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An article relating to this blog post on Finextra:

Standard Chartered agrees $340m Iran settlement

Benjamin M. Lawsky, New York Superintendent of Financial Services, issued the following statement today.

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Wield a Twin-Stick to Deter Culture of Profit over Propriety

Last week I argued that regulators need to get proactive if they are to reduce situations similar to that which engulfed Standard Chartered and those that are now threatening other major banks; in practice, something that is much easier said than done. In fairness to the banks, they are faced with huge compliance demands due to thousands of country-specific regulations; in some cases, fulfilling regulations in one jurisdiction can put them in breach of another. On the face of it, it is entirely the bank’s responsibility to ensure these are adhered to, but without the fear of ‘real’ recrimination, what is the motivation of the Board to go the extra mile and ensure this is the case?

Such complex issues require detailed analysis, focus and pressure from the guys at the top. Given director’s remuneration is largely based on share price (either annually, deferred, or a combination thereof) the transient impact of a fine from the regulators on the share price ultimately doesn’t affect them. Alongside the longer-term desire to have regulators sanity check the information they are being fed, what is needed is more of a ‘stick’ to prevent the practice of profit over propriety in the first place. Such a stick would be there to ensure directors take their regulatory obligations seriously, not just to pay them lip-service. Having spoken with many people about what form this ‘magic’ stick should take (from the pub to the board room), I’ve chiselled it into two branches:

  • Branch A stipulates that if a regulatory fine is received, the entire board shall immediately surrender the right to any annual or deferred bonus to which they were entitled. This should promote a sense of shared responsibility for their actions.
  • Branch B goes one step further and mandates a lifetime ban from working within the UK Financial Services sector if it can be demonstrated that any of the directors had knowledge of unscrupulous behaviours, or were simply turning a blind eye.

One final addition to the use of the magic two-branched stick would be an attaché provided to the bank by the country’s financial regulator. The attaché would be there to act as a passive board member, who wouldn’t contribute to the meetings, but would observe and report back to the regulator on a frequent basis. This should have the added benefit of identifying practices that aren’t necessarily contravening the laws as defined, but are seen to be discouraged. Addressing such problems early on would avoid the cost and reputational damage attached to some of the recent scandals, and help protect the UK’s standing as a global centre of excellence. Ultimately, more stick and less forgiveness is needed to sort these problems out, but it’s also going to require buy-in from the banks themselves which might not be so forthcoming….


Comments: (3)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 24 August, 2012, 19:56Be the first to give this comment the thumbs up 0 likes

Having broken the law and paid a fine, it's deemed that the defendant has already been punished for the crime. There should be no further punishment for the same crime, since that would constitute "double jeopardy", which is not permitted in most judicial systems. Therefore, while they're well thought out, Branch A and B can't be made into laws where the double jeopardy principle reigns. To me, if the fine is set high enough, that itself would prevent recurrence of the crime, without any additional punishment at the board-level. That doesn't seem to be happening now: Barclays' stock price went up when the amount of fine imposed on it for LiborGate was announced - the City / Wall Street felt that the fine was insignificant compared to the bank's overall size. 

A Finextra member
A Finextra member 25 August, 2012, 12:33Be the first to give this comment the thumbs up 0 likes

That's a very good point and something that needs to be carefully considered. Not being a lawyer, I don't know the legal intricacies of double jeopardy; however I think we're talking about actions against two separate legal entities here - the 'company' and the 'board of directors, which should be permissible.

Most importantly though, the implementation of the two branches would require two different approaches. One of these will necessitate a voluntary code of conduct amongst the banks, and a desire to write the requisite bonus penalty clauses into their employment contracts (hence the difficulty in the implementation of this). I take on board your point with regards to the size of the penalties as an alternative, but this could endanger the stability of a bank if not sensitively handled.


Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 25 August, 2012, 13:04Be the first to give this comment the thumbs up 0 likes

I did think of your point regarding company and BoD being two different entities. Neither am I a lawyer, but I think only of the two entities can be named the defendant, so only one of them can be punished. If the BoD is punished per Branch A and B, government gets no fines from the company. If the BoD is fined in addition to attracting Branch A and B punishment, I'm sure they'll file for bankruptcy and again the government will be left with nothing. When punitive damages are awarded against a, say, tobacco company, the general economy is hardly affected. That can't be said of a bank. I agree with you that setting fines for banks is a very dicey affair. Which makes me wonder if there's a practical solution to this problem at all. We seem to be heading towards a "heads, banks win, tails, we lose" kind of a situation yet again!