A question.

Why do banking industry headlines remain so very bad when the talk is all of recovery, strengthening investment and employment indicators and an uptick in base rate soon?

My acknowledgements to the FCA, Reuters, the Telegraph, Independent, Guardian, The Courier.com and other news organisations, on whose material I draw freely.

Here’s just a taste of them.

‘Standard Chartered to scour records for money laundering, with penalty at stake’. (Reuters 11 August).

Coming hard on the heels of its 2012 fine from the US for hiding transactions related to Iran, this time it’s due to faulty AML software. All, it appears, is not yet at all well in that part of the bank’s operations. It’s just turned into a second fine by the New York Department of Financial Services, this time for $300m.

‘Tougher rules risk starting a City brain drain’ (Telegraph, 9 August).

Making bank leaders sign documents confirming responsibility for specific systems and controls and demonstrating that they did the right thing (rather than not personally doing anything wrong), it’s argued, will stop leaders from taking decisions and drive talent from the industry. There is talk of ‘stark departure from the usual burden of proof’.

Am I alone in wondering why professional responsibility at this level should be seen as a surprise? It brings to mind something I came across from FCA Director Martin Wheatley back in 2012:‘From the boardroom to point of sale and beyond, firms’ behaviour, attitudes and motivations must be about good conduct.’

For which I read, not just about stopping bad conduct.

Which implies that some financial institutions might not have the right mechanisms in place to spot and remedy bad conduct or, if they do, a preference to live with it.

This point is touched on in Changing Banking for Good, the 2013 Report of the Parlimentary 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’.

So, pulling no punches there, then.

Now, how about this?

‘Bank of America nears $16 billion record settlement with US regulators’ (7 August, Independent)
This dwarfs BNP Paribas’s recent c. $9 billion fine and lock out from US clearing for a year. It relates to alleged fraud in the sub-prime mortgage securities that helped fuel the financial crisis and includes, apparently, billions of financial support for struggling American home owners.

I wonder how did this arose and what it implies about that business’s strategy and risk appetite at the time.

Or this?

‘Barclays sued by New York attorney general over alleged ‘dark pool’ fraud’ (26 June, Guardian)
Barclays is accused of ‘a systematic pattern of fraud and deceit’ by the New York Attorney General whose lawsuit alleges Dark Pool fraud based on misrepresenting the safety of its US-based alternative trading system, or “dark pool”, to investors. Barclays roundly rejects the claims.
This raises a further set of questions about business model, risk appetite, prevailing culture, controls, a sense of the customer?

Or this?

Banking Group Lloyds fined £218m after ‘truly shocking conduct’ (29 July, The Courier.com)
Lloyds admitted rigging interest-rate benchmarks — and shortchanging the Bank of England. It turns out that rates had been manipulated over number of years with the effect of reducing the cost to the bank of support funding via the central bank.

Lloyds’ Chairman called it ‘truly shocking conduct, undertaken when the bank was on a lifeline of public support.’

The Bank of England Governor said: ‘Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved.”

FCA Director, Enforcement and Financial Crime Tracey McDermott said ‘Colluding to benefit the firms at the expense, ultimately, of the UK taxpayer was unacceptable’ adding ‘This falls well short of the standards the FCA and the market is entitled to expect from regulated firms.

I am left wondering how this went go on for as long as it apparently did without anyone noticing?

I won’t go on. This kind of news has featured prominently in the media for some time. Since its launch in 1 April 2013, the Financial Conduct Authority has levied fines for misconduct in regulated firm in excess of £600m, £249.7m in this year to today, alone.

And it’s not just the global giants in the dock. I discovered, amongst many other examples, that the Yorkshire Building Society was fined £1.43m in June, alongside Credit Suisse’s £2.4m, for misleading investors on a likely rate of return. That the proprietor of City and Provincial, a mortgage broker, was fined in March for entering false and misleading information in his own mortgage application. That Stonebridge Insurance had just been fined £8.4m for mis-selling personal accident plans. That Forex Capital Markets UK was fined £4m for allowing its US Group to withhold $9.9m of profits which should have been passed to its clients, and that Besso Ltd, an insurance broker, was fined £0.32m for failing to put controls in place to counter bribery and corruption risks.

For the full picture, go to http://www.fca.org.uk/firms/being-regulated/enforcement/fines

Why does this continue to happen? Are we not such a long way away now from the well documented causes of the 2008 Crisis that it can’t simply be explained away as a series of after-shocks?

Chris Skinner of the Financial Services Club put his finger on one reason earlier this week, arguing that the structure of many larger financial institutions, siloed by product and division and fragmented by geography, make them incapable of managing enterprise risk and argues for the need for and enteprise risk management system, looking to technology to peer into the structural holes in which market, credit, liquidity and operational risks can materialise into issues.

Now that’s an interesting point, because it is surely not simply in each business function that these faults occur. It’s at their intersection with each other.

Isn’t risk appetite linked to the business model, product portfolio choices and reputation?

Aren’t corporate values and culture linked to leader and staff recruitment patterns?

Isn’t the behaviour of leaders coloured by how they are paid and incentivised?

Aren’t employees who work for those leaders influenced by what they see and hear?

I’m thoughtful about some of the professional responses to identifying and managing conduct across the enterprise and wonder whether leadership teams and those who advise them might be looking through the wrong end of the telescope.