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

May 31 2019

The recent decisions by the FCA to fine UBS and Goldman Sachs £27.6 million and £34.3 million for transaction reporting failures going back to November 2007 and HBOS for its failure to inform the regulator of its suspicions that fraud was occurring in its Impaired Assets team – again in 2007 – is a reminder that the failings of long ago still have bite.  All three firms will doubtless be relieved to put these investigations, finally, behind them.  Systems changes will have been made, extensive remediation measures taken, training given and few, if any, of the people involved will still be in the organisations.  Sighs of relief all round.  After all, the past is another country.  They did things differently then.

And yet, 12 years from the events in question to enforcement is a generation, probably two, in City terms.  There will be people now starting their banking careers who were in short trousers when these events were happening.  It will be all too easy for them to think that there is little for them to learn from what went on in these cases.  After all, haven’t all the lessons already been learnt?  They would be wrong.

For those training the next generation, the challenge is to make the lessons to be learnt from these past cases real for people working today – if the same dismal cycle is not to be repeated in future.  Perhaps too the FCA might realise that the pursuit of perfection in their investigations risks making their ultimate outcomes little more than historical accounts of past misdeeds rather than a quick sharp reminder to those involved and their contemporaries of the perils of not taking their obligations seriously.  Delaying justice for too long risks not just denying it but blunting its wider impact.

Photo by DAVIDCOHEN on Unsplash

March 31 2019

In the week in which Lyft, a company which has never made a profit, whose losses rose by 32% to nearly one billion in 2018 and which, according to its management, will not make a profit in the near-term, was listed with an initial valuation of $2.3 billion with its shares rising by 8.7% on the first day (giving it a market capitalisation of $22.4 billion, almost as much as Chrysler), we learnt a bit more about two other former stars of the business world.

First, London Capital & Finance (LCF).  Perhaps not a star but starry enough – at least superficially – to persuade about 12,000 unsophisticated ordinary savers to put £230 million of their savings into fixed-rate bonds (which they thought eligible for ISAs) providing returns well above those available elsewhere. In reality, the bonds were high risk and not eligible for ISAs, were not regulated investments and the money went into a number of ventures run by persons connected to those behind LCF.  The administrators are now, inevitably, probing what happened and where the money went. But this week investors were told that the administrators were having difficulty locating the assets allegedly acquired with the money, the chances of there being any recovery were low and, to add insult to injury, while investors lost money “through no fault of their own”, there was no basis for any compensation from either the FCA or the FSCS.  The investors fell into the gaps between firms regulated to provide financial advice, which LCF was, and firms regulated to sell bonds, which LCF was not.

The moral of this sad story is an old one: if something looks too good to be true, stay away.  

Still, those savers might well wonder what one of the FCA’s statutory objectives – protecting consumers – actually means when LCF was able to operate in the way it did in full view of the regulators without anyone taking any effective action to protect those consumers.  The plethora of inquiries now taking place – by administrators, the SFO, the National Audit Office and possibly also the Financial Reporting Council – are not likely to provide those savers with much comfort.

Now to Theranos– a company which no longer exists but which is having a lucrative after-life in a book, documentary, podcast and rumoured Hollywood film.  Its story is now well-known: a student leaves Stanford with a brilliant idea which will revolutionize health care (no more nasty needles taking blood – just a teeny pinprick), raises oodles and oodles of money, has a Board consisting of the great and the good (Dr Kissinger, George Schultz), appears on stage with Bill Clinton, is co-opted onto an advisory panel by President Obama, and is fêted as one of the first and youngest and prettiest female Silicon Valley billionaires. What could possibly go wrong?

Well, pretty much the most important thing: the product Theranos was selling did not work. Having an idea is great.  Selling an idea knowing that the reality does not match it: not so great.  Criminal charges have been laid.  We will see whether this was self-delusion and a failed business or something very much worse.  Still, one of the striking facts which has come out is that a lot of very experienced, very rich business people – people as far removed from ordinary savers as it is possible to be – failed to do the most elementary due diligence or ask basic questions, not even for an audited financial statement.

Maybe they were happy to take a risk without more.  Or maybe, like those hopeful savers putting their money and hopes into LCF, they believed in what they hoped would be true, they believed the story, ignored the facts and/or didn’t ask obvious questions.  Any similarities to investors in Lyft are, one hopes, purely coincidental.

Photo by Raul Cacho Oses on Unsplash