OUTLOOK: Banking reform will not be complete until individuals are punished

The natural reaction to the Financial Conduct Authority’s (FCA) announcement of an investigation into the Co-operative Bank is to say “what took you so long”?

In reality, however, we’re nearer the end than the beginning. The term “investigation” marks an important legal milestone when used by the FCA being the formal precursor to disciplinary action by its enforcement arm.

Much of the work will have been done, and you can be very sure that the watchdog’s enforcement people will be burning the midnight oil to get the loose ends tied up.

That’s because the independent inquiry announced by Chancellor George Osborne, can’t start until the regulator is finished to avoid prejudicing any actions it might take (and any appeals against those actions).

If the Co-op is found to have broken the rules by misleading investors about its financial health prior to the Bank of England’s discovery of a £2bn hole in its accounts, standard practice would be to impose a fine, and perhaps a heavy one.

In this case such a move would, however, be entirely counter-productive. The bank is hardly in the best of health. It may have secured a recapitalisation deal, but this is still a business that is on its knees. It is not only grappling with a financial crisis, but with a reputational one. As such, it needs every penny it can get to be spent on stemming the flow of departing customers.

Not to mentioned attracting new ones to replace those who have gone and finding a way to make itself relevant as a stock market-listed plc (a consequence of its recapitalisation).

Suspending any fine – as prison sentences sometimes are – combined with a heavy censure might be a creative way of handling this. But that would leave the job half done.

Fining institutions is of debatable value even when they are healthy. The diffuse shareholders who nominally pay don’t generally kick a fuss as long as executives keep profits flowing and the share price up.

Banks will only behave better when the individuals that run them are called to account for their misdeeds or for the misdeeds that are committed on their watch.

It bears repeating that despite costing this country as much as a £1tn in both direct and indirect aid, only one senior banker has so far been fined for their role in the debacle that was the financial crisis. There have been two City bans, but one of those was voluntarily accepted.

Now the regulatory community likes to point to Co-op as breaking new ground. Here is an institution that went wrong but was sorted out without recourse to taxpayers’ funds.

That is indeed a positive development when it comes to the prudential regulation of banks. But the job of reform is only half done. It will only be complete when some of the individuals responsible for getting the Co-op (and perhaps other banks) into a mess face discipline and are punished for any misdeeds they may have committed.

Which is why the FCA’s next steps are so important. It is to be hoped that its focus is as much on the individuals that caused the debacle as on the Co-operative Bank as an institution.

It would also be highly regrettable if Mr Osborne’s desire to get his “independent” inquiry under way, driven by hopes of it uncovering embarrassing things about Labour’s links with the Co-operative, were to impede this.

CWC chief’s share purchase could prove to be a good bet

Just in case you had missed it, Cable & Wireless Communications (CWC) yesterday reminded the world that its new chief executive, Phil Bentley, is super confident about the business’s prospects.

After breakfast at his Miami pad, his first job on Friday was to put in an order with his broker for 4.3 million shares at a cost of around £2.4m. That’s a lot of confident!

The company duly reported this through a regulatory announcement that day at 3.58pm, a time when the attention of the handful of staff at their desks in the City was firmly fixed on getting home as soon as possible for whatever activities they had planned at the weekend.

That being the case, CWC reported it a second time yesterday. This provided the former British Gas boss with the opportunity to burble on a bit.

So he offered up a quote saying that he plans to drive “top-line growth”, maintain “cost discipline”, increase returns on capital and improve customer service. All at the same time. Now stop laughing at the back you British Gas consumers.

As a result at least one analyst noticed the share purchase and was moved to hail Mr Bentley’s “vote of confidence” in CWC, which is these days focused on Central America and the Caribbean, hence the location of Mr Bentley’s pad (paid for by the company’s relocation package).

But it’s not all that it might seem. Mr Bentley was required by buy twice his £800,000 basic in shares when he took on the job. So he’s only actually placing an £800,000 bet on himself. What’s more, his pay and perks, while trebling bills for customers of British Gas, have been put at as much as £13m, so it’s not as if he can’t afford it.

He’ll also get a similar amount of shares free in three years if he meets performance targets. But here’s the thing: CWC might just make an attractive, and bite-sized target, for an American bidder.

As such, a cynic might see the twice-announced share purchase as more of a bet than a vote of confidence – one that could pay off rather quickly. But I’m not a cynic. Honest.