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Barclays PLC, HSBC Holdings plc And Royal Bank of Scotland Group plc Are Being Fined Into Oblivion

In the heated aftermath of the financial crisis, an angry public decreed that the big banks had got off lightly. They didn’t get their pound of flesh, and I wish they had. Tougher action at the time might have been kinder in the longer run.

It would certainly have been preferable to what we have today, death by a thousand tax hikes and financial penalties.

Banks that didn’t need a bailout, such as Barclays (LSE: BARC) (NYSE: BCS.US) and HSBC Holdings (LSE: HSBA) (NYSE: HBC.US), are being punished as vigorously as  Royal Bank of Scotland Group (LSE: RBS) and Lloyds Banking Group, which did.

HSBC’s loose talk about quitting the UK as a result could turn into firm action if this continues.

The banking industry is heading for oblivion, and plenty of people would celebrate that, at least at first.

Obliviate!

Barclays, HSBC, Lloyds and RBS have shelled out more than £42bn in the last five years, according to new research from Standard & Poor’s.

And they face another £19bn worth of conduct and litigation charges by the end of next year.

The PPI mis-selling scandal alone has cost the banks £26bn so far. The banks have also incurred fines for Libor rigging, swaps mis-selling, currency market fixing, money-laundering and even computer failures.

Top dividend investor Neil Woodford has already warned where all this will lead. He sold his stake in HSBC in September 2014 over fears that “unquantifiable” regulatory fines could eat away at its dividend.

Challenging Times

And that isn’t the only way the authorities are out to get the big banks. They have backed the rise of the “challengers” such as Tesco, Metro Bank, M&S, TSB and Virgin Money.

Some 1.75m people have changed bank since the current account switch service was launched in September 2013, and the numbers are rising steadily.

Barclays has been the biggest loser over the last 12 months, with a net loss of 31,331 customers.

NatWest/RBS has lost more than 30,000 customers, HSBC and Lloyds have each lost more than 10,000.

The banks are losing their captive audience.

No Way To Live

I’m not saying regulators are wrong. The fetid swamp of banking practices needs to be cleaned up. Greater competition is required.

But you also have to understand what you are investing in. The big banks are marked men.

The worst may be over, with S&P suggesting that fine inflation may subside, as claims for PPI and swap mis-selling pass their peak.

It says 2015 maybe the last big year for banking litigation, but also concluded that “conduct and litigation charges are now ‘a way of life’ for the UK banking industry”. Investors in the big banks must expect that some form of charge is “probable” every year.

And you need to include that in your calculations.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended shares in HSBC and owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.