After months filled with allegations of misconduct by London-based banks, Britain’s financiers could perhaps be forgiven for hoping the autumn will bring a major shift in tone.
The summer of banking’s discontent started in June with the announcement that Barclays had reached a £290m settlement with US and UK regulators over manipulation of the London interbank offered rate (Libor). Days later, four of the UK’s biggest high street banks agreed with the Financial Services Authority to compensate small businesses that had been mis-sold interest rate swaps.
Then things went crazy, as a flurry of banks found themselves fending off a string of allegations – rather than official findings – of misconduct. The US Congress accused HSBC of laundering Mexican drug money. A previously low-profile New York banking regulator unexpectedly hit Standard Chartered with allegations that it had violated sanctions against Iran. And word leaked out that as many as a dozen banks are still under investigation for alleged Libor abuses similar to Barclays and half that number are facing probes over their dealings with Iran.
Most of the allegations have come out of the US, where regulators can go public much earlier in their investigations. No wonder a group of City of London elders are mounting a last-ditch stand against the coalition government’s plan to give similar powers to UK financial watchdogs.
Right now, the FSA cannot give details about a case until its internal decision maker, the Regulatory Decisions Committee, has heard the allegations and the defence of the accused and come down in favour of enforcement action.
But the bill to revamp UK financial regulation would let the new watchdog, the Financial Conduct Authority, go public with “warning notices” before a case gets to the RDC. Advocates say this would make the UK more like the US, where the Securities and Exchange Commission can make public charges it has filed with a judge or administrative proceeding.
Lord Flight, leader of the fight against early publicity, says allegations can blacken reputations and harm innocent investors. He points to New York banking regulator Benjamin Lawsky’s allegations that StanChart hid $250bn of transactions with Iran in breach of US sanctions, a charge that caused a one-day 16 per cent fall in the bank’s share price.
Ian Hannam, the former JPMorgan Cazenove oil banker who is fighting FSA market abuse charges, would certainly agree. Under the rule change, the allegations would have become public many months earlier and he would almost certainly have had to quit then.
Ministers argue, with real justification, that the public deserves to know that watchdogs believe a major institution or prominent figure has committed wrongdoing. After all, crown prosecutors are allowed to announce that they are filing murder charges and it is hard to imagine anything more damaging.
Timely announcements allow investors to move their money or protect themselves from similar misdeeds. Wouldn’t you want to know that a broker was facing charges of selling unsuitable investments before you – or even more pointedly, an elderly relative – gave him money?
Quick enforcement also helps restore faith in the financial system. It is quite frankly a joke that nearly four years after HBOS failed, we still don’t know whether the FSA thinks anyone there did anything improper.
But the StanChart affair does highlight the need for safeguards. The bank was apparently blindsided by Mr Lawsky’s decision to go public, as were other US regulators. Although StanChart quickly settled for $340m, it still insists that only $14m of the transactions were illegitimate.
There is a better way. Since 1972, the SEC has made a practice of privately warning companies and individuals the watchdog wants to bring a case against them and inviting them to respond.
For some, the “Wells notice” process allows them to present possible defences and work out an amicable settlement. Others, such as Goldman Sachs in the infamous 2010 Abacus securitisation case, take a more confrontational approach.
But in general, the practice has worked well, especially for investors, who often get an early heads up about potential problems because most public companies disclose when they have received such a notice.
UK policy makers should take note. Don’t give in to the City’s efforts to keep the disciplinary process shrouded in mystery. But do give the target of a case the private right of reply before throwing open the doors. Everyone will benefit.
Brooke Masters is the FT’s chief regulation correspondent
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