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.
Seeing the bigger picture
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?
Setting the right example?
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.