The bulk of the RBS fine is going to the US, but who is really paying for it?

6th February 2013

It was meant to be one of the few benefits of the taxpayers’ majority share in Royal Bank of Scotland. If the UK regulators saw fit to fine RBS, which of course also owns high street giant NatWest, then at the very least much of the fine would return to the UK Exchequer albeit in a round-about way.

But in such instances, it is never quite as easy as that. The fine amounts to £390m but £300m is likely to go to US regulators, in this case, the US Department of Justice and the Commodity Futures Trading Commission.

That means that the UK taxpayer is at risk of paying 82 per cent of more than three quarters of the fine to the US taxpayer. No doubt, people in Birmingham in the West Midlands would rather have the money spent here, than say in Birmingham Alabama.

But even the remaining 18 per cent of shareholders will be UK based perhaps through UK pension funds and other institutional investors.

It looks like a transfer of funds from one country with an uncertain economic outlook, a big budget deficit and no guarantee it has finally seen the back of recession to another country with an uncertain economic outlook, a big budget deficit and no guarantee it has finally seen the back of recession.

This may be the way of the global financial system from which the UK has obviously benefited, but it is also going to cause a great deal of anger among the British public.

On first examination, it looks like the UK Government is correct therefore to attempt to ensure that the bank’s failings are paid for by those responsible i.e. from the bonuses of those who broke the rules. The head of the investment banking arm John Hourican has quit as a result as the BBC reports.

But the difficulty of adopting this stance and making sure that those responsible really pay is also demonstrated by the fact that Hourican, despite being responsible for a lot of unpopular downsizing at the bank, was only in his post for the tail end of the bad behaviour. Is it really his fault and if not, should an effective leader have been pushed out? He has lost his bonus. That will ostensibly help pay the fine to the US. But what if it undermines the bank’s ability to restore its fortunes by completely undermining its ability to compete in investment banking? We understand this is not a popular argument.

Politicians need to take account of public opinion. But what if the dictates of public opinion actually mean that the UK is damaging the long term prospects of its own investment long before it can credibly privatise the bank?

At Mindful Money, we can’t demonstrate this and would probably need a team of analysts to do so. But we hope the Government and the public are not letting their outraged hearts rule their financial heads in the long term.Then again perhaps it is all beyond analysis. As for the way back to something close to normality for the UK banking sector – your ideas are appreciated.

 

 

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