January 21 2019

The best single essay on financial misbehaviour was written not by a journalist, academic or former trader, but by a novelist and 25 years ago: The Deficit Millionaires by Julian Barnes, that most pointillist and French of English writers.  It is about Lloyds of London, the huge losses it suffered in the early 1990’s and how trusting Names slowly realised that their faith in a long-standing and well-established institution was utterly misplaced.  Lloyds had been around for ever.  It was part of the City’s furniture.  And it was insurance, after all.  How boring is that. How could anything possibly go wrong?

Well, with exquisite care and sympathy and the precision of a surgeon’s scalpel, Barnes shows us how.  And the story is a surprisingly familiar one.

• A novel but complicated instrument designed to reduce risk but instead increasing it – the London Market Excess, or the spiral of reinsurance.  “Making a turn” – in the spiral – “was the easiest way to make money” one underwriter said.”
• Greed – “If you are making a good living, if you have self-regulation, if you are outside exchange control, it’s human nature to get greedier and greedier and greedier”.
• The market’s rapid expansion in a short period of time.  There was a near-ten-fold increase in the number of Names in 14 years, most of them trusting amateurs and all looking for insurance to underwrite.
• A lack of due diligence, a suspension of critical faculties, a lack of scepticism coupled with an all too human willingness to believe in the promises of a no risk investment, all wrapped up in a flattering appeal to vanity.
• A  deeply cynical – and possibly fraudulent – approach by the professionals to those who joined (“If God had not meant them to be sheared, he would not have made them sheep.”) 
• Relaxation of the rules and lax monitoring of those that existed.
• The undisclosed conflicts of interest – recruiters were paid a fee for each Name who joined.
• A lack of transparency – it was Lloyds insiders rather than external members who got onto the best managed, low risk and least spivvy syndicates, justified by the then Chief Executive thus – “In any activity, the professionals will know more than the others.”
• The breakdown of trust – what Barnes describes as the “tickle of fraud“, the realisation that the belief in “an honourable society, operating on trust, on shared values” was a chimera.  Or as one Name put it more bluntly, “You know, trust, honour, and then to find in such an august body a bunch of craven crooks”.
• The realisation, far too late, that private warnings were given about some of the risks and unacceptable/criminal behaviour but these were ignored or not shared with those who ought to have been told.
• The turning of blind eyes to unacceptable/negligent and/or criminal behaviour by a remarkable cast of shameless rogues during the 1980’s, even when the latter were the subject of legal action.
• The failed institution’s repeated insistence that any problems were only the result of that well-worn old favourite: one or two rotten apples, despite one of those rotten apples being a Chairman of Lloyds.
• The determined focus by new management only on its new procedures and processes and business plans for the future in the hope that a veil would be cast over the past, without any unseemly digging into it.
• The eventual realisation by the institution that, as its deputy Chairman, put it, for the previous twenty years it had lacked “total integrity” and “strong government“.

Even the modern new building housing the salvaged and totemic Lutine Bell and built by a famous “name” architect is part of the story.

Barnes eloquently shows how an institution believed to be “the highest name of honesty“, seen as part of a certain sort of honourable Englishness, around for three hundred and five years, a stalwart of the City, selling its services around the world, as venerable as the Bank of England and thought to be as safe, came to be seen, harshly but accurately, as “a cesspit of dishonesty“.

If only this had been published more widely than in a US publication and, later, a book of essays.  If only we had paid more attention.  If only we had learnt the lessons that were there to be learnt.

Everything that went wrong in the run up to the near collapse of the Lloyds insurance market happened again two decades later and led to the financial crash 10 years ago, even with the benefit of external regulation and control.  Indeed, pretty much the same things happened in the lead in to most financial scandals going back hundreds of years.

And, human nature being what it is, it’s a pretty safe bet that a version of all or some of these will happen the next time, may indeed be happening now.  The same behaviours will once again come under the spotlight when the the next scandal becomes known, with its inevitable backing chorus.  

Why didn’t anyone see?  

Why did no-one ask the obvious questions?  

Why did no-one listen to the warnings?  

Why, oh why didn’t anyone act?

As Parliament’s Intelligence and Security Committee put it in a different context, “it has been striking how some the issues which arose in [2005 and 2013] have also been seen as having been a factor in 2017.  We have previously made recommendations in these areas, yet they do not appear to have been acted on.”

Scepticism.  Curiosity.  Asking tough questions.  Learning lessons from previous events.  Their absence is a regular feature of many incidents of misconduct, many crises, both large and small.

But ultimately, in finance, as in other sectors, it is those old-fashioned concepts – trustworthiness, integrity, honourable dealing – which remain as essential in 2019, and years to come, as they have always been.

Photo by Boris Stefanik on Unsplash

November 14 2018

2,185 days after he was convicted of two counts of fraud by abuse of position at Southwark Crown Court on 20th November 2012 after a 10-week trial, and despite a shamelessly self-pitying and self-justifying campaign to avoid the consequences of his actions, Adoboli has finally been deported to his home country, Ghana.

The wheels of British justice grind exceedingly slow but they do – eventually – get there.

Let’s put those 2,185 days into a bit of perspective.

• Amount of money lost by his fraudulent trading: US$2,500,000,000.  (If the sums spent by UBS on remediation and dealing with the consequences of this loss were added in, the totals would be truly eye-watering.)
• Days spent on remand before his trial: 267
• Days spent by my team and others working on the investigation: 438
• Sentence: 7 years or 2,556 days
• Time actually spent in prison following his sentence: 946

As the City of London Police said following his conviction: “This was the UK’s biggest fraud, committed by one of the most sophisticated fraudsters the City of London Police has ever come across.”  The trial judge, Mr Justice Keith, admirably summed up his character when he described him as a gambler, arrogant and in denial and said that he was: “profoundly unselfconscious” of his own failings.

But despite his masterly conduct of the trial, Mr Justice Keith did not explain in his sentencing remarks why what Adoboli did was so wrong, why fraud – of any type – is so damaging and this lacuna is perhaps symptomatic of our failure to take fraud as seriously as we should, as some other countries do.  After all, if the UK’s biggest fraud does not result in the maximum sentence, what will?

Fraud is too often seen as a victimless or somewhat technical crime or, perhaps more accurately, the victims, especially institutions, are seen as unsympathetic and partly responsible for their plight.  After all, who cares if an arrogant bank loses some money.  They are not like some naive widow conned out of her life savings.  Who gets hurt, really?

But the damage that fraud does is not the loss of money, bad as that can be.  Nor is it even the damage to reputation – and that can be very bad indeed and much more long-lasting than most think.

Fraud is damaging because it is so corrosive of the trust that is the essence of banking, that is – or should be – at the heart of any working environment, at the heart of any good relationship with colleagues, bosses, clients, the public, at the heart of any well-functioning community.  Fraud breaks those bonds of trust.  When someone is trusted and they let you down by lying, by cheating, by taking advantage, by behaving like Adoboli did, like many other fraudsters have done, real people are hurt.  Worse – the very idea of having confidence – in the institution, in your colleagues, in banking as a dependable underpinning of our society – is damaged and takes time to rebuild.  A fraudster does not just destroy their own reputation.  Their actions chip away at the reputation of everyone else in their sector.  And they make it just that bit harder for those people – however good, however hard-working, however trustworthy – to be trusted by others, by the public.

That is the real harm that fraud does.  We would do well to take it more seriously than we do.

Photo by rawpixel on Unsplash

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.