SpecialSpecial report report chartered Spring 2013 banker The magazine for financial professionals

Beyond the blame game Leaders seek the positives

“This won’t “We’re not “It should “As long as “You become happen creating a never have it’s bankers’ a leper, a overnight” paper tiger” happened” blood” pariah” P3 p7 p11 p12 p15

Beyond the Blame Game 1 Special report

challenges & solutions 3 Pioneers in banking Banking leaders are “moving decisively” to raise the professional standards of thousands more individuals. professionalism The Chartered Banker Institute leads the industry’s LONDON SAYS: effort to enhance its standards and culture, argues “COUNT US OUT” 6 Chief Executive SIMON THOMPSON – and he London excludes itself from Europe’s “historic” welcomes the evidence that so many others are now banking union. following that pioneering trail. or years, this Institute has campaigned for regulators and Electrify the policy-makers to focus on issues of professional culture retail ring-fence 7 and standards in banking every bit as keenly as they must also address key operational behaviours governing capital Ministers must toughen their Fadequacy and lending criteria. reforms of banking regulation At the Chartered Banker Institute we’re therefore delighted and supervision, says the that the sector is now moving so decisively towards that goal Parliamentary Commission. and looks set to build on much of the Institute’s pioneering work. As the only remaining Institute of Bankers in the UK, we’re leading the industry’s effort to enhance standards and culture through embedding a Code of Professional Conduct, From LIGHT touch developing professional standards and enhancing banking qualifications. to hard fist 9 After several set-piece inquiries – Cruickshank, Turner, Walker, Vickers, Wheatley As Ministers reshape financial and now Tyrie – Ministers are now urgently implementing plans to beef up their regulation, there’s an early pivotal Financial Services (Banking Reform) Bill. In this Special Report, we examine the trail of victims and victors background and the new personalities who are taking charge of the UK’s reformed among the watchdogs. regulatory machinery. Our central purpose here is to discuss the key challenges we all face – and our positive proposals for meeting them – as the sector now Rising cost of “Independent research two scandals 11 reaches Beyond the Blame Game that has consumed the shows that bank customers Swift reform is vital to restore energies of two governments overwhelmingly value confidence after the LIBOR to create robust new regulatory rig, while PPI mis-selling risks machinery in the wake of the and trust the Chartered becoming a runaway liability. 2008 banking crisis. Banker qualification – the This is no more than is desired and expected by Gold Standard.” UNCLE SAM’S banking’s own customers. LONG ARM 12 Over months and years, independent market research has shown that bank customers overwhelmingly value and trust the Chartered Banker qualification – the Gold Standard. How that “special Individuals and businesses alike are consistent in saying that they’d prefer: relationship” has been affected by the global • to work with a Relationship Manager who is a professionally-qualified Chartered Banker economic turmoil. • to bank with an institution in which all appropriate staff had passed their banking exams.

And recognition of these pronounced customer expectations is precisely one of the the tale of the 15 reasons why more and more people working in banking, both in the UK and increasingly whistleblower in the world’s financial growth centres, are now seeking to enhance their qualifications, Will they get the support professional status and career advancement with the Chartered Banker Institute. they deserve from the lawmakers?

Beyond the Blame Game 2 CHALLENGES AHEAD

While media and politicians still focus on retribution Special report for the 2008 financial crisis, SIMON THOMPSON finds that banking leaders are moving decisively – led by the Institute – to enhance and extend professional standards to tens of thousands of individuals.

A harvest of challenges &solutions

3 Beyond the Blame Game s Parliament completes Approved Persons Regime to cover more an extension of the Approved Persons its banking regulation individuals working in key retail and Regime.” reforms and MPs prepare wholesale banking roles. And he seeks a Meanwhile, the Institute’s view is their “Phase Two” design of corresponding extension of the current that the boards and senior management new machinery to embed scheme under which the UK’s eight FSA- of banks should themselves have a higher standards of Accredited Bodies, including the Institute, duty to promote a positive culture of professionalismA in financial services, the are mandated to ensure individuals professionalism in their institutions, and banking industry itself has an important in certain roles hold a Statement of produce evidence that this is the case. duty to help move the debate beyond the Professional Standing. “Raising standards in banking current intensive “blame game”. It should be possible to achieve this requires both individual and institutional That’s the conviction of SIMON enhancement relatively quickly, he says, engagement – an individual’s behaviours THOMPSON, Chief Executive of the because the mechanisms are already at work are driven both by their own Chartered Banker Institute. In a in place. “The greatest advantage in moral principles and the policies and memorandum to the Parliamentary adopting this approach comes, in my norms of their workplace.” Commission on Banking Standards, he view, from the fact that we have in examines how policy-makers, regulators banking a strong, independent regulator. INDUSTRY-LED INITIATIVE and the industry might enhance existing “The Financial Services Authority – and The Chartered Banker Professional frameworks and mechanisms for setting, its successor Financial Conduct Authority Standards Board (CB:PSB), established implementing and enforcing professional (FCA) – is well staffed, well resourced and in October 2011 by nine leading UK standards in banking. already operates a strong and intrusive banks and the Institute, has already He identifies two key challenges for monitoring regime.” implemented an industry-led approach to the industry: raising ethical and professional standards • First, how best to extend the reach in banking. The Board’s Customer of regulators to encompass the If we succeed Advisory Panel provides significant thousands of people in banking not in raising external input which is currently being currently covered by any requirement extended. The initiative has involved: to meet agreed professional standards. standards of individual, • Devising a Code of Conduct, • Second, how to sharpen our focus on institutional and subscribed to by banks accounting the professionalism of individuals industry behaviour, for some 75 per cent of UK banking in banking, where at present it is employees. The nine member banks primarily concerned with the conduct then our customers, have adopted or aligned existing of firms. and society more codes with the CB:PSB Code, and have widely, may bestow established systems for identifying and FOCUS ON STANDARDS dealing with breaches of the code. Thompson distinguishes between trust upon us.” • Developing detailed professional the industry’s twin aims of raising standards, setting out the knowledge, professional standards and restoring skills, values, attitudes and public trust. He says he doubts whether TWO KEY CHALLENGES behaviours required for an individual it’s possible to achieve both objectives Thompson foresees two potential to implement the code. “Seventy simultaneously just by extending or difficulties in extending the Approved thousand individuals will meet the strengthening the existing Approved Persons Regime. The first is identifying Foundation Standard for Professional Persons Regime under which the Financial which additional key roles in banking Bankers by July this year, with many Services Authority deems individuals to should be included – and which excluded. more to follow by year end.” be “fit and proper” to perform statutorily The current regime covers some • Aligning banks’ learning & defined controlled functions. 150,000 individuals in financial services, development, performance “I think these two aims must be about 37,000 of them in banking. “It’s management and internal monitoring solutions separated,” he says, “with policy-makers, hard to see this being extended to cover systems to support implementation of regulators and the industry focusing the majority of the roughly 450,000 the code and professional standards. on raising professional standards. If individuals employed in banking in the • Creating systems to monitor and we succeed in raising standards of UK, which would still leave large numbers oversee implementation of the individual, institutional and industry not covered by a new professional code and standards, including self- behaviour, then our customers and standards regime.” assessment, critical evaluation and society more widely may bestow The second challenge concerns the external assurance. trust upon us – but I am not sure that fact that the FSA (and its FCA successor) any reforms we propose or make will is primarily a regulator of firms, the way forward restore trust directly, nor will this rather than individuals. “Regulating Meanwhile, the CB:PSB has prepared happen overnight.” individuals requires a different approach plans for the development of To raise professional standards, to regulating firms, and the FSA/FCA’s Intermediate and Advanced Level he advocates a twin-track approach. Professional Conduct unit would need Standards which are being shared There should be an extension of the to be significantly enhanced to support with key stakeholders including the

Beyond the Blame Game 4 CHALLENGES AHEAD Special report

>> continued regulators. It’s anticipated that an the Board on an independent basis; Advanced Level Leadership Standard will We have in and, second, by extending the Board’s also be developed this year. In addition, banking a membership to all banks taking the Institute is investigating how a non- deposits or lending in the UK. statutory Register might support a new strong, independent Thompson suggests enhancing the professional standards regime. This regulator that is well effectiveness of the CB:PSB by: requires a number of key questions to be staffed, well resourced • creating a Register of Bankers (as addressed, including: above) based on the attainment of • Aim and status: what is the primary and already operates one or more of the CB:PSB’s purpose of the Register and how would a strong and intrusive professional standards a non-statutory Register work? • extending CB:PSB membership to all • Scope: who should be included on the monitoring regime.” banks taking deposits or lending in Register and how would individuals the UK join, stay on and leave it? • establishing robust investigatory • Operation: who holds the Register ENHANCED EFFECTIVENESS and disciplinary systems to deal and what would it look like? What, The very strong support for this with breaches of the code or if any, are its employment and other initiative from Chairs and Chief professional standards. legal implications – and its relationship Executives of the CB:PSB member “Aspirational professional standards with existing regulators? banks, embracing approximately 75 aimed at individuals, of the type being • Discipline: what sanctions will be per cent of UK banking employees, implemented by the CB:PSB,” he says, imposed on individuals if they makes it unnecessary, Thompson says, “require the active support of boards no longer meet the standards to “reinvent the wheel by establishing and senior management if they are to be required, and how will the a new Banking Standards Review implemented on a broad enough basis disciplinary regime operate? Council or similar body as is proposed to support an effective and visible • Time and cost: how long will it take by the BBA and some others”. raising of standards.” Three things to introduce a Register? What will be More could be achieved more would help this process: the costs of establishing and quickly if regulators, policy-makers • Requirement: more senior maintaining it and who will and the industry agree to enhance the executives and other key individuals pay for this? CB:PSB’s work – first, by reconstituting in banks are required to hold relevant Chartered-level professional banking qualifications. • Encouragement: large numbers of bankers in key customer-facing and customer-supporting roles are given greater encouragement to achieve relevant, professional banking qualifications. • Development: competence is continually maintained and developed through Continuing Professional Development. Thompson concludes: “Enhancing education and training alone will not ensure that appropriate values, attitudes and behaviours are maintained. Banks must align their learning and development, performance management, internal monitoring and other systems to support the implementation of a Code of Professional Conduct and professional standards. That’s what CB:PSB member banks are already doing.”

Beyond the Blame Game 5 EU banking union Special report

European leaders broker an “historic deal” to create a banking union, but German objections and British exclusion sour the celebrations.

“A crucial “Count us out” and very substantive step.” say the Brits Jose Manuel Barroso, European Commission President “It cannot be s European leaders take a big step Eurozone banks with assets of more than praised too towards a banking union, the UK 30bn (£24bn), or representing more than € determinedly insists it’s “safer a fifth of a state’s national output. It will highly.” Aon the outside”. It has won an also have new auditing powers for the Angela Merkel, agreement to protect London’s supremacy rest of the 6,000 banks that remain under German Chancellor as the EU’s dominant financial centre national supervision. handling the biggest slice of euro foreign The deal means a large number of “We’ve Exchange transactions. French banks will be directly supervised properly Keen to prevent this powerful role being by the ECB. But in Germany, where gradually marginalised by a Frankfurt-based there’s persistent unease despite protected our European Central Bank directly supervising Chancellor Merkel’s endorsement, interests.” 150-200 of the Eurozone’s largest banks, much of that country’s fragmented but David Cameron, the UK continues to refuse to join either the influential network of retail savings UK Prime Minister Eurozone or its nascent banking union. banks will continue to be controlled by Eurozone countries have acceded to German authorities. “A very UK-led demands for a “double majority” The ECB will be able to intervene with good deal.” principle at the European Banking smaller lenders and borrowers at the first George Osborne, Authority, the EU regulatory agency that sign of trouble. It will have powers to close UK Chancellor creates banking rules across all 27 member down Eurozone banks that do not follow states. This means that EBA decisions are at rules. And it paves the way for the EU’s “An historic least approved by a plurality of countries main rescue fund to come to the direct aid agreement.” outside the banking union – safeguards of struggling banks. Michel Barnier, intended to limit the ECB’s power to impose Despite the deal, it’s clear that EU Commissioner for technical standards on all EU banks. obstacles remain before it can be internal market & Prime Minister David Cameron says: implemented by the target of March 2014. services “The European Union, the Eurozone, needs There continue to be legal doubts, for a banking union, but Britain won’t be instance, about a joint deposit guarantee “Expectations part of this banking union and we have scheme and a joint resolution mechanism we cannot properly protected our interests in the for winding up broken banks. There’s fulfil.” single market.” strong opposition in Germany and other The other EU states still outside the richer Eurozone nations to any further Wolfgang Schäuble, German Eurozone are committed to joining, and taxpayer-funded bailouts of indebted Finance Minister can sign up to the banking union in the banks and governments. meantime, except Sweden and the Czech A clause allows the ECB to take over “I am not Republic, which have said they won’t. And, supervision of a lender at the request of convinced.” along with the UK, Denmark still opts out the European Stability Mechanism, the Jens Weidmann, of the Eurozone. Eurozone bailout fund. This paves the way President, Deutsche The “landmark deal” will put the ECB for an emergency injection of capital but Bundesbank directly in charge of 150-200 of the largest would require unanimous approval.

Beyond the Blame Game 6 banking standards

My message to the banks is clear,” warns Chancellor How the “ring-fence” works George Osborne. “If a bank flouts the rules, the regulator and the Treasury will have The revised Banking Reform Bill includes these key measures: the power to break it up altogether – full • The ring-fence: The High Street activities of each UK bank will be put into a separation, not just a ring fence. In the separate subsidiary from its riskier investment banking. jargon, we will electrify the ring-fence.” • “Electrification”: Regulators will have conditional power to split up an individual The Chancellor has thus accepted the bank completely, if the Bank of England considers that it is undermining the arguments of the Parliamentary Commission purpose of the ring-fence. Regulators will also conduct an annual review of UK on Banking Standards. Headed by Andrew banking to determine whether the ring-fence is effective. Tyrie MP, it had concluded that “the latest • Faster switching: Individual customers and small businesses will be able to switch revelations of collusion, corruption and bank accounts to a rival within a week. market-rigging beggar belief – the clearest illustration yet that a great deal more needs to be done to restore standards in banking”. “we are not creating a paper tiger. Rules Osborne now wants powers to break-up “We need proper with real teeth are required.” banks that don’t conform to strict new professional The Government’s revised Banking proposals – first proposed by Sir John Reform Bill echoes the recommendations Vickers’ Independent Commission on standards in the of the first of the Tyrie Commission’s Banking – to quarantine retail services from banking sector, just like reports, produced just before Christmas. riskier investment operations. Banks that we have for doctors and The Commission has already started seek to undermine this ring-fence, he says, hearing evidence for its second report, may be forced to break-up their retail and lawyers.” dealing with ways of imposing new investment functions. GEORGE OSBORNE MP, Chancellor statutorily-backed professional and ethical The Chancellor also says that changing of the Exchequer. standards in the industry. banking’s culture “goes beyond bonuses The Commission welcomes the and fines – we need proper professional ring-fence around retail operations as standards in the banking sector, just like a contribution to making the banking we have for doctors and lawyers.” The Significantly, Sir John Vickers, author system more secure. “It is essential,” it legislation, he insists, will give this country of the ring-fence idea, has himself adds, “that banks are restructured in a way “the best, most open and transparently welcomed the “electrification” proposal. that allows them to fail, whether inside policed markets in the world . . . that will win And, for his part, Andrew Tyrie, who or outside the ring-fence. Ring-fencing business for Britain and attract investment”. chairs the Parliamentary Commission, can also help address the damage done to Simon Thompson, the Chief Executive of the has consistently argued for tougher culture and standards in banking.” Chartered Banker Institute, comments that sanctions: “For the ring-fence to succeed,” But the proposals, as they initially he’s “delighted the Chancellor now supports he says, “banks need to be discouraged stood, fell well short of what was required. the Institute’s campaign for professional from gaming the rules. All history tells us “Over time, the ring-fence will be tested standards in banking, an issue we first they will do this unless incentivised not and challenged by the banks. Politicians, highlighted in 2008.” to.” Parliament needed to be assured that too, could succumb to lobbying from “We will electrify the retail ring-fence”

The Government is taking steps to toughen up its reforms of banking regulation and supervision. Chancellor GEORGE OSBORNE has accepted the arguments of ANDREW TYRIE’s Parliamentary Commission that: “We must not create a tyrie paper tiger. Rules with real teeth are required.”

7 Beyond the Blame Game Special report

banks and others, adding to pressure to put management, human resourcing, capital persuaded by the Government’s approach holes in the ring-fence. and liquidity. to leverage. “The primary duty of setting a “That’s why we recommend Boards of directors should be under a leverage ratio should fall on the Financial electrification. The legislation needs to legal duty to preserve the integrity of the Policy Committee (FPC), not politicians,” it set out a reserve power for separation; ring-fence and the regulator empowered argues. the regulator needs to know he can use it. to require a “sibling structure” between a The report finally raises the prospect of Furthermore, we need periodic reviews of ring-fenced and a non-ring-fenced bank, a ban on proprietary trading (where banks the sector to reassure us that the ring-fence with a holding company. trade securities for their own account) in as a whole is working. Tougher measures “If the ring-fence is permeable, or is line with the incoming Volcker rule in the may yet be required.” perceived to be permeable, the risk of US. But it concedes that banks should be While the ring-fenced banks will contagion will increase. Clear dividing allowed to sell simple derivatives, such as carry out most of the essential economic lines are needed between the activities of currency hedges, to small businesses from functions that need protecting, says ring-fenced and non-ring-fenced banks. within the ring-fenced operation. the Commission, “it is important to be A duty is needed on board members to Tyrie concludes: “We’re saying to the clear that it is these functions that enjoy ensure these lines are not blurred.” banks: help us make the ring-fence work. protection and not the bank itself or its The Commission also says it’s not If not, the regulator may pull you apart.”

“Banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to.” ANDREW TYRIE, Chair, Parliamentary Commission on Banking Standards

shareholders or creditors. There should be no government guarantee of ring-fenced banks, nor a perception of one.” In the long-run, the ring-fence originally envisaged by the Government might not have provided an adequate degree of separation, it claims. “Nor may it be adequate to buttress banking standards. Additional powers are essential to provide adequate incentives for the banks to comply not just with the rules of the ring- fence, but also with their spirit.” In the absence of measures to “electrify” the ring- fence, there was a high risk that it would simply fail. That’s why the Commission urged that additional reserve powers to implement full separation should be added to the draft legislation, plus a specific provision for enhanced Parliamentary scrutiny of the proposed use of delegated powers. It’s “concerned that the ring-fence could be vulnerable to erosion over time. Pressure will come from many quarters. It is all too easy, and sometimes all too convenient, to forget the lessons of the past. This cannot be allowed to happen.” It wants the Bill to include a strengthened mandate for the new Prudential Regulation Authority (PRA) reflecting its duty to ensure a ring-fenced bank has operational independence on governance, risk management, treasury

Beyond the Blame Game 8 The watchdogs

Bank of England MONETARY POLICY COMMITTEE It decides the official UK base rate, directs other policy aspects such as quantitative easing and is primarily responsible for keeping the Consumer Price Index measure of inflation close to the government’s target (2% as of 2011).

The Financial Services Authority has been a victim of its Chair: own flawed ‘light touch’ MARK CARNEY, as Governor, takes over from political remit.” Sir MERVYN KING in June.

Bank Members: PAUL TUCKER Deputy Governor, Financial Stability CHARLES BEAN Deputy Governor, Monetary Policy SPENCER DALE Executive Director, Monetary Analysis & Statistics PAUL FISHER Executive Director, Markets

Bank of England FINANCIAL POLICY COMMITTEE: It identifies and monitors the wider economic and financial risks External Members: to the stability of the financial system as a whole. DAVID MILES former Chief UK Economist, Morgan Stanley IAN McCAFFERTY former Chief Economic Adviser to the CBI MARTIN WEALE former Director, National Institute of Economic & Social Research BEN BROADBENT former Senior European Economist, Goldman Sachs

Chair: MARK CARNEY, as Governor, takes over from Sir MERVYN KING in June.

FINANCIAL CONDUCT Bank Members: AUTHORITY PAUL TUCKER Deputy Governor, Financial Stability It’s mandated to ensure financial markets operate CHARLES BEAN Deputy Governor, Monetary Policy with integrity; to promote effective competition; ANDREW BAILEY Executive Director & MD, Prudential Business Unit and to enhance consumer protection. ANDREW HALDANE Executive Director, Financial Stability Chief Executive: MARTIN WHEATLEY became PAUL FISHER Executive Director, Markets CEO-designate in September 2011. He’d served for five years as Head of Hong Kong’s powerful Securities & Futures Commission

External Members: ALASTAIR CLARK Treasury Senior Adviser for financial stability LORD ADAIR TURNER Chairman, Financial Services Authority MICHAEL COHRS former Management Board Member, Deutsche Bank DONALD KOHN former Vice Chairman, US Federal Reserve ROBERT JENKINS former CEO, Combinatorics Capital

Photos courtsey of Bank of England and the Financial Conduct Authority

9 Beyond the Blame Game Special report

PRUDENTIAL REGULATION AUTHORITY It’s responsible for promoting the safety and soundness of deposit-takers, insurers and investment firms with “significant balance sheet risk”. Chief Executive: ANDREW BAILEY has been named as the CEO-designate of this new regulator. He replaces HECTOR SANTS.

“Light touch” becomes “hard fist”

As Ministers radically reshape the regulation of the UK’s pivotal financial industry, the post-crisis carnage is leaving an early trail of victims and victors.

or the best part of a year now, new structure of internal and external the UK’s new financial services regulatory agencies, each with an explicitly regulators have been intensively “tougher” set of political ground rules. planning and jostling each other That’s accompanied by a significant in the ante-rooms of power. leadership bloodletting. Ministers make They’ve been waiting for the more than a presentational point by Fpassage of the Financial Services legislation reaching far outside the discredited City to formalise their authority to replace the for candidates to carry their new brooms: machinery so comprehensively smashed Canada’s respected central banker MARK by the excesses that precipitated the 2008 CARNEY replaces Sir Mervyn King as Bank banking crisis. of England Governor; Hong Kong’s trouble- That legislation, still being fine-tuned shooter, MARTIN WHEATLEY, is drafted in as we go to press, is expected to clear its to enhance sector integrity and exorcise the Parliamentary hurdles this spring. The ghosts of the LIBOR scandal. essentials are already clear: the Financial That’s already left a litter of ambitious Services Authority, which has patrolled the casualties. PAUL TUCKER, a Bank of boundaries of sector conduct for virtually England Deputy Governor, failed to reach a decade and half, is being wound up – a the top job for which he’d been groomed; victim of its own flawed “light touch” ADAIR TURNER, recruited to clear up political remit. the post-crisis mess as FSA Chairman, The Bank of England is being given a is sidelined; HECTOR SANTS, its Chief greatly strengthened role to supervise a Executive, is off to Barclays. Expect more.

Beyond the Blame Game 10 financial scandals Special report

The PPI scandal £25bn costs and rising It’s become a runaway liability, business leaders warn, that’s now being exploited by “ambulance chasers”. The cost of compensating people who’ve Customers generally have six years or who would have been unable to been wrongly sold payment protection from the insurance mis-sale to claim – or make a claim. insurance (PPI) by financial institutions during the three years after they became More than 2.5 million people have could rocket to £25bn – almost double aware they might have a case, even if the already received payouts averaging previous estimates. sale was more than six years ago. £2,750 each. Banks are writing to So far, following FSA instructions It’s “a huge scandal that should never those who suspect they’re victims, to invite customers to claim, UK banks have happened,” Cridland agrees, “and inviting them to claim. And demand have set aside nearly £13bn to cover it’s right that consumers are able to get has been boosted by TV ads and text the liability. Calculations last November swift and proper redress. But banks and phone messages from claims suggested the final bill could reach £15bn. are sending out tens of thousands of management companies, which take Now a new assessment in The Times, compensation payments and cheques a share of payouts. based on FSA monthly PPI pay out figures and there’s a real sense that the ball is Increased third-quarter provisions by and historic selling data, says banks may now firmly in the court of ambulance- leading UK banks (reported in November) be forced to pay out £25bn in redress. chasing claims management companies.” brought totals then to: It’s become such an apparently run- Designed to cover loan, credit away liability that business leaders card and mortgage repayments if a Lloyds £5.3bn like the CBI’s Director General, JOHN policyholder became ill, redundant or Barclays £2.2bn CRIDLAND, now urge a deadline for legal had an accident, PPI was widely mis-sold RBS £1.7bn compensation claims. to applicants who didn’t want or need it, HSBC £1.3bn

The LIBOR scandal £1.6bn finesand rising “Swift and decisive” reforms are needed to restore confidence in the benchmarking of £185tn-worth of worldwide contracts.

A score of banks in seven countries UBS and £290 million on Barclays. More organisation that had given banks are named in investigations and court recently, RBS found itself landed with a “unfettered latitude” in submitting rates. cases resulting from the so-called LIBOR fine of £387.5 million. The Wheatley Review urges “swift and rate-rigging scandal. The London-based The scandal has forced the decisive” action to restore confidence in scandal has undermined the credibility resignation of Barclays chairman, the benchmarking process. Among its of the decades-old system to set daily Marcus Agius, and the bank’s chief recommendations are: benchmarks for financial contracts executive, Bob Diamond, who told • managers overseeing LIBOR worth some £185tn worldwide. a Parliamentary committee he was submissions should be approved Root-and-branch reforms unaware of the manipulation. Paul by the regulator to make it easier to recommended by one of the UK’s Tucker, Deputy Governor of the Bank of discipline them top regulators, MARTIN WHEATLEY, England, denied he’d ever encouraged • a “code of conduct” with submissions will strip the British Bankers’ manipulation in discussions with corroborated by trade data Association of its long-established role Diamond. • reducing from 150 to just 20 the as sponsor of the London Interbank From at least 2005, rates were number of benchmark borrowing Offered Rate. His 10-point overhaul, routinely manipulated by traders to rates in five currencies and four fully accepted by Ministers, will put an benefit their own financial positions maturities independently regulated administrator and later, during the 2007–2012 global • more banks should be involved in charge and make rate manipulation a financial crisis, to make their bank and individual rates submitted criminal offence. seem healthier. should not be published for three The LIBOR crisis has already seen The head of the Financial Reporting months to avoid banks deliberately fines of more than £1.6bn imposed on Council, Lady Hogg, leads a panel lowering rates to mask their financial three banks – £940 million on the Swiss to select the successor to the trade difficulties.

Beyond the Blame Game 11 PAGSETAR HEADS & INGSTR IPES

Uncle Sam’s long arm The transatlantic “special relationship” is changing. The financial crisis and new politics are recasting what was always an edgy mix of admiration and rivalry. How will UK and US banks emerge from this turbulent time, asks Arthur Allan.

12 Beyond the Blame Game ncle Sam has wielded his cane Mark Calabria, Director of Financial again. The Royal Bank of Scotland Regulation at Washington’s Cato Institute, says “UK banks certainly is the latest UK institution to feel public opinion has been stoked by the level of the smack of firm American attention focused on the misdemeanours of underestimated the government, in the shape of a UK-based players. toughness of US Ulong-predicted fine for its LIBOR “If you’re benchmarking for share of world regulators, who have misbehaviour. finance, it’s not clear to me that UK banks a much stronger track This time, of course, Britain as a whole have been better or worse than anybody else,” record of criminal will be sharing the pain. Since RBS is 81 per he says. “But I don’t think the American public prosecution.” cent owned by the Government, it’s UK has a sense of how much bigger the footprint taxpayers who will effectively be paying the of London is than Paris or Frankfurt.” bulk of the fine. More complex cultural differences may That news did nothing for the reputation underlie the recent rocky ride of the Brits in New York. I think the New York regulators of RBS. At the same time, it focused fresh America. UK banks certainly underestimated have been short-sighted in undermining the scrutiny on the way US regulators appear to the toughness of US regulators, who have competitive position.” be penalising British banks more harshly than a much stronger track record of criminal The fallout from criminal investigations will their own. prosecution. not be the only factor in determining the Over the past year, UK institutions have The complex and fragmented nature of the prospects for the two countries’ financial been handed fines of more than $3bn for regulatory system is another factor. For industries. Much also depends on the progress LIBOR fixing and breaching money-laundering instance, New York State’s Department of of bank restructuring and regulatory reform in rules, with more likely to follow. By contrast, JP Financial Services, one of the authorities that each territory. Morgan got a mere slap on the wrist for poor fined Standard Chartered, didn’t even exist US banks are widely seen to have governance that allowed the trader known as until little over a year ago. undergone a more rigorous and painful the “London Whale” to lose $2 billion in risky HSBC’s recent appointment of a former US restructuring than their UK counterparts. But hedging activities. Treasury official, Robert Werner, to a newly UK and EU reform of the regulation is The headline-grabbing language used by created role – leading on financial crime arguably moving faster. some US authorities in passing sentence has compliance – suggests it recognises the need America’s Dodd-Frank reforms will see heightened suspicions of a political motivation. to understand the system from the inside. banks obliged to keep more capital on hand HSBC was accused by a congressional Calabria also suggests US banks were this year, as well as being subject to the investigation of letting “drug kingpins and simply more aware of money-laundering rules Volcker rule, which prevents them playing the rogue nations” launder money, while Standard – and more accustomed to having to work markets with their own money. But these laws Chartered was denounced by another hand-in-hand with government in general. are still crawling through the development regulator as a “rogue institution” involved in “I don’t think US banks like it, but they process. While the re-election of Barack a “staggering cover-up” over its transactions are used to the Government tasking them Obama dashed any industry hopes of a with Iran. with law enforcement responsibilities,” he bonfire of regulations under a Romney Professor Emilios Avgouleas of the points out. presidency, the pace of change is slow. University of Edinburgh Law School, who “For instance, the US approach to internet Back at home, Avgouleas believes the studies international financial regulation, gambling for offshore centres like Antigua has cleaning up of the UK banks’ balance sheet believes US regulators have been playing to been, ‘Let’s make the banks stop it’. That’s how has not been as rigorous as it should, partly the gallery. US regulators deal with child porn: the bank has because further restructuring would mean “It’s easier to target bankers abroad than responsibility to track the credit card number.” pain for the taxpayer. at home,” he says. “When you offer blood to At the root of the cries of foul play, “Most of the efforts of regulators and the crowd in the arena, the crowd doesn’t of course, is the competition between politicians have gone into populist policies really care whose blood it is, as long as it’s London and New York – for years neck-and- such as compensation, which frankly is a bankers’ blood. neck in the race to be the world’s leading secondary issue in terms of the stability of the “That said, it shouldn’t be forgotten that financial centre. banking system,” he declares. the British banks have grossly misbehaved, Calabria believes the New York authorities “In contrast, the American banks have especially vis-à-vis LIBOR.” would be mistaken to attempt to weaken radically restructured and cleaned up their In the States, financial institutions in UK banks through sanctions: “It’s not like we balance sheets. They are in much better general are now perhaps held in even lower could push out RBS or HSBC, for instance, and financial health. esteem than in the UK – but if there’s one suddenly Citibank would come in and grab “Unless the British banks’ balance sheet is thing Americans hate more than banks, it’s that business. It’s more likely those radically restructured and a series of write-offs British banks. transactions would go somewhere other than continued on p14 >>

Beyond the Blame Game 13 STARS & STRIPES

“At the root of the cries of foul play, of course, is the competition between London and New York.”

>> takes place to free them from toxic loans and the Eurozone’s other bad assets, they will never become bigger banks. The globally competitive again.” move has the Avgouleas salutes UK and potential to create European efforts to reform a more close-knit regulation: “In this respect the eurozone that could UK industry is in better shape rig the single market than the US one, where regulatory to Britain’s disadvantage. reform is much more complex and Andrew Campbell, Professor of nobody really understands what’s International Banking and Finance Law at going on.” the University of Leeds, sees a risk to But a recent missive from Brussels, Britain’s financial industry. barely covered in the UK media (see p6), “My major concern about this is that has set alarms ringing for some. EU finance if the UK is not at the top table, contributing ministers agreed in December to give the towards all the discussions for what is European Central Bank power to supervise being proposed about a single banking supervisory authority, our position could become significantly weakened in due Tackling the big one – together course – which could have an effect on the They may be pursuing their own paths on But Calabria believes the regulators have dominant role of the City of London and bank restructuring, but the UK and the US their work cut out to finalise a process for give New York a competitive advantage,” have agreed they need to work in tandem so-called “cross-border resolutions” that Campbell says. on the issue of failing global banks. would work efficiently in practice. Meanwhile, in another part of Europe, the Basel Process is churning out new rules The first fruit of their efforts, a blueprint “The US law is not clean, even when the for the 12 biggest international banks, was issue is 100 per cent domestic,” he says. that will affect both countries’ banks. unveiled by the Bank of England and the “Even if Lehman Brothers had had no Bankers widely welcomed the recent Federal Deposit Insurance Corporation. foreign operations, there’s no way it would relaxation on proposals for minimum liquidity have been resolved in the US bankruptcy and capital requirements. The deadline for Their proposals would consolidate the court in a matter of weeks.” banks to meet these rules was put back to process for dealing with insolvency in a big 2019 – sparking scepticism about whether bank – making a single regulator Professor Andrew Campbell of Leeds responsible, rather than have bodies in University agrees that the ultimate solution the rules would ever be implemented. each country affected handling the is a long way off, but says the joint Calabria has a different concern. He subsidiaries. approach was inevitable. believes Basel risks eroding healthy diversity. “I think it’s a real flaw to try to make According to Mark Calabria of the Cato “There will still be a role for national countries’ banking systems all look the Institute in Washington, it made sense for supervision for national banks, but with the same,” he explains. “If they all start to hold US and UK regulators to put their heads main banks operating in so many countries, together: “The reality is that New York and the type of supervision we’ve had previously similar assets, shocks to asset classes become London are the world’s financial markets – is no longer the right model,” he says. systemic and everyone tries to sell at the everybody else is a rounding error. same time. You want to try to diversify, so “In fact, when you look at the really big that when somebody’s selling, someone else “They are not as far along as they should players, they are now globally owned and is buying. be, but there’s a recognition by both registered in one country purely for regulators that this is the bilateral convenience – we don’t really have banks “I worry that the Basel process is relationship that matters.” that are ‘American’ or ‘British’ any more.” encouraging UK and US banks to look more alike. Ultimately, I think, that will be costly rather than beneficial.”

14 Beyond the Blame Game

OPEN CULTURE

The tale of the whistleblower The issue of how whistleblowers are treated and what support they are offered by regulators and lawmakers has never been more timely, as Andrew Stone reports.

eing a whistleblower isn’t easy. Just to LIBOR manipulation, money laundering, PPI mis- ask Paul Moore, sacked as HBOS Head selling and the reckless (and sometimes criminal) lending of Group Regulatory Risk in 2004 after that led to the financial crisis. warning his employers that they were And as the UK’s Financial Services Authority consults taking excessive risks. He turned on the exact nature of the role and remit of the Bwhistleblower in the aftermath of the crisis, incoming Financial Conduct Authority (FCA), which exposing the aggressive and reckless lending comes into being on April 1, whistleblowing is one of culture to Parliament in 2009, and he has suffered the issues it is looking at, as part of the wider ongoing for it ever since. shake-up of the UK’s financial regulation that aims to “I know to my own detriment what happens as a make finance cleaner and safer. result of becoming a public whistleblower,” says If the FCA (headed by former Chairman of Hong Moore, whose career was left in ruins. “As a Kong’s Securities and Futures Commission, Martin whistleblower you become like a leper, a pariah. I Wheatley) does hope to make it easier for had an impeccable reputation in my profession, whistleblowers to expose wrongdoing within but since I went public I have not been offered a the financial sector, it is likely to have its work single consulting job or been approached by any cut out, says anthropologist and business journalist headhunters. Even people who have worked Joris Luyendijk. with me and know I know what I’m talking The factors deterring whistleblowers are about can’t touch me because they feel it will considerable, says Luyendijk, who has been impact on their career.” speaking extensively to employees in the The resulting professional and financial banking sector for his Guardian banking blog. pain has only been part of the difficulties he There are strong cultural, legal, psychological has endured, which he is writing about for a and financial reasons why public whistleblowing forthcoming book. There is nothing so is such a rarity, he says. wounding to a person, observes Moore, than The great emphasis on performance and being punished for doing the right thing. “It’s performance-related reward in sections of the a hard thing to live with personally. I’ve financial world is one of the biggest factors spoken to other whistleblowers and I know preventing the exposure of wrongdoing, says that there are lots of mental health issues.” Luyendijk. “If you look at the incentive structure of Moore is not alone in having had a tough many people, particularly those in the front office in time following the decision to become a finance, there’s no job security, zero trust and zero whistleblower. When UBS employee Brad loyalty. If you know everyone around you can be fired Birkenfield exposed tax evasion at the Swiss bank in the in five minutes, it’s not a nurturing environment for US, he was jailed, although ultimately he received a whistleblowing.” record $104m IRS reward for his trouble. Banks are, by their nature, divided organisations locked The issue of how whistleblowers are treated and in a kind of continual struggle between the money makers what support they are offered by regulators and and the compliance people, he adds. “You could best see lawmakers when they seek to expose wrongdoing is an the banks as nations in a permanent state of civil war. Inside especially timely one following a slew of fraud and mis- them there are people tasked with finding fraudulent selling scandals, including alleged wrongdoing relating activity, while others are tasked with making money. ”

15 Beyond the Blame Game

“The tendency for companies to gag whistleblowers with big payoffs is all too common, not just in the financial sector, and leads to much wrongdoing never seeing the light of day.”

www.charteredbanker.com BeyondFebruary/March the Blame 2013Game 1616

OPEN CULTURE

continued from p15 >> Seen in this light, it’s possible to argue that the tougher regulation being imposed by national, European and other “Where profit is international regulators on banks may, paradoxically, only widen this divide, he the sole measuring adds. “You could say that more regulation on banks forces them, in an indirect way, to take more risks to pay for the compliance.” stick of everything Chris Skinner, industry commentator and Chairman of networking group the Financial Services Club, sees a lack you are bound to of support for whistleblowers from regulators, together with weak corporate end up with people law as further impediments to potential whistleblowers. “In the US under Dodd Frank, you have doing bad things.” to take the bank to court yourself and only if the Feds believe you have a good case, and adds that “we will place significant corroboration should bear no weight.” will they join your case and if you win you value on whistleblowing alerts and seek to Corporate law, which was not designed get a percentage,” says Skinner. provide as much useful feedback to the for balance sheets the size of countries, “That says to me right now there is not whistleblower as possible”. also needs to be amended. The huge really the will to help whistleblowers and An FSA spokesperson said the existing potential rewards resulting from the scale there’s even less structure and chance of whistleblowing hotline had more than of these balance sheets can be corrosive for getting the authorities on your side in 3,000 calls last year, although it does not the moral judgement of the individuals in Europe and the UK.” track directly what proportion or type of charge of them, says Moore. As a result, the career risks of calls resulted in exposure of wrongdoing. “We need to find a way of changing the whistleblowing are still too high, says He added that the FCA will be open to all way company law works to recognise that Skinner. “There should be an independent relevant sources of information into if profit becomes a person’s exclusive goal third party you can go to confidentially and wrongdoing: “In speeches Martin Wheatley they will become morally and legally get due diligence done without your name has said we are open to using a wider range relative if they can get away with it. Where being associated and also with the of sources in future for information from profit is the sole measuring stick of understanding that you will be supported whatever source is appropriate.” everything, you are bound to end up with by the authorities if you have a case.” Much more needs to be done, however, people doing bad things or losing Moore adds that the tendency for to create a more open culture and a legal perspective about right and wrong.” companies to gag whistleblowers with big approach both inside and outside of banks Another fact of human nature makes payoffs is all too common, not just in the and other regulated financial businesses if the act of whistleblowing a risky option – financial sector, and leads to much whistleblowing is to be truly encouraged, the tendency to shoot the messenger and wrongdoing never seeing the light of day. says Moore. to shun the insider who goes against the Although it is very early days, the FCA is “There should be additional protections prevailing culture even though they speak promising to help whistleblowers in the UK for those in control functions. They should the truth, says Moore. financial sector once it comes into being, report to a specialist oversight and Despite the difficulties, however, he including a dedicated phone and email assurance non-exec who represents them refuses to accept that the difficulties should contact specifically for whistleblowers. In its on the board and spends two to three days prevent employees, banks, investors or document Journey to the FCA, it sets out its a week there. If there is a desire to dismiss regulators from the vital task of trying to aim to “improve the way we gather someone from the control function, there improve transparency, openness and intelligence...including listening to has to be a proper hearing. honesty. “The banks are vital to the comments from consumer organisations “I think we also have to phase in proper economy and we have not got the checks and whistleblowers…creating a bolder competence and credibility of the control and balances right yet,” says Moore. organisational culture, and adopting a new function. We need to have a proper, He is philosophical about his own style of supervision.” chartered, professional qualification for bruising experiences, believing he is the It promises that the information these people.” better for it, despite the financial and received will be analysed and investigated It should also be incumbent on emotional damage he has suffered. “It has companies to carry out thorough and been an intensely painful experience but robust investigations when wrongdoing on the other hand we get transformed by is alleged, he adds. “There is a big risk if trouble and so it has been a very graceful you take the statements of the manager, experience too. who tells you everything is fine, at face “Mother Theresa once said, ‘If I lose my value without calling in the auditor reputation, at least that’s one less thing to or compliance officer to worry about.’ It has been cathartic in that check. Self-serving way and I’m glad I did it. I think I’ve been statements doing some good and there’s more good without still to be done.”

17 Beyond the Blame Game The Chartered Banker Institute is helping to rebuild public confidence in banks and bankers by developing and embedding high ethical, professional and technical standards. We also provide world-class professional qualifications for the financial services industry in the UK and overseas. In 2011, the Institute launched the Chartered Banker Professional Standards Board (www.cbpsb.org) to enhance and sustain professionalism in banking.

The Chartered Banker Institute is the only remaining banking institute in the UK. We are unique in being entitled to award the “Chartered Banker” designation to our qualified members. The Institute also offers a wide range of education tools to support members with Continuing Professional Development.

For further information, please contact: Simon Thompson Chief Executive Chartered Banker Institute Drumsheugh House 38b Drumsheugh Gardens Edinburgh EH3 7SW

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