September 16 2018

According to this survey (taken this August), only 3% of people had a very positive view of financial services, with 57% having a very or somewhat negative view.  And all this 11 years after the run on Northern Rock and a decade after the Lehman’s bankruptcy, the bailout of RBS, the Lloyds takeover of HBoS and the disappearance of venerable institutions redolent of Britain’s sober manufacturing past, such as the Bradford & Bingley Building Society.  One might have thought that a decade would have been enough for people to forget what happened.  But like an itch that continues to be scratched, banks have, right up to the present day, provided many more examples justifying customers’ perennial exasperation with financial services providers: closure of branches, endless IT problems, the continuing PPI mis-selling saga, interest rates for savers still at rock bottom, mis-selling and mis-advice over pensions.  Even the much vaunted culture change programmes embarked on by many banks don’t seem to have changed perceptions, possibly because some of the sector’s leaders have not fully appreciated that this applies to them too.

The 10-year anniversary has brought out two figures from the past to give their take on where we are now and, in so doing, they managed to compliment themselves (without seeming to, unless that was the point of the exercise) on their past successes.  The first was Gordon Brown, the Prime Minister in charge when the crisis struck and famous for having claimed in Parliament that his efforts “saved the world” or its banks, anyway.  Certainly, the efforts of his government in autumn 2008 prevented the failure of the entire British banking system.  Would it be uncharitable to consider what responsibility his government (and the previous government in which he served as Chancellor) had for the state in which banks found themselves that autumn?  Had earlier warning signals perhaps been ignored by regulators?  Still, his claim that a more fractured system of political governance might make it harder for governments to co-operate should another financial meltdown occur is well made.  It is not just within financial institutions that silos can prevent those at the top seeing the full picture; the same can happen at governmental and regulatory levels too.

And so to Bob Diamond, never shy about arguing the case for aggressive investment banks and the need to take risk, who popped up on the radio last week to tell us that we should view Barclays (which did not get government funding) very differently to RBS, which did.  Possibly a touch premature, given that the SFO trial of senior Barclays executives in relation to Barclays’ capital raising that autumn is not due to start until January 2019.  (Even Diamond’s previous arch-critic, Lord Mandelson, after his change of heart, has weighed in echoing his criticism.)  Far from being concerned about a breakdown of trust between governments (Brown’s concern) or, indeed, trust in banking, let alone the culture at Barclays or other banks in the period leading up to the crash, Diamond thinks that the changes made in the last decade have made banks “too risk averse”, that without risk, banks won’t lend, the economy won’t grow.

Both men have a point.  But they miss something which has not been much canvassed in the reams of commentary devoted to what happened a decade ago.  Regardless of how well risks are understood, regardless of how co-operative governments and regulators are, regardless of how good the rules are, regardless of how many wonderful AI developed risk management systems are used, there will never be a perfect financial system.  Or a perfect regulatory system.  Problems will always arise.  And there will be warning signs – about people, about institutions, about certain types of business.  They may not be obvious or easy to read.  As the haystack gets bigger, trying to find the needle in it becomes ever harder.  Identifying what needs to be followed up and what can be ignored takes skill and experience.  Sensing what might become serious and getting people to act before it does so takes persistence.  No-one wants to be a Cassandra, endlessly forecasting doom. Even fewer want to listen to her.

Being prepared for the next big meltdown is necessary.  But just as much effort – rather more, in fact – needs to be focused on listening to – and acting on – those warning signs, to catching problems (whether mistakes, incompetence or deliberate wrongdoing) early, when they are small, when they can be contained and resolved without too much pain or collateral damage, when they can become learning opportunities for all rather than crises to be managed.  Problems, however small, don’t just need fixing then forgetting.  They also tell you a story – about the institution, about the people in it, about how business is done.  If we are to avoid the inevitable recitation, after every scandal, of the numerous opportunities when the issue might have been identified, acted on and stopped – or mitigated, it is a story which needs to be listened to.

After all, Cassandra turned out to be right.

May 13 2018

Even regulators can sometimes fail to see the wood for the trees.  In highlighting Mr Staley’s conflict of interest when he became aware of the whistleblower’s letter against an employee he had hired, the regulators barely scratched the surface of a wider issue.  It was not just his failure to recognise that it was his conflict of interest which made it wrong for him to involve himself at all in the whistleblowing process.  Rather, it is that he did not seem to understand (or if he did, he did not let this understanding guide his actions) the crucial importance of both knowing when there was an actual or potential conflict of interest and knowing how to avoid it or minimise it.

This is critical to more than just whistleblowing.

At a time when the all-encompassing financial institution is pretty much the norm, conflicts of interest policies are essential – to address conflicts between firms and their clients, between clients, between employees and the firm, employees and clients etc etc.  But above all they are essential because they seek to address the very problem caused by the existence of financial behemoths. Their very size and and the scope of their activities create all sorts of actual and potential conflicts of interest which, if not properly recognised and managed, risk damaging the trust which is essential to the survival and success of a financial institution, indeed of the financial sector as a whole.

One of the ironies of that Big Bang 21 years ago is that, in enabling the abolition of the inefficiencies of all those small brokers, jobbers and the rest (inefficiencies which were believed to hold the industry back) through their mergers and takeovers by large (mostly) US banks, it led to the recreation on a massive scale and in enhanced form of all sorts of new conflicts and issues around trust, necessitating ever larger – and increasingly complex – rulebooks.

The regulators have been playing Whack-A-Mole with wrongdoers ever since.

So it is not a surprise that a failure to recognise and/or a determination to ignore conflicts of interest have been at the heart of some of the worst scandals of recent years: split cap investment trusts, market manipulation, PPI and pensions mis-selling, LIBOR, FX, front-running and so, dismally, on.   All the more important, therefore, for those at the top to understand why managing conflicts of interest properly is at the heart of establishing and maintaining trust in their institution – and the whole sector.

Note too the reference to Mr Staley being concerned that his authority to make hiring decisions was being undermined by the whistleblowing allegation.  There is the authentically aggrieved tone of the senior man unused to not getting his own way.  Let’s not be too hard on him though.  He is not the only person in power to have reacted thus to any challenge, though possibly the first to have this made public in such circumstances.  And yet the hiring process is the first – and often – best collective opportunity to decide whether this person is right for this firm in this role. A whistleblowing provides an opportunity for such a challenge, as does the vetting process.  The latter risks being seen as a bureaucratic step to be got through, rather than an opportunity for proper scrutiny, if people feel that the decision is already a done deal and any questioning of it unwelcome.

After a year long investigation a pity that the regulators’ decision did not consider these points.

Still, no reason for the industry not to take the wider view about the lessons to be learned from this affair.  Will its leaders do so?  Or will they breathe a sigh of relief, make some process changes, create a few more reports but largely carry on much as before?

Photo by Drew Coffman on Unsplash

May 11 2018

Well, the first FCA/PRA enforcement decision against a senior manager – a CEO, no less (Barclays’ CEO, Jes Staley) – is out and can be read here.  Mr Staley is fined – a total of £642,430 – and Barclays has also announced that his bonus has been reduced by £500,000.  All very aggravating for Mr Staley, no doubt.  And Barclays faces continuing review of its whistleblowing framework and processes.

But there are some interesting features to the FCA’s reasoning which warrant a closer look:

(1) Much is made of the conflict of interest which Mr Staley had in relation to the first anonymous letter which was sent and why it was, therefore, wrong of him to get involved in decisions about whether the letter’s allegations should be classified as a whistleblowing and investigated.  All very true.  But a CEO – any senior manager, indeed, any manager at all – should not get involved at all in making such a decision (let alone be involved in the investigation) regardless of whether they have an actual or potential conflict of interest.  The decision about whether something is or is not a whistleblowing allegation should be made by the team in charge of whistleblowing.  No-one else.   The FCA’s focus on the conflict of interest point risks creating the impression that it may be OK for senior managers to be involved in deciding this when they face no actual or apparent conflict of interest.  Will this really give potential whistleblowers the reassurance they need?

(2) The level of the fine was not made any higher because Mr Staley was deemed to have acted negligently.  According to the facts set out in the Final Notice, Mr Staley appears to have taken a number of deliberate steps for reasons which made sense to him at the time.  To describe these as mere negligence might be viewed as generous.

(3) The seriousness of the breach is classified as a Level 2 (out of 5) breach, partly because of the negligence and partly because there was no profit made or loss avoided and there was little or no loss or risk of loss to consumers, investors and the market generally.  But these latter two tests are largely irrelevant in the case of something as important as whistleblowing.  The risk of his actions was that it sent out a message to anyone concerned about misconduct at the bank that, whatever the procedures said, senior management’s instinctive reaction was to try and shoot the messenger and/or dismiss the allegations.  It sent out a message that the bank – at the highest levels – did not appear to value the integrity or independence of the whistleblowing investigative process.  How could anyone wishing to raise concerns feel confident that their allegations would be taken seriously, investigated properly and treated confidentially?  And if this could happen at this bank, how could anyone be confident that it would not be the same at other financial institutions?

This was an opportunity to send out a very clear signal to the whole market about the importance of whistleblowing: not just the existence of procedures but the reality in practice of a function where the whistleblowing team is independent, in charge, trusted, not undermined or second-guessed by management and has the necessary skills, experience and resources to investigate allegations properly.  And, critically, that senior managers need to live by the rules applicable to others not simply espouse them.

The acid test for whether a culture has really changed for the better is whether those at the top are treated in the same way as those at the bottom when they misbehave.  Let’s hope that this is the lesson the sector learns from this decision.

And, finally, a plea: misbehaviour / breaches of rules are not “inappropriate” (a word best used for social or grammatical solecisms) but “wrong“.  It would be nice if the regulators were to say so.