Scandal and the City: Where does the solution lie?

By Natasha Roberts

Date: Wednesday 04 Jul 2012

Equitable Life, Liar Loans, Arch Cru, PPI – these are just a few of the numerous scandals to hit the headlines in recent decades.

Of course, new regulations have been brought in, with fresh rules and higher standards to adhere to, but with the LIBOR debacle now dominating the front pages as well as the City pages of newspapers, and the heads of Barclays bosses rolling in all directions, questions are being raised over what needs to be done to put a stop to such shameful misbehaviour.

Already the British Bankers’ Association (BBA) is undertaking a review of the way LIBOR is set, and the UK government is planning a full enquiry into the now infamous carry on, but some figures in the City are calling for more to be done.

One such figure has spoken to Sharecast about his views on what needs to be done to to restore faith in the City.

The law

In the view of Gary Wright, the Chief Executive Officer (CEO) of B.I.S.S Research, the full might of the law is needed to deter future scandals such as the current LIBOR stinkfest.

Wright, who is no stranger to the workings of the financial world, having worked in the industry since 1969, believes the “new regulatory implementations have been shown to be somewhat ineffectual in totally deterring infringement”.

The B.I.S.S. CEO feels that a number of the current regulations were put in place as a “knee-jerk reaction” to the various scandals which have occurred over the years and have since proved ineffectual in making the City sit up and take notice.

Lord Adair Turner, the now former head of the Financial Services Authority (FSA), is of a similar view, telling the BBC that he believes consideration should be given to a change in the law regarding the liability of directors.

"If you are the director of a bank that's failed, it's not a matter of bad practice but simply causing problems for the whole economy, whether there should be a presumption that you should not be allowed back into the industry again.

"The situation on the law is that we have looked very carefully at what types of cases we are able to bring, and in this particular case of LIBOR, because it is not a qualifying instrument under the Act, it is not covered by the criminal law."

It is a view that Business Secretary Vince Cable has also considered, and one that has largely been received favourable by the public. According to a survey by consumer group Which?, 78% of respondents feel that when a bank breaks the law, individuals should be prosecuted.

Break up the banks

Another popular move is breaking up the banks into retail and business operations, something Wright supports.

He believes the first step would be to dismantle the banks, first by activity then by size, then create more competition by introducing more trusted brand names, such as the likes of Marks & Spencer.

“The industry has to recognise that banks have grown too big to manage effectively, where problems in managing people who are tempted to transgress for individual and corporate greed or to protect reputations. Splitting the banks' activities does look sensible, although it's not always the investing side of banking that has caused most of the problems. Customers have to be more certain that their assets are safe and a return to safe banking will build confidence.”

His views run contrary to those of George Osborne, the Chancellor of the Exchequer, who on Tuesday told BBC Radio 4's Today Programme that he believes the UK is already "leading the world" with regards to improving the working of banks through the introduction of the Financial Services Bill, adding that the government is "in the process of sweeping away the failed system of regulation".

However, rather than "sweeping away" a failed system, Wright argues that economic growth is being stifled and the Stock Exchange is not doing what society needs it to do.

"I can't agree that the UK is leading the world at the moment. Until these catalogue of failures in banking and other financial services stops, the feeling is that there is just another round the corner. Each appears to be worse than the last and it's not certain that all the dirty linen is out of the cupboard. In this case it's hardly leading - more reacting."

"The UK does need to lead the world. It's the biggest international market and a vitally important industry for UK GDP [gross domestic product]. The government is right to have an urgent enquiry into banking, but I fear it will not go far enough. The problems are endemic and interrelated. Banking governance is extremely difficult in today's world. Globalisation and the size of banks operating in diverse markets and financial products supported by systems and old technology that simply does not provide enough quality information for boards to manage day-to-day."

Organisational responsibility

For Tracey McDermott, acting head of enforcement at the FSA, the responsibility lies with each financial organisation. In McDermott's view, Barclay's misconduct was only possible because the group failed to ensure it had proper controls in place.

“To change things in the future, to restore that trust and confidence, requires tough action from the regulator, but it's not our job alone. Perhaps the reaction to the penalty imposed last week on Barclays will be a watershed moment, the point when the industry realises that it also has to rise to the challenge and to recognise that things have to change.”

Wright agrees that boards are part of the problem, but points out they are also part of the solution. He argues that there is a real problem at board level to understand in detail the business they are responsible for, something which has been known for years and about which little has been done.

Regulators

However, the buck does not stop there, and Wright believes the quality of regulators has to be questioned as well.

"[Regulators] have not attracted top quality people and often individual regulators are not strong enough personally or charged with enough industry knowledge to do the job well.

“We need to introduce regulations that work and are well researched [rather than] knee jerk reactions.

This is a view underlined by reports that regulators were informed as many as five times since 2007 that there were problems with the way LIBOR is set.

US and UK government records reportedly show that both the Bank of England (BoE) and the FSA overlooked these opportunities to look into the problem.

Indeed, according to minutes of a meeting of eight BoE officials, it was stated that LIBOR rates were lower than actual borrowing rates, with the minutes from the meeting reading that “LIBOR indices needed to be of the highest quality given their important role as a benchmark”.

What is more, the FSA has revealed that “individuals at Barclays raised concerns with the FSA, the Bank of England, the Federal Reserve Bank of New York and the BBA about the accuracy of LIBOR submissions.”

Of concern to many was the fact that until his recent departure from both positions, Marcus Agius was both the head of the BBA - which in its own words works to promote a legislative and regulatory system for banking and financial services - as well as the Chairman of Barclays.

Personal responsibility & ethics

For Lord Turner, it is the "cynical greed of traders" that has led to a “a culture of cynical entitlement”, and he has called for the industry to be purged of this behaviour which he believes has “eroded customer confidence that the industry is looking after its customers’ rather than its own interests”.

In Wright's view too, it is the decline in ethical and moral performance that is the most worrying, but perhaps also the most difficult.

“It’s more about the individual buying into an ethical and moral position that is handed down by industry leaders and old heads, rather than what you will find in any rulebook or law. For this reason it’s actually more powerful. The Chartered Institute for Securities and Investment has championed an ethical and moral stance for some years now and it’s a laudable attempt to get everyone on the same ethical page. However it requires far more buy-in from a broader finance industry perspective.

"I believe there has to be a stronger use of ethical behaviour introduced that can only come from people handing down the way to act.

“I don’t know how people can sleep at night knowing they are doing incalculable damage to their neighbours and colleagues. If demonstrating ethical behaviour is a prerequisite in finance and is lauded by industry leaders and shown to be the prime requirement for success, we might finally be able to tackle the reputational problems the finance industry has today.”

In an ideal world, it would be wonderful to think that the financial industry could rely on the moral code of the individual, whose commitment to the service of his or her clients were enough to ensure every action and transaction was above board and free from self-serving greed.

In reality this seems impossible, not least because those who work in the financial industry are likely to have a very real interest in making money for both the client and themselves. Whether or not a system free from misbehaviour, dodgy deals and public scandal is impossible, I think we can all agree that it is certainly something to strive for.

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