Bringing trust back to the banking industry

January 01, 1970 by Mark Dunn

Two major new announcements in light of the financial crisis

Last week at the Mansion House, the Chancellor of the Exchequer, George Osborne and Mark Carney, the Governor of the Bank of England both, in their own ways, addressed two of the major consequences of the financial crisis and subsequent recession.

It was George Osborne's announcement that the government plans to sell off the 80% shareholding in RBS that it acquired in 2008 for almost £50 billion that stole most of the newspaper headlines.  However it is arguable that Mark Carney's speech will have the more wide-reaching implications for the City of London's future.

Driving ethics back into banking

The Governor attacked the ethics of city workers, accusing them of acting with a "culture of impunity" and warning that "the age of irresponsibility is over".  This message has been supported by the final report of the Fair and Effective Markets Review, which was published on the day of the Mansion House Dinner.

The Fair and Effective Markets Review

The report sets out 21 recommendations to restore trust in financial institutions.  According to the press release that accompanied it, the review is centred on four principles. These are:

  • Individuals should be held to account for their own conduct
  • Firms should take greater collective responsibility for market practices
  • Regulators should close gaps in regulatory coverage and broaden the regime holding senior management to account
  • Given the global nature of these markets, coordinated international action should be taken wherever possible to improve fairness and effectiveness

Rogue trading – a brief history

There is, of course, a long if somewhat embarrassing history of 'rogue traders' causing major issues for financial institutions.  Perhaps most famously, Barings Bank was bankrupted in 1996 by the actions of trader Nick Leeson, although the $1.1 billion loss incurred is dwarfed by Jerome Kerviel, of Societe Generale.   The futures trader cost the bank more than $6.9 billion in losses between 2006 and 2008.  Both Leeson and Kerviel spent significant time in prison, as have most rogue financial traders.

Recommendations from the review

Whilst rogue traders will remain an issue for financial institutions, the banks will be closely focussing on the recommendations for firms by the UK regulatory authorities.

For the banks, there is a recommendation to create a new Fixed Income Instruments, Currencies and Commodities (FICC) Market Standards Board with participation from a cross-section of banks and end users to address areas of uncertainty in trading practices and promote adherence to standards.

The recommendations for regulators include extending scrutiny of senior managers in firms to a wider range of activities in FICC markets and creating a new statutory civil and criminal market abuse regime for the spot foreign exchange markets.

Whilst many in the financial industry will raise eyebrows about yet more regulation within the industry, most will surely accept that the days of self-regulation are long gone and that rebuilding trust in the industry is central to the future success of financial services.  By addressing individuals, financial institutions, regulators and recognising the global nature of the problem, the Fair and Effective Markets Review is demonstrating its seriousness to address the problems of the past at all levels and financial institutions would be well advised to proactively take up its recommendations.

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