News

June 2 2018

As this fascinating programme shows, the art market and finance have much in common, well illustrated by the story of Salvator Mundi, painted by Leonardo and sold for an eye watering $400 million last year.

This painting disappeared from view after Charles 1’s collection was dispersed following his execution.  No-one knows what happened to it.   It reappears out of obscurity in 1958 described as a painting by a follower of Leonardo and is sold – for the not very princely sum of £45.  It is only when it was eventually acquired by some art dealers and attributed to Leonardo himself that its value shot up.  How clever of those dealers to spot that it was by the master himself and not some unknown follower.

And even cleverer of yet another dealer to acquire it for $80 million and almost immediately resell it to a  Russian for $120 million.  (Though perhaps that part of the story has not had a happy ending, the Russian client now suing the dealer for the difference between what he paid for his art collection and the price the dealer acquired the paintings for.  How very remiss of them not to agree whether the dealer was acting as agent for the buyer or as principal.)

Still, it is amazing what an attribution to a well-known artist, one moreover who did not produce very many paintings, can do.  Much like a AAA-rated credit rating applied to an obscure credit product.  Still, unlike CDOs, Leonardo paintings cannot be reproduced.  And so its price went on its merry way into the stratosphere.  It is now in storage, unseen by anyone other than its guards one imagines, until it reappears as the star exhibit at a Middle East museum to bestow its blessings on its owners and mesmerised visitors.

At least it will be seen.  It has been estimated that 80% of the world’s art is in storage, much of it in freeports, from where it is both untaxed and can easily be transported from country to country with no-one, let alone the authorities, knowing anything. It is art as a store of value, a prettier version of bitcoin.  And like all these alternatives to ordinary money, the authorities are now taking an interest in who is buying, who is selling, how they are paying and where the money to pay comes from.  As the representative from the US Attorney’s office points out, the secrecy surrounding the players in the art market, the ease with which art can move from country to country and the inexact or even irrational science of art valuation and pricing shows “how easy it is to use art to launder money”.

At around the time when banks were becoming ever more heavily regulated in response to their own difficulties, key art market players did consider adopting guidelines to manage the reputational and legal risks of their industry, guidelines drawn up by the Basel Institute on Governance.  They did not do so.  Why?  As the appropriately named Dr Thomas Christ has pointed out, the art market was perhaps more afraid of losing sales than of losing its reputation.

Unlike banks.  For now.

May 14 2018

Delighted to have contributed to – and be quoted in – this interesting feature article in this week’s Law Gazette on the various new ways in which law enforcement, regulators and government agencies are trying to crack down on the UK’s most common crime – fraud.

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