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new paper March 6, 2015

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I have been working on this paper on Changing Perceptions of Systemic Risk in Financial Regulation.

article on interconnectedness May 21, 2014

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In the Texas International Law Journal, Breaking Up is Hard to Do: The Interconnection Problem in Financial Markets and Financial Regulation: A European (Banking) Union Perspective.

problems with the culture of finance: fca sanctions state street uk January 31, 2014

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The UK’s Financial Conduct Authority fined State Street UK £22,885,000 for overcharging customers in its Transitions Management (TM) business. The FCA press release states:

The systemic weaknesses in State Street UK’s business practices and control environment around the UK TM business were so serious that the overcharging only came to light after a client notified staff that it had identified mark-ups on certain trades that had not been agreed. Those responsible then incorrectly claimed both to the client and later to State Street UK’s compliance department that the charging was an inadvertent error, and arranged for a substantial rebate to be paid on that false basis. They deliberately failed to disclose the existence of further mark-ups on other trades conducted as part of the same transition.

The Final Notice says that

State Street UK failed to treat its customers fairly by allowing a culture to develop in the UK TM business which prioritised revenue generation over the interests of customers. As a result, the UK TM business developed and executed a deliberate and targeted strategy to charge substantial mark-ups on certain transitions, in addition to the agreed management fee or commission, that were deliberately not agreed with clients or disclosed to them.

But State Street had held itself out as adhering to the principles in the “T-Charter” a self-regulatory code of practice for participants in the Transitions Management business which provides that participants in this market should only impose charges they agree with their clients. State Street was a “founding signatory” of this Charter.

conflict minerals in the news November 15, 2013

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The 6th ICGLR-OECD-UN GoE Forum on Responsible Mineral Supply Chains has been meeting in Rwanda. Meanwhile, it seems that there is some uncertainty about how the EU will be regulating conflict minerals. And the DC Circuit will hear the National Association of Manufacturers’ appeal of the rejection of its challenge to the US rules (here is a link to NAM’s latest brief in the case filed this week).

judge rakoff on the downside of corporate deferred prosecution agreements November 13, 2013

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There’s a lot more than this in the article (at zerohedge) which suggests that the government’s role in creating the conditions which propagated the financial crisis helps to explain why we haven’t been seeing criminal prosecutions of senior financiers. But part of the story Judge Rakoff tells is of a prosecutorial environment which focused more on corporate than on individual responsibility:

if your priority is prosecuting the company…Early in the investigation, you invite in counsel to the company and explain to him or her why you suspect fraud. He or she responds by assuring you that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks you to defer your investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with you. In order to save time and resources, you agree. Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. You and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched…. Just going after the company is ..both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

Meanwhile, the SEC just announced its first deferred prosecution agreement with an individual. And, as Brandon Garrett and David Zaring note here, the UK has adopted a regime for deferred prosecution agreements which differs in some important respects from the US approach:

Britain’s impending adoption of the agreements, on the other hand, exemplifies the cautious embrace offered by good administrative law.
Britain’s proposed program comes with a code governing its use, and a requirement that a court conclude that the agreement is both “in the interests of justice” and “fair, reasonable, and proportionate.” Moreover, the proposal itself has been opened for comment from the public.

rbs libor settlements February 6, 2013

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The CFTC announced that Royal Bank of Scotland plc and RBS Securities Japan Limited will pay $325 million to settle charges of manipulation, attempted manipulation and false reporting of yen and Swiss franc LIBOR (see order here). The UK FSA announced it had fined Royal Bank of Scotland plc (RBS) £87.5 million for misconduct relating to the London Interbank Offered Rate (LIBOR) (Final Notice here).

efta court holds iceland was not required to ensure protection of depositors January 28, 2013

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One might ask what is the point of harmonization of deposit protection at a minimum level to facilitate cross border banking if a bank’s home state doesn’t have to regulate banks properly to limit stresses on the deposit insurance system or really do anything to ensure that the deposit protection will in fact be available in the event of bank failure. But this is what the EFTA court has held in EFTA Surveillance Authority v Iceland:

the Court holds that the Directive does not envisage that the defendant itself must ensure payments to depositors in the Icesave branches in the Netherlands and the United Kingdom, in accordance with Articles 7 and 10 of the Directive, in a systemic crisis of the magnitude experienced in Iceland.

For the future the impact of the decision is limited by the fact that the rules relating to deposit guarantees have changed since the crisis.

more on the sec investor advisory committee January 11, 2013

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The SEC published a Sunshine Act notice about the meeting on January 18th because a quorum of the SEC may attend the meeting. Meanwhile, I notice that there seems to be no mention of the Investor Advisory Committee on the SEC’s “website dedicated to retail investors” at investor.gov.

culture of banking November 13, 2012

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From Michael Cohrs, a member of the Financial Policy Committee at the Bank of England, in a speech today, a reminder of why it is that the culture of banking matters:

Reading, in one case, about traders shouting across the floor to submitters asking them to submit preferential rates, has shocked most people. The cultural problem seems to have extended from the trading floor right through middle management to senior management. There looks to have been an inadequate response from both the executive officers and the Board of Directors. It is not clear to me that the shareholders were very concerned once the news broke. This incident and others, primarily relating to conduct related issues, show just how much work there is to do to create financial institutions with a culture of producing the best product possible and caring for the client’s interests first.

As I read comment letters submitted in consultations by financial firms and trade associations and notice the common references to the best interests of consumers I do wonder why policy-makers would take such comments seriously.

haldane on fixing banking October 30, 2012

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Andy Haldane gave a speech to Occupy Economics yesterday. He noted:

the crisis was… the story of a system with in-built incentives for self-harm: in its structure, its leverage, its governance, the level and form of its remuneration, its (lack of) competition. Avoiding those self-destructive tendencies means changing the incentives and culture of finance, root and branch. This requires a systematic approach, a structural approach, a financial reformation.

He identified five cs of the ongoing financial reformation: culture; capital; compensation; credit; and competition. And he described some of the regulatory changes under way which relate to these five cs. Cultural change was described as being about separating banking from investment banking, which is only a small part of the sort of change some would like to see. And implementing the separation is proving to be really complex. But in discussing competition he talked about Handelsbanken:

They may be the fastest-expanding bank in the UK at the moment… Their business model is fascinating, Quaker-even, in its orientation. They offer only basic banking services, mortgages and small business loans, to people in a tight, locally-defined catchment area.
All credit decisions are taken locally by people, not centrally by a computer. No bonuses are paid and no-one has a sales-target. When the whole firm out-performs, a contribution is made to a pooled fund which is invested on employees’ behalf. The fruits of success are distributed equally and gratification is deferred.
For banking, this is back to the future. If that sounds attractive, then it is down to us – not regulators, not politicians, you and I – to deliver it. If as bank customers we want to change the culture of banking, then we should start by supporting those banks who are delivering that change. Putting your money where your mouth is would deliver far greater and more durable change than any amount of banker-bashing.