LIBOR: The Final Nail in the Coffin?

Strong conflict can be observed in the prediction made by Dixit Johsi, who thinks that eliminating the use of LIBOR from the global financial system may present a Herculean task that could be “bigger than Brexit”, and the view espoused by FCA’s boss Andrew Bailey this July in Interest rate benchmark reform: transition to a world without LIBOR who is adamant that the use of the discredited rate must end by 2021. In an earlier speech on the future of LIBOR last July, Bailey stressed the need to transition away from LIBOR and the importance of doing so has not changed. However, Johsi, who is the group treasurer of Deutsche Bank and is also a board member of the International Swaps and Derivatives Association, is of the view that ending the use of LIBOR is a unenviable “mammoth task” which is “bigger than Brexit” on the overall scale of things. In his  speech Bailey reiterated the notorious status that LIBOR had attained after the global financial crisis (GFC) prior to which no one knew of its significance in the global marketplace. “Before then it was largely taken for granted, part of the financial landscape,” it how Bailey put it while stressing that the FCA has regulated LIBOR since April 2013 and that significant improvements have been made in its submission and administration. He said that the reforms of recent years had ensured that no further illegality took place but it was equally Bailey’s position that LIBOR must be terminated in its present form because the absence of active underlying markets raises a serious question about the sustainability of the LIBOR benchmarks that are based upon these markets.

But since “LIBOR is a public good” regulators were eager to protect the the interests of all involved by sustaining the current arrangements until such time as alternatives are available and transition arrangements are sufficiently well advanced. A proxy LIBOR was discussed.  Yet despite the need for a frictionless transition, Bailey is now saying that the time has come to put an end to the use of LIBOR and he therefore stressed that firms should not see phasing out LIBOR as a “black swan” event or a measure of last resort because it is not a “remote probability” and the benchmark’s termination is inevitable. He is pleased with the efforts made to change things thus far but he is not happy about the pace of the transition. The FCA is clear that ensuring that the transition from LIBOR to alternative interest rate benchmarks is orderly will contribute to financial stability and that “misplaced confidence in LIBOR’s survival will do the opposite, by discouraging transition.” Alternatives to LIBOR in the form of SOFR, SONIA, SARON and TONA are already operating globally. The Bank of England has started to publish a reformed and strengthened SONIA. Bailey informed us that it is now supported by an average of 370 transactions per day, compared with 80 before the reform.

Banking and Misconduct: A Critique of the Cure of Culture

Strangely enough, after controversially abandoning a long-awaited revolutionary review of culture in banking, the FCA has started to invoke the mantra of culture yet again. In that regard, Transforming culture in financial services DP18/2 advocates a pressing need for financial firms to clean up their act because cultural complications have been “a key root cause of the major conduct failings that have occurred within the industry in recent history.” Being prescriptive about the panacea of culture is quite an odd thing for the FCA to indulge in yet again. Worse still, the idea that a wider culture is to blame makes a mockery of individual culpability and provokes irresponsibility. The approach is misconceived and fundamentally flawed. Jonathan Davidson, the FCA’s director of supervision, predicts at the outset of the discussion paper that organisational and societal change cannot be brought about by a “quick fix” because of “the complexity of human dynamics.” Events demonstrate that the FCA is in denial about the reality of things. Blaming bad culture has failed as a defence for many people such as Tom Hayes, Jonathan Mathew, Jay Merchant and Alex Pabon who were prosecuted and jailed for benchmark rigging. The FCA’s latest theory is that culture is manageable despite being immeasurable. On any view, this is a fallacious argument because the calculus of culture is not only measurable but has already been clearly recorded as conduct costs, £264 billion between 2012-2016, by the CCP Research Foundation. The systematic arrangement and coding of these costs shows that bad culture and culpability can be readily measured.

Generally, one can only agree with the practical effect of many a cultural mission statement, when everyday conduct, ethics and accountability are what will truly drive good outcomes for customers and engender trust. No issue is taken here on the good work many of the banks are doing in this space. The conduct costs research was never intended to be a means by which to bluntly expose a bank’s conduct costs. Rather, it was to identify a proxy indicator of culture. CCP Research Foundation readily accepts the limitations of this metric. It would further accept that there are many initiatives, controls and/or mitigants that, if properly implemented, would act to promote good behaviour and outcomes for customers; as opposed to shining a light on misconduct post facto. The indirect effect of the capture (and publication) of a firm’s (and/or its peer’s) conduct costs on behaviour is clearly subordinate to such a priori measures. Aside from the lack of guidance and substantive discussion on how to effectively measure and manage common grey area conduct risk, the fact that the regulator is highlighting the culture issue again must, on its face, be applauded. Importantly, any criticisms voiced in this post are my personal views alone.

Benchmark Manipulation and Corporate Crime: Insights on Financial Misconduct

In the second innings things were different. The reverse swinging old ball meant that the Serious Fraud Office’s openers came back to the pavilion with a duck and those charged with misconduct and put in the dock began to eye up the opportunity of scoring a hat trick. Coupled with the reduction in Hayes’s sentence by the Court of Appeal (Lord Thomas of Cwmgiedd CJ, Sir Brian Leveson PQBD and Gloster LJ, see here) on the ground that he was not in a managerial position and suffered from autism, the fact that Darrell Read, Danny Wilkinson and Colin Goodman, Noel Cryan, Jim Gilmour and Terry Farr were found not guilty of LIBOR manipulation casts doubt over future successful prosecutions in benchmark rigging cases. Hamblen J directed the jury to convict the brokers if they had played a “significant” role in helping him rig LIBOR. Apparently they had not. The Court of Appeal’s refusal to grant Hayes permission to appeal to the Supreme Court may provide limited comfort to the SFO but the acquittal of the above brokers charged in the second “sham” LIBOR trial has reversed the momentum gained by the authorities. The brokers’ exoneration exposes the SFO to the accusation that it has been wildly swinging a sledgehammer to smash a nut. So, having tasted blood after Tom Hayes’s conviction, taking a gung-ho approach to weeding out the City’s “bad apples” seems to have backfired because the clever brokers had simply let Hayes believe whatever he wanted.

According to the brokers, the SFO “didn’t investigate it properly and didn’t listen”. Despite big increases to its funding, claims that the SFO’s director David Green QC has overseen a “string of successes” and that the extension of his contract for two years is a “boon” for justice are proving to be totally without merit. These days it is the SFO which is in the dock and Tom Hayes’s tormented father Nick Hayes used the opportunity to defend his son and said: “Today Tom Hayes stands tall. He refused to testify versus the LIBOR brokers and paid the price … I’m proud of him.” Of course, measured against such poor performance, the fact that the embattled agency wants a top-up of £21.5 million in emergency funds for “blockbuster” probes to bolster its dwindling fortunes amounts to expecting rewards for failure; it is completely unjustified.

Case Comment: Maximillian Schrems v Data Protection Commissioner

Schrems v Data Protection Commissioner and another (Case C-362/14) EU:C:2015:650

Comparing the mass surveillance under the Commission’s US Safe Harbour Decision to the world of financial misconduct, Max Schrems said: “It’s like with the banking crisis, there was outrage and then we all kept on walking by. Letters went sent, words were said. The usual drill. But there was not really any change.” The young Austrian law student’s successful campaign, funded through small donations totalling €65,000, to close the legal loophole that allowed US corporations to circumvent EU law caused quite a stir because the CJEU declared the Commission’s US Safe Harbour arrangement invalid. The Grand Chamber held that because of Articles 7, 8 and 47 of the Charter of Fundamental Rights of the European Union (CFR), Commission Decision 2000/520/EC did not prevent Ireland’s supervisory authority from examining the claim made by Schrems (who was concerned about the protection of his rights and freedoms) in regard to the processing of personal data relating to him which had been relayed from Ireland to the US (a third country) when he contended that the law and practices in force in the third country did not ensure an adequate level of protection. Commission Decision 2000/520/EC was adopted under Article 25(6) of Directive 95/46/EC, or the Data Protection Directive, and through it the European Commission deemed the US to provide adequate protection.

The CJEU was unimpressed with the attitude of the Ireland’s Data Protection Commissioner (DPC) who refused to investigate a complaint made by Schrems regarding Facebook Ireland Ltd transferring the personal data of its users to the US to keep it on servers located there. The ruling brought an end to more than 4,400 US firms – including Amazon, Apple, Facebook and Google – easily transferring European customers’ details abroad under the 15-year old agreement which was seen by many in the industry as a get out of jail free card. The scrapping of the pact, which purported to have an overriding effect over the scrutiny of national regulators (who must protect data moved by a company to a foreign server), sparked outrage in America and the Obama administration was “deeply disappointed” by the ruling. Overall, the decision tends to be seen as protectionist and anti-business in America. It also crystallised growing suspicion of US firms, Safe Harbour’s main beneficiaries, in the aftermath of Edward Snowden’s disclosures about the scale of the American government’s digital espionage programmes.

Tom Hayes: LIBOR Fraudster’s Sentence Reduced, But Conviction Upheld

Regina (Respondent) v Tom Alexander William Hayes (Appellant) [2015] EWCA Crim 1944 (21 December 2015)

In this redacted judgment, the Court of Appeal (Criminal Division) upheld Tom Hayes’s conviction but reduced his brutal sentence from 14 years to 11 years. The clawback of three years will come as a blow to the resurgent fortunes of the Serious Fraud Office (SFO). Lord Thomas of Cwmgiedd CJ, Sir Brian Leveson PQBD and Gloster LJ reduced the sentence because Hayes was not in a managerial position and also suffered from autism (see here). Expressing mixed emotions about the outcome of his appeal against conviction and sentencing Hayes said that he “was immensely disappointed” by the overall result but was nonetheless “relieved and grateful” that the “immensely disproportionate” sentence passed by Cooke J was reduced. “I never asked for a dishonest or inaccurate LIBOR rate to be submitted. I was at secondary school when these practices started,” is how Tom Hayes still places himself in the grand scheme of things. The three judges found that Cooke J was right to conclude that the expert evidence sought by Hayes was of low probative value. He initially entered into an agreement with the prosecution under section 73 of the Serious Organised Crime and Police Act 2005 (SOCPA) in order to avoid extradition to the US but later withdrew and changed his plea to not guilty. In more ways than one, Hayes is somewhat of a comeback kid and Cooke J had called him a “gambler”.

However, the Court of Appeal held that ordinary standards of reasonable and honest people, rather than the standards of the market or a group of traders, determined judging the extent to which a banker had acted dishonestly in manipulating financial markets. The court was clear that an example had to be made of Hayes so as to deter others with similar ideas from misbehaving. “I continue to maintain my innocence. I look forward to pursuing every avenue available to me to clear my name,” is how he intimated a possible appeal to the Supreme Court. In relation to his conviction, Hayes advanced six grounds of appeal but was granted permission to appeal on only one. The details contained in paragraphs 38 to 60 of the court’s judgment cannot be reported until the conclusion of Trial 2 (see here) before Hamblen J.

SFO v Standard Bank: First UK Deferred Prosecution Agreement

The director of the Serious Fraud Office (SFO), David Green QC, has overseen a turnaround in the ailing agency’s fortunes. Green is reportedly paid £175,000 annually and the press suggests he is likely to continue his role for another two years after his four-year term expires in April 2016. With successes such as the conviction of benchmark fraudster Tom Hayes (presently jailed in Lowdham Grange Prison) already under his belt, Green has his sights set on securing further convictions in other ongoing benchmark prosecutions. In Hayes’s appeal, Sir John Thomas LCJ has directed that a medical report should be filed by 9 December 2015. Hayes argued the Nuremberg defence and said that he was merely following orders. But he failed miserably in winning the jury’s sympathy and is a broken man. He suffers from Asperger’s syndrome and attention deficit hyperactivity disorder but that did not stop Sir Jeremy Cooke from sentencing him to 14 years’ imprisonment for his fraudulent ways. Of course, only recently the SFO also secured the UK’s first deferred prosecution agreement (DPA). In SFO v Standard Bank Plc, the president of the Queen’s Bench Division, Sir Brain Leveson approved the UK’s first DPA in a bribery case connected to a £397/$600 million sovereign note deal involving Tanzania.

Two things stand out about this case. It is the first example of a UK prosecutor entering into a DPA or a “plea deal”. Moreover, the situation was equally novel because it was the very first time that the offence of failing to prevent bribery – under section 7 of the Bribery Act – was used since its introduction in 2010. The government considers DPAs as a new and important enforcement tool to deal with corporate economic crime. DPAs came into existence in the UK by virtue of section 45 and schedule 17 of the Crime and Courts Act 2013. The present case turned on the Tanzanian government’s wish to raise funds by way of a sovereign note private placement. The bribe took place when, in March 2013, Standard Bank’s former sister firm Stanbic Bank Tanzania paid £4/$6 million to Enterprise Growth Market Advisers (EGMA). The SFO contended that the improper payment’s purpose was to induce a representative of the Tanzanian government to favour Standard Bank and Stanbic’s proposal for the sovereign note deal. Stanbic and Standard Bank shared the transaction fees of £5.6/$8.4 million that were generated by the placement.

Former Rogue UBS Trader Kweku Adoboli Loses Deportation Appeal

In comparison to Tom Hayes (who got 14 years’ imprisonment and is appealing his sentence and conviction) and others being prosecuted for benchmark rigging, it is arguably quite scandalous that UBS rogue trader Kweku Adoboli (who was convicted of two counts of fraud and sentenced to seven years’ imprisonment) was released from prison after spending just a bit over three years behind bars for losing $2.5 billion in unauthorised trading. Ghana-born Adoboli – who travelled the world as a child – is said to be the son of a United Nations official/diplomat. Because of his misconduct, the Financial Conduct Authority (FCA) understandably wishes to ban Adoboli, who reckoned he had a “magic touch”, from being a regulated person in financial services. But now it has emerged that Adoboli was notified of his liability to deportation and has lost his appeal in relation to the decision to deport him from the UK. The 35-year old Ghanaian national, who has resided in the UK for 23 years but never got around to obtaining British nationality, was released from prison in June 2015 and reportedly found the immigration tribunal’s decision upholding his deportation to be “heartbreaking”. His rogue trading wiped off £2.7 billion ($4.5 billion) from UBS’s share price.

The media suggests that the former public school head boy and University of Nottingham graduate – holding a degree in e-commerce and digital business studies – plans to appeal the tribunal’s decision. It has been reported that the home office only seeks to deport individuals whose sentence is longer than four years (Immigration Rules, Part 13, Deportation and Article 8, para 398(a)) unless they are able to demonstrate otherwise. (A sentence of four years’ imprisonment or more means the person is a serious criminal and “very compelling circumstances” is an extremely high threshold. As a general principle, the greater the public interest in deporting the foreign criminal, the more compelling the foreign criminal’s circumstances must be in order to outweigh it.) However, under para 398(b) the deportation of a person from the UK is conducive to the public good and in the public interest where they have been convicted of an offence for which they have been sentenced to a period of imprisonment of less than four years but at least 12 months. It is common knowledge that anyone who has been convicted of an offence exceeding 12 months’ imprisonment is caught by “automatic deportation” because after the foreign national prisoners crisis the government legislated in

Navinder Sarao: ‘Flash Crash’ Trader’s Extradition Appeal Adjourned

Like Tom Hayes who got burned for benchmark rigging – but is appealing both his conviction and his sentence – Navinder Singh Sarao also suffers from Asperger’s Syndrome (autism). People like them only see the world in black and white and are unable to see shades of grey. Hayes got 14 years which seems to be disproportionate given that UBS had distributed a manual on rigging LIBOR. But he managed to play the Serious Fraud Office and achieved his main objective, i.e. to dodge extradition to the US. Sarao faces a potential sentence in the US, on 22 counts, which may be as long as 380 years’ imprisonment. The charges against Sarao include wire fraud, commodities fraud, commodity price manipulation and attempted price manipulation. He is charged with using his trading algorithm to spoof markets. After being granted bail in August he got his second lucky break and his extradition hearing was adjourned for four months because of changes, which seek to vary the start date of the allegation of the criminal activity by six months, in the charges levelled at him. Sarao was arrested on 21 April 2015. The US authorities, led by the Department of Justice and the Commodities Futures Trading Commission (CFTC) believe that Sarao is a malevolent individual.

But then again the Americans are also still running Guantánamo Bay despite the Obama administration’s promise to close the prison which Lord Steyn famously described by as a “legal black hole”: see post on Shaker Aamer’s return after 14 long years of being held there without charge. Because he does not have a spouse or a child, Sarao was initially refused bail because of posing a “quintessential flight risk” but was finally released on 14 August 2015 by Westminster magistrates’ court when his bail was reduced from £5 million to £50,000. His extradition appeal was due to be heard this month. Hitherto attempts to postpone the hearing scheduled on 25 September 2015 were unsuccessful: see posts here and here. The reasons for postponing the extradition hearing are related to the fact that the US authorities are pressing further charges against him and want to back date his criminal activity by six months to January 2009. Sarao told that Westminster magistrates’ court that he did not consent to being extradited to America.

Hunter into Prey: City Watchdog Exposes its Achilles’ Heel – Part 2

The issues in the last post must be examined in light of the scandal which erupted in late 2014 when the FCA came under heavy fire from the Davis Report because of the highly irresponsible way in which it had leaked sensitive data to the media earlier in March that year. Simon Davis, a partner in the Magic Circle firm Clifford Chance, stressed that there had been nothing less than systemic failure. Davis was adamant that the FCA failed to address the issue of whether the information given out might be price sensitive. The conclusion was unsurprising because the leak culminated in an article in the Telegraph headlined Savers locked into ‘rip-off’ pensions and investments may be free to exit, regulators will say which claimed that the regulator was planning an investigation of 30 million pension policies, some sold as far back as the 1970s. Consequently, big insurance companies had billions wiped off their share prices. The misapprehension that selected annuity products would be picked out meant that major UK insurers saw their share prices plummet. The insurers called for Wheatley’s resignation. Even the Chancellor George Osborne bemoaned he was “profoundly concerned” by the episode. In his inquiry, Davis unearthed multiple failures symbolic of a dysfunctional organisation, and he emphasised that the regulator was “high-risk, poorly supervised and inadequately controlled.”

Davis – who was unsparing in his criticism – held the FCA’s Board responsible for the flaws in the regulator’s controls on the identification, control and release of price sensitive information. The buck ultimately stopped with the board because it “failed in its oversight of the FCA’s executive and … failed to identify the risks inherent in the FCA’s communications strategy.” The episode required urgent action and an external organisation needed to review the board’s practices and effectiveness. So serious were the mechanical failures of corporate governance of the City watchdog. To scotch the confusion, in light of public hearings that ensued, on 17 March 2015 the House of Commons Treasury Select Committee (the Treasury Committee) published Thirteenth Report (2014-2015): Press briefing of information in the Financial Conduct Authority’s 2014/15 Business Plan (HC881).

Navinder Singh Sarao: Criminal Mastermind or Sacrificial Lamb?

This article examines the charges against Navinder Singh Sarao and it argues that he is put in an invidious position in comparison to traders protected by predatory global banks. The Parliamentary Commission on Banking Standards (PCBS) had dubbed bankers “the masters of the universe” because of their repetitious recklessness and disregard for customers and shareholders. Yet, the banks are routinely able to pay their way out of trouble. From that perspective, Sarao becomes a sacrificial lamb and a scapegoat in America’s quest for bringing abusers of the market to justice. Indeed, Nick Leeson – the historic “rogue trader” from two decades ago, who wrecked Barings Bank by losing £832 million and subsequently went to ground – was of the view that Sarao is a likely scapegoat and he may not have foreseen the consequences of his actions. But can we trust the words of Leeson, who in his professional career, seems to have been nothing short of a congenital liar? On the other hand, the information available in the public domain points to the existence of a double standard that puts Sarao in a relatively prejudiced position in comparison with other bent individuals who remain above the law and are treated leniently.

Applying the hierarchy devised by Roger McCormick in Seven Deadly Sins: ‘Retrospectivity, Culpability and Responsibility’ – save that Sarao was not a bank operative – it is apparent that Case 1: “Clustered Criminality” has controversially been put behind Case 5: “Individual Criminality”. Clustered Criminality, of which benchmark manipulation is a classic case, occurs “where there is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved.” Individual Criminality, which the “rogue trader” classically exemplifies, is “where there is clear evidence that a crime has been committed by a bank employee and the culprit (usually acting alone) is identified.” Thus, recent events may be read as turning the hierarchy on its head by putting Case 5: “Individual Criminality” at the apex of culpability. The approach is questionable because