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

Posted by Bradley in : financial regulation , add a comment

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.

eu summit and banking union October 19, 2012

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The final Presidency conclusions differed a bit from the draft. For example, the roadmap the European Council wants in December is now to include “concrete proposals” to achieve the following:

The process towards deeper economic and monetary union should build on the EU’s institutional and legal framework and be characterised by openness and transparency towards Member States which do not use the single currency and by respect for the integrity of the Single Market.

The draft had the objective but not the concrete proposals idea. There’s also some redrafting of the timetable- the SSM legislative framework is to be agreed by the new year and operational implementation will follow. The language about the accountability of the ECB changed. Now:

There is a need to ensure a clear separation between ECB monetary policy and supervision functions, and the equitable treatment and representation of both euro and non-euro area Member States participating in the SSM. Accountability takes place at the level at which decisions are taken and implemented. The SSM will be based on the highest standards for bank supervision and the ECB will be able, in a differentiated way, to carry out direct supervision. It will also be in a position to use the effective powers conferred on it by the legislation as soon as it comes into force. In addition, it is of paramount importance to establish a single rulebook underpinning the centralised supervision.

This is still not a model of clarity. And they kick the can down the road on voting in the EBA:

It is important to ensure a level playing field between those Member States which take part in the SSM and those which do not, in full respect of the integrity of the single market in financial services. An acceptable and balanced solution is needed regarding changes to voting modalities and decisions under the European Banking Authority (EBA) Regulation, taking account of possible evolutions in the participation in the SSM, that ensures nondiscriminatory and effective decision-making within the Single Market. On this basis, the EBA should retain its existing powers and responsibilities.

The conclusions state that within the euro area “Strong mechanisms for democratic legitimacy and accountability are necessary”. But whereas the draft conclusions suggested that the EU should explore the idea of enhancing the role of the social partners, this language does not appear in the final conclusions.

Update: Although there’s not much sign of agreement on critical details, some groups have reacted positively to the summit. For example, the EESC:

The EESC is pleased to learn that, even though belated, a European banking union will come to life. It is crucial that the Member State governments have the breadth of vision to create more Europe, handing over some powers and ensuring that they can be applied, in order to achieve effective European governance that is socially useful and economically efficient. New and stricter rules will offer security to people and markets.

eu summit: not much visisble progress on european banking union October 18, 2012

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The Draft Conclusions of the European Council Meeting (via euractiv) don’t suggest that there’s much progress on achieving the European Banking Union although they urge legislators to make progress. Meanwhile, in a speech in Poland, Andrea Enria of the EBA worried about the future of the single market as domestic bank regulators “strongly encourage a de-risking process which also entails lower exposures to counterparts in other more fragile or stressed Member States.” And he made the expertise argument again as a way of resolving the banking union issues:

I would invite to think out of the box and consider also decision making mechanisms that are less based on country representation and more on technical skills and accountability frameworks. We need the best people we have in Europe to design high quality rules and implement effective supervision, in the common interest of savers in the whole area; and we need mechanisms to ensure that their decisions do not unduly penalise any actor in the Single Market. More reliance on independent decision making bodies, composed of experts selected on the basis of their technical skills, would put all countries, in and outside the euro area, on the same footing. It would ensure that decisions are taken in the best European interest, not as a compromise amongst different national positions. Monitoring mechanisms could then ensure appropriate representation of all the Member States, high quality and unbiased processes, and the possibility to call back decisions that are not considered of an appropriate standard.

In a speech at the BBA’s conference Stephen Majjoor of ESMA said this:

I want to emphasise that for large parts of the financial markets the distinction between Eurozone and non-Eurozone member states has very limited relevance. For example, market infrastructures, investment firms, and investment funds span the Eurozone and the non-Eurozone and in all the directives, regulations, technical standards and guidance that are within ESMA’s scope, the Eurozone/non-Eurozone distinction hardly ever plays a role.
In other words, the rationales for developing a single rule book, consistent supervision and a single securities market are not affected by the integration of the Eurozone. We should remain focused on the economic benefits of the single market in securities for all 27 member states and jointly continue our important work of achieving a single rule book and a consistent approach to supervision.

These ideas of having technical experts make the rules and emphasizing the single-rule book seem designed to appeal to financial institutions based outside the eurozone, suggesting that they might benefit from going along with the European Banking Union/Single Supervisory Mechanism. But the broad brush rhetoric runs up against concern about the details (see, for example this report prepared for the International Regulatory Strategy Group of the City of London by Anita Millar).

Update: In report published today the UK’s House of Commons European Scrutiny Committee (focusing on the EU proposals about the EBA/SSM and on the UK Government’s reaction (described in the report)) wrote:

there is potential for harm to UK interests, particularly in relation to the single market. So we presume the Prime Minister will be cautious in expressing any support during the forthcoming European Council for the elements outlined in the report…As for the role of national parliaments in ensuring democratic legitimacy and accountability we are concerned: at the implications of the apparent presumption in the report about the primacy of the European Parliament; and the presumption that democratic legitimacy and accountability of a new strengthened EMU framework and cooperation under Article 13 of the SCG treaty should only be explored within the context of the European Semester.
We remind all concerned in this debate that national parliaments are representative of sovereign states. Incidentally, we note the rather odd phraseology — “we can use” — the Minister deploys. We presume he does not actually mean that governments use parliaments… These matters are of high importance for the UK…we recommend ..[a debate] for three hours on the Floor of the House..In making this debate recommendation we note, notwithstanding the Minister’s comments, that the document will not be cleared from scrutiny until the debate takes place and take the view that actions by the Government which amounted to agreement of the report would be a serious breach of the scrutiny reserve.