS SAN SCB SOC. GEN.

UBS WFC

PVN as at 31 Dec 2012 [GBP Bn] PVN as at 31 Dec 2013 [GBP Bn] PVN as at 31 Dec 2014 [GBP Bn] PVN as at 31 Dec 2015 [GBP Bn] PVN as at 31 Dec 2016 [GBP Bn]


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Part 3 – Conduct Costs Project Metrics Introduction

The numbers recorded against a bank’s conduct costs record might assist in explaining low profitability and/or factor in the suppression of its share price. The numbers might also provide a valuable insight into its non-financial performance and can serve as a metric against which to assess a bank’s culture and conduct risk management. However, the numbers on their own, arguably, tell only half the story. With the introduction of multiple data points for each conduct cost entry, such as the originating jurisdiction, the prosecutorial authority and even the date and timing of crystallisation, one begins to add context to the numbers and is able to raise the value of quantitative analysis and inform qualitative judgement over conduct performance. It is with this in mind that the Project has developed (and continues to develop) additional codings, with the objective of tracing conduct costs from cause to consequence (both in terms of the manifestation of misconduct cost and its relative culpability).

These take the form of CCP ‘Cause Codes’, ‘Cost Codes’ and ‘Culpability Codes’. The following analysis provide an insight to the conduct costs using the project’s metrics.

The CCP Cause Code

The Project team has assigned a Cause Code to each entryto reflect the circumstances giving rise to the Conduct Cost. The codes used are as follows:

Exhibit 6 - The CCP Cause Codes.

Cause Codes Definition

PPI PPI provisions, as published by bank. AML Money-laundering related issue. MAB Market-abuse related issue (including insider dealing. SAN Sanctions contravention. MIS Mis-selling other than PPI or mortgage market /swaps. CLA Adverse judgement / settlement in class action v bank (or one or more officers). CON defective internal controls (including rogue trader. SEC Breach of confidentiality. CLI Client money failing. DIS Failure to disclose as required by law or regulation. TAX Payment related to tax irregularity (including failure to comply with undertaking). LOS Egregious loss due to bad judgment (e.g. London Whale) (not include rogue trader). ENV Environmental issue. EMP Employment issue. HRI Human Rights issue. BMK Benchmark manipulation, specifically interbank offered rates (LIBOR etc). FXM Foreign Exchange Market Abuse/Manipulation. MOR Mortgage market mis-selling (including primary and secondary markets; retail and wholesale

e.g origination and foreclosure abuses as well as RMBS).


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SWP Swaps mis-selling, specifically IRHP. OPE Operational Risk issues not covered by any of the above categories. OTH Other event indicating governance / management failure (not failing within any of the above

categories. PVN [Financial] Provisions made in respect of any of the above categories.

Cause Code Analysis

Exhibit 7 is presented as an overview of Conduct Costs by Cause Code.

Exhibit 7 - Overview by Cause Codes of the 20 banks [GBP Bn], for the 2012-2016 period.

The 20 banks have incurred a broad range of Cause Code costs, from failures of mis-selling claims (MIS, MOR, PPI), defective internal controls (CON) and Market Manipulation (FXM, BMK, MAB), as well as Sanctions Violations (SAN) and Money – laundering related issues (AML).

The large sum recorded against code OTH reflects the need to assign a code where no other code is entirely appropriate or possible on the basis of the publicly available disclosures.

0.04

0.05

0.11

0.17

1.69

2.28

2.53

3.60

3.72

4.56

5.53

5.68

5.85

6.10

7.04

7.88

18.63

26.89

32.47

65.84

EMP

SEC

CLI

HRI

OPE

MAB

TAX

AML

CLA

LOS

DIS

BMK

FXM

SWP

SAN

MIS

CON

PPI

OTH

MOR

Data and analysis for previous periods and for the UK banks are included in the Full Report.


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The CCP Cost Code

The Project team has assigned a Cost Code to each entry in order to illustrate, quantitatively, the various consequences (and not just the causes) of misconduct. The Project applied three different Cost Codes whose working definitions are as follows:

Exhibit 8 – The CCP Cost Codes.

Cost Codes Definition

FNE Fines and/or Penalties imposed by a regulatory and/or other ‘Conduct’ authority.

RCC Conduct Costs that arise out of a regulatory directed redress, whether or not it results in formal proceedings, fines or penalties (Other than FNE).

OCC All Other Conduct Costs.

Cost Code Analysis

Exhibit 9 is presented as an overview of Conduct Costs by Cause Code.

Exhibit 9 – Overview by Cost Codes for the 20 banks.

The Cost Codes stress the fact that the consequences of misconduct are not only a matter of fines and/or penalties, on which, c57.2% of the conduct costs are allocated to regulatory-related Conduct Costs (cost code ‘RCC’) between 2012-2016, for the 20 banks. However, when comparison with the five UK banks12, the ‘RCC’ code is allocated to c78.5% of the Conduct Costs, leaving ‘FNE’ with c13.9%, for the same period (2012-2016).

As previously mentioned in the 2016 report, the level of FCA fines felt sharply in 201613. For the period 2012-2016, the level of FCA fines for the 20 banks in analysis reach the total amount of cGBP2.6Bn, reflecting a proportion of c6.3% of the total ‘FNE’.

12Being BARC, HSBC, LBG, RBS and SAN. 13 FCA fines (20 banks between 2012-2016): 2012 – GBP0.26Bn; 2013 – GBP0.28Bn; 2014 – GBP1.36Bn; 2015 – GBP0.71Bn; and 2016 – GBP0

FNE21.54%

OCC21.24%

RCC57.22%



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The CCP Culpability Code

The final of the three codings is an event’s “culpability”. The principle behind this coding is that Conduct Cost data should reflect the different levels of responsibility and moral culpability that are involved.

For a detailed analysis and methodology relating to CCP Culpability Codes, please read the authors’ paper Seven Deadly Sins: ‘Retrospectivity, Culpability and Responsibility’, published in the Law and Financial Markets Review 2016, vol. 10(1), 27-37.

CCP Research Foundation

The seven ‘grades’ of culpability currently employed are defined as follows (in suggested order of bank culpability):

Exhibit 10 - The CCP Culpability Codes14.

Culpability Codes Definition

Case 1 - “Clustered Criminality”

This is where there is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved. Classic examples: fraudulent manipulation of markets or benchmarks such as LIBOR, concerted complicity in tax evasion and breach of US sanctions regimes.

Case 2. "Corporate integrity-related regulatory breach"

This applies where there has not been any criminality but there is a clear and egregious breach of regulation that impugns the integrity of the institution. This will also include serious corporate governance failings tied to a regulatory breach such as inadequate ‘systems and controls’, irrespective of whether or not there has been customer detriment or loss and misconduct of a systemic nature with high reputational damage. Examples: PPI mis-selling or mis- handling of client money.

Case 3 - "Imputed breach"

This would be the case where a bank is not the "primary culprit" but it has committed a criminal offence or regulatory breach that is closely linked to, and arises by reason of, another's (actual or potential) criminal act. Examples: failure to comply with AML requirements and insufficient controls in relation to a customer's tax evasion (in relation to which new criminal offences have been proposed by various politicians in the wake of the HSBC Switzerland affair).

Case 4 - "Corporate conduct/behavioural failure"

This is similar to, but less serious than, Case 2. It does not, necessarily involve a clear regulatory breach (or the breach might be of a more technical nature (such as IT system failures) that does not necessarily impugn the integrity of the bank (it does not represent endemic misconduct)). Rather, it arises out of a pattern of behaviour (e.g. "poor practices") where the bank accepts that some redress to its customers is appropriate. Example: the FCA redress scheme for SME customers who have allegedly been mis-sold IRHP and other products. (This may turn out to be sui generis; the FCA itself refers to it as a "unique solution to a specific set of concerns").

14The Culpability Codes range from corporate and individual criminal conduct to regulatory and behavioural transgressions. Case 1, which involves a significant amount of criminal behaviour, is (in our, admittedly subjective, view) the worst in terms of moral culpability, whereas Cases 6 & 7 is for the least morally culpable transgressions (with the other Cases ranked in descending order of culpability).


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Culpability Codes Definition

Case 5 - "Individual Criminality"

This is where there is clear evidence that a crime has been committed by a bank employee and the culprit (usually acting alone) is identified. Classic examples: insider trading and the "rogue trader".

Case 6 - "Corporate reputational event"

This arises where the bank's reputation is severely damaged even though it may not have committed any crime or breach of regulation. Examples: the difficulties experienced by RBS in relation to GRG and its alleged harsh treatment of borrowers in default and the problems encountered by HSBC in relation to alleged complicity in its customers' alleged "aggressive tax avoidance". Egregious, unjustified bonus payments could also fall into this category. Pending crystallisation of an event into a conduct cost, Provision items that cannot be assigned to another Case, are assigned to Case 6.

Case 7 - "Individual reputational event"

This Case is for situations (not falling within any other Case) where a person employed by the bank or in some way associated with it behaves in a way that attracts criticism not just of that person but also of the bank itself. Example: the events reported in relation to the former Chairman of the Co-op Bank, Paul Flowers.

Culpability Code Analysis

Exhibit 11 is presented as an overview of Conduct Costs by Culpability Code.

Exhibit 11 – Overview by Culpability Codes of the 20 banks.

The allocation of Culpability Codes allows to separate the conduct costs into degrees of moral /ethical culpability. The majority of the events were, unsurprisingly, assigned to Case 2 and Case 4, reflecting the highly egregious nature of such transgressions. Case 4 applies to similar events as

Case 1 - Clustered Criminality

6.05%

Case 2 - Corporate Integrity-related

Regulatory breach36.33%

Case 3 -Imputed Breach

6.56%

Case 4 -Corporate

Conduct/Behavioural failure

49.12%

Case 5 - Individual Criminality

1.91%

Case 6 -Corporate

Reputational event0.03%



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Case 2, while such events do not necessarily involve a clear regulatory breach but arise out of a pattern of behaviour. Case 2, on the other hand, is allocated to Conduct Costs with predominance of regulator-led redress (e.g. PPI mis-selling and MOR market mis-selling).

Alongside Case 2 and Case 4 allocations, it is noted that Case 1 – “Clustered Criminality” Conduct Costs feature results of interbank and benchmarks manipulation / abuse.

For completeness, Exhibit 12 displays the proportion of the Culpability ‘scoring’ system allocated to each of the 20 banks for the period 2012-2016.

Exhibit 12 – Culpability Codes.

As the Culpability codings develop and as the Project’s historical data is updated with these codes, one will be able to identify Culpability trends across the five-year review periods, as well as derive CCP Culpability Index score for each bank. This analysis alongside the other Project codings and data points, will add a further metric against which CCP stakeholders can access banks’ ambitions for culture change and the restoration of public trust.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

SOC. GEN.

ING

SCB

CBK

SAN

NAB

UBS

CS

DB

BNP PA

HSBC

GS

WFC

RBS

MS

BARC

CITI

LBG

JPMC

BAC

Case 1 - Clustered CriminalityCase 2 - Corporate Integrity-related Regulatory breachCase 3 - Imputed BreachCase 4 - Corporate Conduct/Behavioural failure Case 5 - Individual CriminalityCase 6 - Corporate Reputational event


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