In June 2017 Barclays PLC (‘the Bank’) and four former senior executives from the Bank were charged with fraud. It is the first-time criminal charges related to the 2008 financial crisis have been brought against a bank in the UK.
The charges relate to the actions of the Bank in raising additional capital during the financial crisis. The additional capital came from a number of investors including the state-owned investment fund, Qatar Holdings, and allowed Barclays to retain its independence at a time when two of its biggest UK rivals were bailed out by the government.
You are a Financial Manager working for Barclays Bank. You have been asked to prepare a 1,500-word report on implications of the Qatar case for John McFarlane, the Chairman of Barclays PLC.
Solution
a- Outline the main features of the 2008 financial crisis and explain its implications for the UK banking sector.
The roots of the financial crisis of 2008 can be traced back to the deregulation of the financial markets in the US, UK, and Western Europe. This deregulation was initiated in 1970 but went aggressive in the 80’s. It freed many organizations to conduct trade in different geographical regions. Banks and institutions before 1970’s was restrained to many limits. They could not operate outside their specialized spheres of trading. Europe was specifically limited to trade within its territory. There were defined geographic constraints for some countries like in the USA, banks and institutions were restricted to operate within some mentioned states.
In Europe, specifically, the UK restrained its banks to trade within its own country. Banks were controlled by tight regulations in the form of cash and capital ratios. More specifically, the banks were required to control the percentage of the depositor’s funds that they lend to the customers.
After the relaxation of these controls in the 1970s and 1980s, the banks and institutions were allowed to raise funds from sources other than depositors. The banks and financial institutions were able to raise funds from money markets, and thus they grew rapidly as compared to their previous positions. Deregulation of the economy was aimed to expand the mortgage and personal debt markets.
In the UK, main institutions and banks were nationalized as well. The largest mortgage lender HBOS was forced by the government into a merger with Lloyds TSB. The interbank lending rates were quite high which led to a rapid downturn in construction and housing markets (Claessens et al., 2014).
b- Explain why Barclays needed to raise additional capital in 2008.
After the financial crisis of 2008, Barclays Bank was only trying to protect itself and decide its destiny. The rivals of Barclay bank had already given away to the bailouts of the taxpayers. The then-Boss of the Barclays feared the same faith for themselves. That is the reason they raised capital from Abu Dhabi and Qatari investors of around £7.3 Billion. It was the second of the two-phase capital injection, which was inducted into the Barclays for avoiding any chances of nationalization.
The Serious Fraud Office brought charges against the bank stunning the world with this decision. The decision by Barclays to get money from lenders in the Middle East of up to £7.3 Billion was raised for suspicions.
The Bank was required to raise such huge amount of capital to strengthen its balance sheet. It was done to ride out the effect of the financial crisis without getting any help from the taxpayers. The capital raised was funded by Qatari Royal families who already owned a significant share in the bank ownership. This deal was meant to stop the selling of the same stake to the UK government, which was done by the competitors of Barclays bank. It consequently meant that Barclays would be able to avoid the UK governmental regulations on executive pays, bonuses, and dividends. The two Qatari families were getting significant favors in the result of this induction of cash to Barclays.
The bank was forced into raising capital as part of the scheme of bail-out which the seven banks and a building society had signed with the government to raise the confidence in the banking system. When the deal was being agreed, the then-boss Varley had convinced the officials of the government that he has an investor who is ready to invest £ 1 Bn in Barclays (Wearden & Treanor, 2008).
c- Explain why the Serious Fraud Office consider that the actions taken by the Bank and its executives at that time may have been unlawful.
The Senior Fraud Officer is considering that the bank and its four executives were either lying or not fully disclosing the information to the market of what they were paying to the Qatari investors. The Senior Fraud Officer considered that there has to have some information which is not disclosed about the side agreements with the Qatari investors. They asked why Qatari investors would be this much motivated to plowing millions of pounds into the Barclays; a British Bank and saving it from the taxpayer bailout. This case, along with the case raised by the regulator, the lawsuit of $ 1 Billion are all related to the Advisory Service agreement which was agreed between the Barclays bank and the Qatari investors during the capital raising of 2008 (Goodley, 2012). This agreement pledged a total pounds of 322M to the Qatari investors in exchange for the help or raising of capital to Barclays in 2008. The bank just before closing the deal gave a loan to the Qatar government of about $ 3 billion. The Senior Fraud officer suspected that the pledged amount was reinvested in the bank and not lend to the Qatari investors who were also the majority stakeholder of Barclays.
The exact amount of the deal of ASA was not disclosed to the public. The second phase of the deal, which was debt deal from the Qatari side, was not disclosed to the public. Similarly, the loan of $3 Billion to the Qatari government was also not disclosed. The non-disclosure of the loans and the pledged amount made it look suspicious. The disclosure is required to make sure each participant is getting an equal benefit from the deal. The lending of the money from a bank to one of its cornerstone investors at the same time when it is raising funds for it can be perceived as secret financial assistance for raising the company share price (Binham, 2017).
d- Recommendation Based on your analysis, set out a clear recommendation as to one specific action the Bank should take to prevent this happening again.
With all the allegations and cases that Barclays is facing and has faced, it has not pleaded guilty and is fighting these cases vigorously. The SFO case, along with the case raised by the regulator, the lawsuit of $ 1 Billion are all related to the Advisory Service agreement which was agreed between the Barclays bank and the Qatari investors during the capital raising of 2008. It shows that the upper management is not ready to accept its wrongdoings. It also means that they are trying to find ways to get past these in the same manner they did during financial crisis 2008. It shows that they are not going to let go of the corrupt banking activities.
The banking sector of this era after the financial crisis has changed. There is more about box-ticking of regulations, more of compliance officers and more speeches about ethics. However, on the ground, the upper management seems to remain unchanged and is stuck to their old culture of fraud and scams. The change in ethical banking will only come if the upper management will also accept these changes and push its company to adopt these changes.
This cultural change needed at Barclays cannot succeed in the current situation where the four executives which were sent to jail for rigging had not lost their licenses to practice again. No-one has been barred from entering the financial industry again. If these perpetrators are not penalized, the cultural change towards ethical banking will never initiate.
There are many recommendations for the bank to abstain from such types of incidents but one on the most effective recommendation is that the bank must consider substantial changes in its operating habits and internal control system to prevent scams and frauds in future. The internal governance systems of the banks are not adequate (Chu, 2017). The stronger the internal control system, the stronger will be the probability of fraud detection and its prevention. Further, Barclays should consider changes in its management by hiring or promoting of the senior managers who have had a past reputation for being strict on internal controls. The bank should implement zero-tolerance strategies on frauds and scams. This strategy would only succeed if there are equality and justice in the handling of such cases internally.
References
Bingham, C., 2017. What is the Barclays fraud case about? [Online] Available at: https://www.ft.com/content/d3ebeb7c-55a8-11e7-80b6-9bfa4c1f83d2 [Accessed 7 February 2018].
Chu, B., 2017. A decade after the banking crisis, nothing has changed inside the city – and the latest Barclays scandal proves it. [Online] Available at: http://www.independent.co.uk/voices/barclays-banking-investigation-libor-corrupt-ceo-jes-staley-whistleblower-hunt-bob-diamond-a7676486.html [Accessed 7 February 2018].
Claessens, S., Kose, M.M.A., Laeven, M.L. & Valencia, F., 2014. Understanding Financial Crises: Causes, Consequences, and Policy Responses. [Online] Available at: https://www.imf.org/external/np/seminars/eng/2012/fincrises/pdf/ck.pdf [Accessed 7 February 2018].
Goodley, S., 2012. Serious Fraud Office is investigating Barclays payments to Qatar. [Online] Available at https://www.theguardian.com/business/2012/aug/29/sfo-investigation-barclays-qatar [Accessed 7 February 2018].
Wearden, G. & Treanor, J., 2008. Barclays turns to the Middle East in £7bn fundraising. [Online] Available at: https://www.theguardian.com/business/2008/oct/31/barclay-banking1 [Accessed 7 February 2018].
+447462439809