Once-Mighty British Banks See Reputations Soiled

Barclays Bank Chair Marcus Agius has resigned amid revelations related to an interest-rate rigging scandal. Banks function as a law unto themselves. The scandal is international in scope., a photo by Pan-African News Wire File Photos on Flickr.

August 7, 2012, 7:42 p.m. ET

Once-Mighty British Banks See Reputations Soiled by Scandals

By DAVID ENRICH, MAX COLCHESTER and SARA SCHAEFER MUÑOZ
Wall Street Journal

The City's reputation as a banking center has been tarnished by a series of scandals involving its most prominent institutions.

LONDON—Is something rotten in the City of London?

In the past six weeks, the three big British banks that had survived the financial crisis relatively unscathed have been immersed in scandal—further soiling the British banking industry's already marred reputation and undercutting the sector's efforts to fend off tougher regulations.

First, in June, Barclays PLC was busted for trying to rig a benchmark interest rate, ultimately claiming the jobs of its chairman and chief executive. Then a U.S. Senate committee attacked HSBC Holdings PLC for allegedly handling money for drug gangs and terrorist groups.

The latest blow came Monday, when New York's bank regulator threatened to revoke Standard Chartered STAN -0.66%PLC's U.S. license for alleged money-laundering violations involving Iran.

Things are so bad that before the Standard Chartered news broke, the U.K. government had launched a public inquiry into banking culture—even bringing in a bishop to offer a moral perspective.

Accusations that U.K. bank Standard Chartered illegally handled billions of dollars in transactions with Iranian entities is bad timing for a bank that just announced positive earnings. The WSJ's Deborah Kan speaks to Hong Kong bureau chief Ken Brown about what regulators are calling a 'rogue institution.'
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London is one of the world's pre-eminent financial centers, alongside New York and Hong Kong.

But until fairly recently, its regulation was known for lacking teeth. "Light-touch regulation," as the British authorities called it, was part of a deliberate British strategy to coax more financial institutions to do business in London.

Margaret Cole, who arrived as enforcement chief at the U.K.'s Financial Services Authority in mid-2005, argued in 2006 that "London's philosophy of 'light touch' regulation has helped it in becoming the world's leading center for mobile capital."

After the financial crisis erupted, U.K. regulators cracked down, getting tough on white-collar crime with a number of cases against insider trading and fines for product mis-selling.

But the light-touch legacy still reverberates. Most of the alleged wrongdoing that U.S. and other authorities are investigating took place between 2005 and 2009, when that hands-off approach was in use.

"These scandals [don't] reflect well on the regulators who are becoming a global laughing stock," said Chirantan Barua, analyst at Sanford C. Bernstein.

A spokesman for the Financial Services Authority, the U.K.'s financial watchdog, declined to comment.

To be sure, banks in the U.S., Switzerland and elsewhere have been caught up in similar probes. But the scandals involving U.K. banks have hit in rapid succession lately, leaving British bankers scrambling to stanch the reputational bleeding.

Industry executives acknowledge that the latest flurry of scandals has impeded their efforts to head off tighter regulation, such as a proposal to ring-fence riskier investment-banking operations away from retail banking, and to have U.K. banks hold more capital than peers in other jurisdictions.

."It happens with such regularity that you can't say it's just one bad apple," said a senior London investment banker who has been a prominent campaigner against tougher regulations. "It keeps looking like every barrel has a rotten apple."

Standard Chartered's troubles are especially damaging. Until Monday, the bank had been the poster child of responsible British banking and its chief executive was one of the few untarnished advocates for moderate regulation. It avoided problems during the financial crisis, and just last week, CEO Peter Sands —whose strong reputation put him in the running to become the next governor of the Bank of England—boasted that "our culture and values are our first and last line of defense."

Then New York's banking regulator accused the bank's U.S. unit of operating "as a rogue institution," handling at least $250 billion in transactions with Iranian entities between 2001 and 2010.

Standard Chartered strongly denied the allegations, saying in an emailed statement it "strongly rejects the position or the portrayal of facts as set out in the order."

Analysts said Tuesday morning that they expected investors to give the bank's management the benefit of the doubt. They didn't. Standard Chartered's shares plunged 16% on the London Stock Exchange Tuesday.

The string of scandals is starting to alter, at least slightly, the centuries-old dynamics of the City, as London's financial hub is known.

Traditionally, gentlemen bankers resolved their problems behind closed doors. Last month, the outgoing chairman of Barclays, Marcus Agius, invited CEOs of rival British banks to attend a private discussion about what the industry could do to address its reputational woes, according to people familiar with the matter.

But in a sign of the shifting mood, some bank chiefs declined Mr. Agius's offer, dismissing the meeting as a waste of time, according to a person familiar with the matter.

Meanwhile, some CEOs are publicly calling for changes to London's banking culture.

The banking industry's reputation has reached "new lows," said Royal Bank of Scotland Group RBS -0.42%PLC Chief Executive Stephen Hester as the bank presented its results last week.

"We are in a chastening period," he said. "The consequences of the sector's past overexpansion are still being accounted for, probably with some way still to go."

RBS is likely to land in further hot water soon. The bank is in negotiations to settle allegations that it tried to manipulate interest rates, according to people familiar with the matter.

And RBS has also disclosed it is in discussions with U.S. authorities over its compliance with the country's economic sanctions regulations.

"It used to be said that money laundered through the City of London was cleaner than clean," said David Greene, a partner at law firm Edwin Coe.

"That is no longer the case," he said. "It will take a generation for London to rebuild its reputation."

Write to David Enrich at david.enrich@wsj.com and Max Colchester at max.colchester@wsj.com