News

Taking Responsibility

August 1 2018

Last month the FCA published its near final rules on the Senior Manager and Certification Regime, a hefty 420 pages (and that’s not counting the consultation papers, responses and rules for insurers and solo regulated firms and so forth).  So many words to deal with what was succinctly described in this paragraph of the Report of the Parliamentary Commission on Banking Standards:

“One of the most dismal features of the banking industry to emerge from our evidence was the striking limitation on the sense of personal responsibility and accountability of the leaders within the industry for the widespread failings and abuses over which they presided. Ignorance was offered as the main excuse. It was not always accidental. Those who should have been exercising supervisory or leadership roles benefited from an accountability firewall between themselves and individual misconduct, and demonstrated poor, perhaps deliberately poor, understanding of the front line. Senior executives were aware that they would not be punished for what they could not see and promptly donned the blindfolds. Where they could not claim ignorance, they fell back on the claim that everyone was party to a decision, so that no individual could be held squarely to blame—the Murder on the Orient Express defence. It is imperative that in future senior executives in banks have an incentive to know what is happening on their watch—not an incentive to remain ignorant in case the regulator comes calling.”

But what does taking responsibility really mean?

A few days after the FCA’s publication, the death was announced of someone who, in his life, gave three striking examples of this: Lord Carrington, Foreign Secretary 1979-1982, subsequently Nato Secretary-General and the last politician to have served in Churchill’s post-war Cabinet.  Much of the commentary on him focused on his resignation following the Argentinian invasion of the Falklands in 1982.  Though absolved of personal blame by the Franks Report, he explained his decision to resign thus: “It did not seem to me a time for self-justification and certainly not to cling to office.  I think the country is more important than oneself.”  In his autobiography he wrote: “The nation feels that there has been a disgrace. Someone must have been to blame. The disgrace must be purged. The person to purge it should be the minister in charge. That was me.”  

Those 7 sentences admirably summarise what it means to be in charge and to take responsibility when something goes wrong on your watch.

(It would not be far-fetched to say that the nation might well feel that aspects of banking have in recent years been “a disgrace” which ought to be purged.)

It was not the first time Carrington had offered his resignation.  As a very junior minister at the time of the Crichel Down affair in 1954 (a landmark case on the rights of individuals vs the interests of the state and the standards to be expected of Ministers) he had offered his resignation though it had been refused.  It was the senior Minister in charge who resigned following findings of severe maladministration in his department, the first such Ministerial resignation since 1917.

Most surprisingly of all, despite being awarded the Military Cross in 1945, Carrington never mentioned it in his autobiography, stating that he only got it because of the good men he had under him and that it was “all such a rough raffle. Pot luck – nothing to do with me.”  Well, hardly.

Still, that is what marks out leaders: recognising that being senior means taking responsibility even when you are not to blame and having the humility to know that your own achievements rest on the hard work of others (and a fair amount of luck) at least as much as on your own efforts.

What might we learn from this?

  • Well, however wonderful the rules, having people around to set a good example and be good role models is even better.
  • Role models can be found in the most unexpected of persons.
  • And, finally, the aim of all good and long-lasting training is to ensure that concepts such as responsibility and leadership become an instinctive and genuine part of a person’s every day conduct and behaviour and not simply something to trot out in specified circumstances.

The Art of Reputation

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.