- General -
- The Conduct Costs Project is, primarily concerned with the production of data in an accessible form rather than the interpretation of that data. It is recognised, however, that the data produced by the project is likely to prompt debate in a number of areas (and that is to be welcomed). At the risk of stating the obvious, all of the banks covered by the project have different business models and operate in different jurisdictions. And they are not all the same size. This needs to be borne in mind when the figures are considered.
- All of the data should, in any event, be regarded as approximate and subject to on-going verification and checking. The Project extends an open invitation to the banks to respond to the data. Any bank that feels that any figures relating to it are inaccurate may contact the Project’s team and request a correction provided it is prepared to explain fully why it believes there is an inaccuracy and substantiates its alternative figures. The Project team would welcome the banks' engagement to assist with the production of accurate figures for conduct costs.
- The figures are based solely on data available in the public domain. Mere allegations are not taken into account. Events are only taken into account when they have "crystallised" (e.g. a judgement has been given, a settlement agreed, or a provision made in accounts). This can affect the timing of inclusion of figures in the tables. For example, the cost of remediation by repurchase appears in the year the settlement was reached, even though the bank concerned may take several years to repurchase the financial instruments from customers.
- The Project recognises that not all instances of financial output (whether arising out of fines, judgments or settlements against the bank) are recorded as separate entries within CCP1, since not all conduct failings are the subject of public disclosure. In order to ensure that all financial outflow arising out of misconduct is captured, the researchers wished to include a ‘catch-all-other-costs' entry for each year, that records what was in effect the bank’s 'conduct costs' incurred for that year. To do so, researchers refer to the Banks’ published financial statements.
- As little information was disclosed in the annual reports, with limited detailed disclosure of legal proceedings, investigations and regulatory matters, some of the cost figures were obtained from legal sources or the press.
- Wherever possible and relevant, these figures were verified against and netted from the:
- “provision utilised” figures from the cash flow statements
- “non-interest, non-compensation expense” figures from the P&L statement
- “asset impairment” figures
- In certain cases, the figures may be based on incomplete information, where it is known or suspected that some conduct costs have been incurred but the published data do not reveal what they are. A typical example is where the cost is aggregated with other costs or expenses and no breakdown is available. In such cases, the aggregate figure has usually been used. An example is “litigation expense”, which may include items unrelated to misconduct. (On the other hand, there may be other liabilities that arise out of misconduct that are not aggregated within "litigation expense").
- In the case of conduct costs in respect of the repurchase (at par) of auction rate securities (as required by US regulators) the cost has been deemed to be the purchase price, absent any detail as to the scale of any write-down, or residual value.
- The provision figures for 2014 were taken from the liabilities section of the relevant balance sheet as at 31 December 2014. In certain cases, the figures were not available, and the provision charges from the Profit & Loss statement were used (and therefore the assumption is that the provision from the previous minus the provision utilised is nil).
- Lastly, the treatment of provisions differs under US GAAPs and IFRS and this may influence the comparison between banks. Figures for 2014 provisions include relevant contingent liabilities.
Amounts originally denominated in non - GBP were converted as set out below:
- Regional Results: Australia -
- In Australia ANZ, Wesptac, NAB and CBA are commonly referred to as the "big four banks". The big four Australian banks also collectively hold a dominant position in the New Zealand banking sector.
- The financial statements of ANZ, Westpac and NAB are prepared for year ended 30 September. Whereas the financial statements of CBA are prepared for the year ended 30 June. As such, if any of these banks incurred conduct costs in the month of November 2011, for example, these would be accounted for in the 2012 financial statements (and related provisions).
- Regional Results: Israel -
The Israeli Results are subject to the above Notes on Interpretation unless a contrary indication is stated below:
A. In relation to paragraph 2 above, a request has been made to the banks to respond to the data before publication.
B. The reports refer to the banks themselves. In addition, they refer to subsidiaries, which are banks that operate in Israel or abroad. However, the reports do not refer to other subsidiaries that do not engage in banking businesses, such as trust companies, investment houses, credit card companies, underwriters, etc.
C. In relation to paragraph 4, the researchers were unable to identify even a reasonably accurate ‘proxy’ for such an entry within the banks’ public disclosures, due to the lack of specific disclosure within Israeli banks’ reports. The banks do not specify the amount of "provision utilized";
a. Some Israeli banks specify the amount of their "legal expenses". However, there are no binding rules as to the question what should be included in this category, and each bank decides for itself. This term may include only the fees paid to the lawyers of the banks for various legal matters, as opposed to fines, financial sanctions, compensation to customers, and similar misconduct costs;
b. The Israeli banks specify the amount of their "other expenses", a general name for a wide range of expenses. Here, again, there are no binding rules as to the content of this category, which may include the data we are looking for, but buried among many other non-relevant expenses;
c. The banks do not specify within relevant ‘provisions’ (see paragraph E below), the amount of “provisions utilised”.
d. Due to all this, the researchers did not include in the tables any entry for provision utilized, expenses, etc.
D. The result of all the above mentioned is that the yearly totals for the Israeli banks are likely to be lower than is really the case.
E. As to provisions: Unfortunately, the researchers could not find the amounts of provisions related to misconduct. Under the instructions of the Israeli Supervision of Banks, the banks are not obliged to include such data in their reports. The only provisions that should be specified in the reports are provisions for taxes and provisions for doubtful debts, which are not relevant to the research.
a. However, the researchers included in the tables the amount of the estimated additional exposure to actions filed against the bank, of which the probability of realization is estimated by the bank as "reasonable possible" or "not remote". The banks did not make any provisions against these actions.
F. The values in New Israeli Shekels (NIS) were converted to GBP based on an exchange rate of 6.0814, which is the five year average of the "Representative Rate" published by the Bank of Israel.
- Form CCP2: List of Heads of Loss and Applicable Codes used by Researchers -
Every instance of Conduct Costs recorded against a bank is attributed a "Cause Code" to reflect the circumstances giving rise to the Conduct Cost (Form CCP2).
Most recently, the Project has assigned “Cost Codes” to each entry within its database in order to illustrate, quantitatively, the various consequences (and not just the causes) of misconduct. In its initial phase, the Project has applied three different “Cost Codes” to the data for the four UK banks only. The working definitions for the Cost Codes are as follows:
• ‘FNE’, being Fines and/or Penalties imposed by a regulatory and/or other ‘Conduct’ authority.
• ‘RCC’, being “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’, being all Other “Conduct Costs”.
• ‘UKN’,the nature of the Conduct Cost is "Unknown". This code is assigned to entries where the cost is identified as a Conduct Cost but there lacks sufficient information to enable allocation to either FNE or RCC or OCC. The apportionment is unknown (UKN).