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Rights abuses by US financial firms, hearings scrutinize

The application of Guiding Principles on Business and Human Rights (GPs) in the financial sector came under focus at hearings held in the United States (Washington DC and New York).

The hearings were part of activities by the Working Group on Business and Human Rights, a United Nations body established in 2011 to promote dissemination and implementation of the Guiding Principles. One of the ways in which the Working Group does this is by carrying out visits to particular countries to look at implementation by companies therein.

The US country visit, undertaken from last April 22 through May 1, was framed by the ongoing repercussions of the 2008-09 global financial crisis. Triggered by the business practices of the financial sector in the United States, the crisis soon amplified its impacts as it reached financial sectors in other countries. Its repercussions, including the defunding of public budgets and lagging recovery of jobs, continue to be felt worldwide.

The Working Group met with banks, investors, and civil society organizations to discuss the implementation of the GPs in the financial sector.

At a meeting in DC, convened by the International Corporate Accountability Roundtable and Human Rights Institute at Georgetown University, John Richardson, of the American University –based Initiative for Human Rights in Business, discussed human rights issues surrounding speculation by financial investors in commodity derivatives markets.

He explained that commodities were being touted as immune from fluctuations in the rest of the economy and were sold as an effective panacea to manage risk of the volatility in the other asset classes. But “unlike farmers and food manufacturers banks and financial institutions really have no stake in the direction of commodity prices. They are not interested in holding a commodity. They don’t take a bale or a bushel of corn or rice, they’re simply interested in betting on the rise and fall of the prices,” he said.

Four banks (Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Barclays) control 70 per cent of the global commodities markets, that is, 3 of the 4 banks are based in the United States, which illustrated the relatively greater importance of implementing the principles in the United States.

In a submission at another meeting convened in New York by the Economic, Social and Cultural Rights network –ESCR-Net – Barry Herman, a professor at the New School, spoke about the need for regulations to protect middle-income as well as poor households from financial sector abuses. “While there are often opportunities for people to exploit other people in daily economic activities,” he said, “the opportunities are especially prevalent in finance because most financial transactions embody a degree of trust.”

Among the abusive practices he mentioned are banks not informing customers of fees and charges for some of their services (e.g. on credit cards) and aggressive investment advisors working in what are known as “boiler rooms,” in which high-pressure salesmen push high-risk securities onto unsuspecting small investors and then “churn” the account by encouraging frequent trading to increase fees.

A key obstacle to the regulation of the sector in line with human rights standards is, in the US, the extreme interference financial companies can have in the legislative process, something Mr Herman exemplified with the dispute over the creation of a Consumer Financial Protection Bureau in the financial overhaul of 2010.

Further, he explained that certain financial practices that had earlier been outlawed were once again made legal under the cynically named 2012 “JOBS” Act (“Jumpstart Our Business Startups”), which reduces the information that small firms seeking investor financing need to make available and weakens other restrictions. “After laws had been earlier adopted to make “boiler rooms” illegal, they have again become a potentially profitable business,” he reflected.

In my own submission to this meeting, I discussed features of the financial sector that call for an exceptional treatment when it comes to the application of the Guiding Principles on Business and Human Rights. The financial sector cannot be treated just like any other sector in account of, firstly, the  systemic repercussions of its activity, that can be easily ascertained looking at its weight as a portion of GDP, or of corporate profits, and the repercussions it can have far beyond the borders of the country where it operates.  Second, its distance from the right-holder, as it is hard to think of any other sector where the company to hold accountable is so far removed from  those whose rights are affected by its activity. We often hear about mining, forest, or other companies that are involved in human rights abuses, but we should recall none of these could operate absent some sort of financial support from the financial sector. Thirdly, the financial sector’s leverage over other actors is unique. Given that financial companies have the potential to influence the behavior of other actor, they also should be upheld to a greater level of responsibility when they fail to do so.

The Guiding Principles on Business and Human Rights (hereinafter “the Guiding Principles”) are very clear: business and governments have an obligation to address human rights in all areas of business activity –not only those with a most direct impact on human rights.

It is also very clear from the Guiding Principles (and, of course, international law) that the State is responsible if it fails to prevent human rights abuses –by failing to implement adequate regulations, policies, legislation or adjudication. Regulatory action by the State is the key here to establish what can or cannot be done in order to safeguard human rights.

Some points were recognized in the Working Group’s Statement at the end of its visit: “Some stakeholders pointed out that the activities of the financial sector leading up to and during the financial crisis impacted rights, in particular for adequate housing in the US, and on food security both within and outside the US. There was neither effective protection nor access to remedy for those impacted.” The Working Group encouraged further studies on applying the GPs in the financial sector.

This means the tool is relatively untested, with human rights advocates waiting still to see what value it will offer for struggles to hold companies accountable for abuses. In fact, parallel initiatives by States to develop binding treaty obligations that can go beyond the Guiding Principles are gaining momentum, with one such proposal tabled by more than 80 countries at the Human Rights Council a few weeks ago. The visit was also framed by the financial crisis that, triggered by the business practices of the financial sector in the United States, soon amplified its impacts as it reached financial sectors in other countries.

Discussing its meetings with financial firms it said “some investors mentioned that the existing narrow definition of fiduciary duty makes it difficult for asset managers to include human rights within an assessment of materiality. The Working Group encourages the investment community to evolve definitions of such duties, and push for their adoption by regulators, to enable better consideration of the opportunities and risks arising between business and human rights.”

While the Guiding Principles are so far, as a recent and relatively untested tool, much more promise than action, rights advocates are waiting to see what value it will offer for struggles to hold companies accountable for abuses.

In the meantime parallel initiatives by States to develop binding treaty obligations that can go beyond the Guiding Principles, are gaining momentum, with one such proposal tabled by more than 80 countries at the Human Rights Council a few weeks ago. The States introducing this petition characterized the Guiding Principles as a first step but one that, without a legally binding instrument, will remain only a first step without major consequences. “Non-binding legal instruments, such as the Guiding Principles and the creation of the Working Group … are only a partial response to the urgent questions related to abuses by transnational companies,” they added.

Even as such work progresses, the body of guidance that the Working Group on Business and Human Rights defines as it promotes the principles on the ground can position it as a helpful source of insights into the practicalities of implementing and enforcing human rights obligations for companies.

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