Exclusive: Banks Fire Warning Over Fines

The bosses of Britain's biggest lenders have warned regulators that mounting fines linked to a string of industry scandals pose a wider risk to the stability of the banking system.

At a meeting with officials from the Financial Services Authority (FSA) last week, bank chief executives said that escalating redress and penalties for mis-selling and other malpractice could jeopardise both their lending capacity and their ability to rebuild capital in line with regulators' demands.

The warning comes in the wake of a rising compensation bill triggered by the mis-selling of payment protection insurance (PPI) and interest rate swaps, which have so far cost the major banks more than £8bn.

A person familiar with the talks said the bankers highlighted the unpredictability of recent conduct-related fines both in the UK and US.

"This is not about special pleading. Banks which have mis-sold products to consumers should provide appropriate redress," said one person close to the talks. "But there is a wider point about lending and the stability of the banks if so much capital is leaking out in the form of fines as well as compensation for which there is sometimes no justification."

Standard Chartered recently paid $340m to New York's main financial regulator to settle allegations that it failed to control payments involving Iranian entities. It is still in negotiations with several other authorities about an overall settlement.

HSBC set aside $700m in its half-year results as a provision for potential fines related to failings in its Mexican operations, but warned at the time that the eventual payout could be significantly higher.

A number of UK banks are also facing penalties for attempting to manipulate the Libor interest rate which could outstrip the £290m levied on Barclays in June.

Last week's meeting was attended by Lord Turner and Andrew Bailey, respectively the chairman and managing director of the FSA; Ana Botin, Stuart Gulliver, Stephen Hester and Antonio Horta-Osorio, the chief executives of Santander UK, HSBC, Royal Bank of Scotland (RBS) and Lloyds Banking Group; and Chris Lucas and Richard Meddings, finance directors of Barclays and Standard Chartered.

Insiders said that the FSA acknowledged the concerns about the stability of the banking system and the dangers of heavy fines being applied unilaterally by individual US regulators.

Sir Mervyn King, the Bank of England Governor, said after Standard Chartered's fine that cross-border regulatory co-operation was essential.

Senior bankers point out that the comparatively large fines issued by US authorities lead to a transfer of significant sums of money from the UK across the Atlantic.

The FSA meeting also focused on the ongoing tension between bankers and regulators over UK lending, according to those present.

Banks have expressed concern that the new Funding for Lending scheme conflicts with efforts to ensure their capital levels are compliant with new global rules by the end of 2013 because of the way the Bank of England programme is structured.

"There was a clear message that banks can run down liquidity buffers during fallow periods as per official guidance and that banks shouldn't blame FSA liquidity rules for poor lending growth," a source close to the FSA said.

None of the institutions represented at the meeting would comment.