Tuesday, 25 September 2018

Sign or resign?

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  • Peters 475px June 2014

The UK should know better than to push the FCA’s unfair and dangerous Senior Persons Regime.

THERE HAS BEEN much talk about the flawed culture of greed within investment banks but when push comes to shove, we’re mostly in it for the money rather than the glory.

And if that’s why we’re here, we should all be feeling miserable because nobody is going to get rich when 2015 bonuses are declared in the new year, other than maybe the guys and gals in the M&A groups.

DCM and syndicate have had a good time but they are also carrying sales and trading as well as an army of legal and compliance folk, and by the time all the bills are paid there may not be too much left for the individuals concerned.

When I first came into banking we got decently, if not spectacularly, paid and that, along with the subsidised mortgage – a 3% mortgage, even if a taxable benefit, was quite something when market rates were well into double digits – made life entirely bearable.

The massive expansion of the business from Big Bang in 1987 and onwards demanded an equally massive increase in human resources and, given the money on offer, it brought in many people for whom banking was a means to an end and not an end in itself. And with demand for talent outstripping supply of suitably competent and ethical people, the gaps were filled with all-comers, so long as they could demonstrate an IQ of around 145 or above.

Put a lot of ethically untested brainpower next to huge piles of money and you get 2008.

One of the good things, if there is such a thing, about the ongoing contraction of the industry and the disappearance of the vast riches that beckoned is that some of the more dubious players who diluted the “gene pool” are either being chopped or are giving up and walking away. I think as a result we might eventually find ourselves left with a leaner, meaner and more ethically suitable workforce.

IT IS NOT news that the regulatory authorities are still preparing to fight the last war and it seems to me that here in the UK – where we should know better – one of the craziest pieces of legislation is in the making. I am thinking of the FCA’s Senior Persons Regime.

The idea is to hold senior management responsible for mischievous acts perpetrated under their watch by their juniors. If lowly front-line troops step out of line, the authorities can come down on managers like a ton of bricks – in the form of potentially enormous fines.

The sanctions, however, as most of us seem to understand them, expose managers to near-unlimited liability with little or no time bar.

So an overly ambitious young Australian, working in your Hong Kong office but who is in your reporting line, flogs a dodgy structure to a Japanese life company. It blows up, the ethical intention of the product is questioned and as the Aussie has moved on and is running a chain of back-packers’ hostels back in the Lucky Country, you are on the hook. An unblemished 30-year career, your savings and your kids’ inheritance are now at risk. That just can’t be right, can it?

Who would ever want to hold a senior position in a bank in those circumstances? It was the lesson of Lloyds – the insurance market in which “names” assumed unlimited liability – that every risk has a price but that there is no price that can compensate for unlimited risk.

In the 1980s, the newly prosperous British middle classes steamed into Lloyds in their droves and, then, when the asbestos claims out of the US started to hit with all their punitive damages, these people, often the cream of the English country set, got wiped out. Now the law is setting itself up to visit the same risk upon the leading echelons of our financial system.

The thought of beggaring senior managers for the misdeeds of their juniors seems harsh

I HAVE RECEIVED as yet unconfirmed reports that a number of senior managers, some in concert, are having second thoughts about signing up to the responsibilities that the Senior Persons Regime is seeking to impose upon them.

If faced with “sign or resign”, surely a goodly number will quite seriously consider the second option and the banks, having already lost much of their finest talent to the boutiques and hedge funds – as well as to “retirement due to excess wealth” – might find themselves embarrassed again.

The growing fears that there are already not enough people on the ground who have experienced rising rates and protracted bear markets might find themselves multiplied.

The risks of systematic misconduct are surely lower now than they were and the more the business contracts and the more modest the financial rewards become, the less it will attract people whose greed and brainpower lead them down paths they should not be mapping.

Nevertheless, there will always be rotten apples in the barrel but the thought of beggaring senior managers for the misdeeds of their juniors seems harsh. Yes, I know, it’s not the intention of the proposed legislation to bring about bad outcomes but anybody who has traded knows where Murphy’s Law was written.

Legislators, on the other hand, have worked out that if you want to guarantee that the toast lands butter-side up, the best thing to do is to spread it on both sides.

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