July 30 2019

Ever since the financial crisis started there has been a plethora of explanations about why traders and bankers behaved as they did.  Some have been purely descriptive: what happened and when, allowing us to marvel at the folly of it all, at least in hindsight.  At the time these clever financiers were praised by pretty much everyone from Chancellors down. There were very few pointing out at the time that the Emperor had no clothes.

But increasingly there have been attempts to use the insights gleaned from other disciplines to explain why what happened in the way it did. The latest neuroscientific findings were used to describe the biology of boom and bust (The Hour Between Dog and Wolf, for instance). Behavioural economics has had its say, as has nudge theory. Rather than nudging people to behave well, all the payment and reward incentives nudged financiers into doing what suited them financially irrespective of the effect on the customer and no matter what the expressed good intentions of the firm were. Goodness! Whoever could have predicted that, without a theory to explain it.

Psychologists have had their say, of course, though only a cynic might wonder about how much actual knowledge about the realities of life in the financial sector they have. No matter: all could opine merrily on the importance of culture in finance and on all the wonderful insights that these disciplines could bring to those seeking to manage and regulate the financial sector.

And now the anthropologists have got in on the act, as in this article by Gillian Tett. In it she points out how anthropologists have tried to analyse the cultural patterns, the rituals and symbols, even the words people use in finance to understand what was going on under the surface. In truth, the insights brought by anthropologists (at least as described here) are pretty obvious rather than thought-provoking; the article does not need them to be worth reading.

What is interesting, though, is how commentators on finance and perhaps also regulators are, perhaps unconsciously, making the same mistake as many of those traders and bankers. They are over-complicating, coming up with all sorts of theories and hypotheses apparently grounded in science or other social studies, described and interpreted by experts, using technical language to describe common human behaviours. Just as too many traders developed over-complicated products which they only half-understood and managers kidded themselves into believing that they had found a foolproof solution to valuation or risk management or any of the other difficult tasks they had, so there is a risk of developing overly complex explanations for why so many people behaved so stupidly or worse. The risk is that the more complex the explanation, the more people feel that it is all too difficult really to do anything about it or that this is something best left to the culture specialists, psychologists and other “ologists“.

Keep it simple might be the motto. In the end, by whatever means the conclusions are reached, what everyone in finance needs to remember is this:-

1. Trust is at the heart of finance.
2. Everyone in a financial institution is, in one way or another, managing risk.  There is no such thing as a risk-free product or institution.  Or, indeed, individual.  Understanding the risk you are running and managing it properly is what every bank, every employee in a bank, every customer of a bank, every shareholder in a bank, every investor in a financial product and every regulator of a bank is doing.  Or ought to be doing.
3. Understanding properly is hard work.  There is no magic bullet, algorithm, theory, process, spreadsheet, AI or killer piece of management information which will do it for you. Thinking is often required.
4. There is no way of eliminating risk.  Mitigating and minimising it: yes.  Eliminating it: no.  If anyone says otherwise (and much of the financial crisis was caused as a result of clever people thinking they had done just this and learning, painfully, that they hadn’t) they’re a charlatan or worse.
5. Human beings, even clever ones (particularly them, it sometimes seems) do not behave rationally around money. Money and emotions are bosom pals. As any decent novelist or lawyer dealing with divorces or wills will tell you.  The “animal spirits” Keynes described do not just apply to market participants but to all of us.
6. Managing people, understanding them, motivating them, inspiring and leading them, teaching them, setting them a good example, setting them high expectations and making it clear what the boundaries are, what behaviour will not be accepted, what crosses the line, helping them get past their frailties, working effectively with them is hard work, the hardest work anyone ever has to do.  And by far the most valuable – and rewarding.
7. Finance is there to serve others, not itself.  It is a means to an end and the moment it (and the people in it) start thinking of themselves as indispensable, as set apart from the society they are part of, as entitled to special consideration and immunity from challenge is the moment when hubris sets in.  Nemesis will surely follow.

Photo by Lesly Derksen on Unsplash

June 28 2019

2016: Tracey McDermott, the then acting CEO of the FCA:-

“I’m not saying in 2001 I would have seen a failure. But one of the roles of a regulator is to have the confidence to ask what you think might be stupid questions. This is a big task for a 25-year-old faced with masters of the universe. The people who live and breathe this stuff, who speak in basis points, will say you don’t understand because you are in some ivory tower as a regulator. Making sure FCA people have that resilience is very important.”

26 June 2019: Andrew Bailey (CEO of the FCA) when questioned by the Treasury Select Committee admits that, despite having concerns about the Woodford funds since February 2018 and the various risk warnings it had given, the FCA had been taken by surprise by the wave of redemption requests and their effect on the fund. He admitted that the fund had been guilty of “regulatory arbitrage” and ‘sailing close to the wind”.

The FCA’s Chairman said that the European funds regime had created a “perfect storm” that allowed the Woodford situation to escalate, but that there should have been a more incisive cutting through to the key issues.  You don’t say.

27 June 2019: Mark Carney (Governor of the Bank of England) talking to the Treasury Select Committee about the issues raised by Neil Woodford and his various funds:-

“These funds are built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid.”

The FCA’s answers do not impress the Committee’s Chair.  “Doesn’t anyone at the FCA actually read the newspapers and listen to what’s going on in the industry?”

Evidently, developing the confidence to ask any questions, let alone stupid ones, or even learning to cut through to the key issues are harder tasks than the FCA thought.  Still, after three years you’d have thought some lessons would have been learnt.  If only this one: curiosity is one of the most underrated but most necessary qualities for a regulator to have.

Photo by Ken Treloar on Unsplash

April 30 2019

The recent decision of the Solicitors’ Regulatory Authority to strike off Emily Scott, a junior solicitor, for being involved in misconduct while a trainee, only belatedly raising her concerns as a whistleblower after she left, raises, albeit tangentially, the difficult question of when – or if – it is ever right to discipline an employee for misconduct if they are also a whistleblower about that misconduct.

In this case, Ms Scott felt unable to report clients being defrauded by her firm while she was a trainee.  She was involved in perpetrating the frauds on the instructions of the partners, the Disciplinary Tribunal finding her conduct to have been “deliberate, calculated and repeated”.  It was only after she had left, some two years after the conduct in question, that she reported the fraud to the SRA who then took action against the partners of her firm and, controversially, her.  The Tribunal reached its decision on Ms Scott despite accepting that she had been young, a trainee and had been “deceived, pressured, bullied and manipulated” by the partners into both carrying out the fraud and covering it up.  The fact that she did not use the confidential route open to her by reporting the matter to the SRA was a factor, as was the fact that part of the conduct involved misleading the regulator when it sought answers.  

Ms Scott feels that she has been punished for – eventually – doing the right thing, with the Tribunal refusing to accept her mitigation, even while expressing sympathy for her.  It is easy to feel sorry for her: in her first job, anxious to impress, worried about her prospects if she refused or left and feeling bullied.  In such circumstances, it is not hard to see how someone can justify to themselves what they are doing and convince themselves that they are still an honest person despite doing dishonest things.  

Still, the SRA took the view that a solicitor, even a trainee one, is rightly held to a very high standard and there can be no excuse for dishonesty.  Our system of justice depends on its practitioners being utterly trustworthy.  

Will such a decision nonetheless lead to unintended consequences?  Misconduct is often perpetrated by the most junior employees being made to do something wrong by superiors who seek to keep their hands clean.  So it will often be those most involved who have the best knowledge of misconduct which should be reported and stopped.  If their own careers will be lost – as Ms Scott’s has been – will this encourage those with the relevant knowledge to speak up?  The SRA is, understandably, reviewing its rules in light of this case in order to ensure that it gets that balance right.  

Ms Scott was not retaliated against by her employers for being a whistleblower.  She was disciplined by a regulatory authority, which has different and wider concerns.  Nonetheless, all employers will likely come across whistleblowers who have themselves been involved in bad behaviour and who may seek to protect themselves from the consequences of such bad behaviour by blowing the whistle, sometimes at a late stage when an investigation has already started – or is about to.  Ensuring that a whistleblower is not retaliated for speaking up but is not also given a free pass against being disciplined for misconduct requires the most careful of judgments.

But the moral – however harsh it may seem – is that, ultimately, a professional – or someone aspiring to be one – is responsible for their own actions, that they need to do the right thing even if this prejudices their personal position and that acting dishonestly but saying to yourself “I’m not a dishonest person” may be comforting but is still a dangerous self-deception.  It is our actions that make us what we are.

Similar considerations arose in the case of Dr Bawa-Garba, a paediatrician convicted of manslaughter over the death of a young child from sepsis, suspended from practice, then struck off and recently reinstated.  There are, however, some obvious differences between the two cases:-

1. The doctor was open about – and admitted – her mistakes immediately and was convicted in court.  The initial medical disciplinary panel felt, however, that it was not just her mistakes which led to the child’s death and that these wider failures were a reason why her additional punishment should be suspension, during which she could do the necessary training to learn from those mistakes and improve her professional competence.
2. It was the General Medical Council which sought to strike her off on the basis that her standards as a doctor were so far below those to be expected that she should not be allowed to practise.
3. The concern within the medical community at this decision was that this would lead to the wrong consequences, both for doctors and patients.  Criminalising individual mistakes would be more likely to lead to cover ups and a failure to learn from problems.  It would have a chilling effect on health professionals’ willingness to be candid about errors and thereby learn what to do better next time.  There was also significant concern that the wider failings which had been identified – lack of staff, poor supervision, inadequate resources, poor note-keeping by others – were being ignored in favour of placing the blame, unfairly, all on one individual.  
4. Most obviously, the consequences of the wrongful behaviour were much more serious in the doctor’s case than in Ms Scott’s.  Yet it is Ms Scott who has lost her career and the doctor who will continue to practice.

Unfair?  Superficially maybe.  Is gross incompetence in a doctor less bad than dishonesty in a lawyer? Whatever the doctor’s failings, she was not dishonest; indeed, her very openness about her failings made it easier for her to be convicted and disciplined.  A lack of knowledge or competence is something which is capable of being remedied.  

Whereas integrity and honesty and the courage to say no when asked to do the wrong thing go to the heart of what it means to be a lawyer.  If they are missing or capable of being so easily subverted, what else is there?  

And while the work culture in which a person operates matters, often significantly, and frequently needs improving, it should never be an excuse for behaving without integrity.

Photo by Vladislav Babienko on Unsplash