King and Country: Reflections on the Costs of Market Misconduct

1 04 2016

Read as updated SSRN paper with reference to the Panama Papers. Because of the Budget 2016, the chancellor has been accused of “looking more like Gordon Brown as a purveyor of gimmicks.” In difficult times when calls for his scalp over the row regarding the budget seemed to have eclipsed everything else, the rare bit of good news for George Osborne is that he can use the opportunity provided by the threat of Brexit – “a leap in the dark” which may cost the UK £100 billion or 5 per cent of GDP and 950,000 jobs by 2020 – to camouflage and obfuscate the real problems of conduct in the world of economics and finance. On the other hand, in an important interview with Charles Moore the former Bank of England governor Mervyn King showed hallmark signs of euroscepticism and said the people need to make up their own minds about the upcoming referendum. King also warned that lenders have not stopped taking excessive risks with savers’ money and the result is “bankers have not learnt the lessons of the Great Crash”. Unsurprisingly, in his somewhat controversial new book The End of Alchemy he makes the case against financial sorcery by arguing that it must be squeezed out of the world’s banking system. Perhaps, such failings are amplified further because “financial crises are a fact of life” and we are “moving into a rerun of the credit crunch”. Indeed, Lord King calls banks “the Achilles heel of capitalism.”

Below I sketch important/emerging issues in the intersecting themes of economics, law and misconduct as seen in the media, especially through the lens of “conduct costs” – some other themes are also explored. Mentioning Walter Bagehot and his classic text Lombard Street, which argued that the BoE should provide short-term financial support in times of crisis, King advises us that the old “lender of last resort” model (LOLR) is in need of revision because “banking has changed almost out of recognition since Bagehot’s time.” The former governor argues that the time has come to replace LOLR with the pawnbroker for all seasons (PFAS) system. For him, it is time for financial institutions to drop LOLR and embrace PFAS and be prepared to advance funds to just about anyone who has sufficient collateral. “The essential problem with the traditional LOLR,” argues King “is that in the presence of alchemy, the only way to provide sufficient liquidity in a crisis is to lend against bad collateral – at inadequate haircuts and low or zero penalty rates.” Read the rest of this entry »





LIBOR Roundup: Fraud, Misrepresentation and New Directions in Civil Proceedings

30 03 2016

ICE Benchmark Administration, which took over LIBOR from the BBA in 2014, has published a roadmap for LIBOR and banks will no longer be able to manipulate the interbank rate once a new system comes into place this summer connecting the IBA’s computers to banks’ trading systems. “We built new systems to do the surveillance which run about 4m calculations every day, looking for collusion, or aberrant behaviour, or possible manipulation,” explained the IBA’s president Finbarr Hutcheson. He expressed confidence that traders will no longer be able to lie to improve their trading positions and said that anomalies would be investigated and reported to the FCA. The banks have paid billions in fines in relation to the benchmark’s manipulation. The Wheatley Review 2012 engineered and guided LIBOR’s transformation because the distorted benchmark, underpinning more than US$350 trillion in outstanding contracts, was “not fit for purpose”. But of course, the review’s author Martin Wheatley was ousted from office because of his overt aggressiveness, or his “shoot first” and “ask questions later” policy for bad banks. Under IBA oversight, daily LIBOR rates will be rooted in market transactions “to the greatest possible extent” by using a “waterfall” system devised to begin with transactions but relies on human input in circumstances when trading volumes decline.

IBA is extremely confident that the move will bring rectitude to the scandal ridden financial sector. Hutcheson said that coupled with the earlier changes, the roadmap will ultimately make LIBOR “one of the world’s most trusted, scrutinised and robust financial benchmarks.” Insofar as benchmark rigging from the old days is concerned, after the settlement (2014) in the series of reported judgments in the Graiseley Properties case, new claims have been brought and a series of fresh judgments were published in litigation arising out of disputes between the Property Alliance Group – a property developer with a portfolio worth about £200 million – and the Royal Bank of Scotland. RBS has been in the spotlight recently because of the fact that it has failed to generate profit for eight successive years and that its losses since the global financial crisis 2008 have exceeded £50 billion which is more than the £45 billion of taxpayers’ money used to bail out the ailing institution. Read the rest of this entry »





Hunter into Prey: City Watchdog Exposes its Achilles’ Heel – Part 1

6 07 2015

Achilles “When the pendulum swung back it did so in dramatic fashion,” claims the iconic Howard Davies in his admirable sketch of the 2008 global meltdown entitled Can Financial Markets Be Controlled? “Bankers have vanished from the Honours lists in London. They are barely respectable in New York,” continues the first ever chairman of the abolished Financial Services Authority (FSA, 2001-2013). Yet in May 2015 the tide turned against the FSA’s successor. In The Financial Conduct Authority (FCA) v Achilles Macris [2015] EWCA Civ 490, the legal pendulum swung back in favour of the banks because an unhesitant Court of Appeal safeguarded the reputation of the global financial elite by unanimously dismissing the FCA’s appeal against the decision of the Upper Tribunal: reported as [2014] UKUT B7 (TCC). At first blush, the decision looks like a small step. But properly understood it significantly derails clichés about the bugbear of evil bankers. It equally exposes the FCA’s Achilles’ heel. The issue before Longmore, Patten and Gloster LJJ was whether the FCA’s notices identified Mr Achilles Macris for the purposes of section 393 of the Financial Services and Markets Act 2000 (FSMA) in which case the watchdog ought to have given him third party rights. The third party procedure secures the fair treatment of the reputation of third parties so that they are not presumed guilty in the enforcement process.

Oddly, despite the recent 800th anniversary of the fight for freedom incorporated in Magna Carta, present day executive procedures are not being properly followed. These two posts argue that the tough talking FCA’s Achilles’ heel is becoming increasingly exposed not only because of the important issues in the landmark case of Macris but also because of its unpardonable misconduct in relation to the Telegraph article headlined Savers locked into ‘rip-off’ pensions. Mishaps such as these seem to be turning the hunter into easy prey and questions loom large over its prowess to hold mischief to account. Similarly, these two posts also examine the new Senior Managers and Certification Regimes and question the conventional wisdom in relation to whether a heftier rulebook will bring us closer to a better formula for conduct. Light is also shed on the Supreme Court’s existing jurisprudence involving the FSA/FCA because Macris is in the process of being appealed Read the rest of this entry »





Rock Center: Ten Myths of Say on Pay

17 11 2012

This post summarises the findings of an interesting paper called Ten Myths of Say on Pay (Larker et al) published by the Rock Center for Corporate Governance. The executive remuneration debate is hard to balance and at times even harder to conceptualise. Other academics such as Professor Cheffins and Randall Thomas argue that sudden increases in pay can be controlled through say on pay but in the long run executive pay would continue to increase. It seems that there is truth in both approaches and the Rock Centre’s paper is worth reading to get insight on the remuneration debate in a US-UK perspective. In any event, the “ten myths” are:

(1) There is only one approach to say on pay: it is argued that given the views that are out there, no one can agree on how to solve the problems of compensation.

(2) All shareholders want the right to vote on executive compensation: it is said thatPrior to Dodd-Frank, shareholder support for proxy proposals requiring say on pay routinely failed to garner majority support. Among the 38 companies where shareholders were asked to vote whether they wanted the right to vote on executive compensation in 2007, only two received majority approval. Read the rest of this entry »





Directors’ remuneration: proposed amendment regulations

29 09 2012

Lucian Bebchuck and Jesse Fried’s seminal study Pay without Performance: The Unfulfilled Promise of Executive Compensation and similar critiques have killed stone-cold the argument that arm’s-length contracting works: the argument has not been resurrected and it is widely accepted that in the corporate sector pay remains decoupled from performance. For Bebchuck and Fried – both professors of corporate law at Harvard University – management can easily manipulate directors and, rather than creating value for the company, everyone is more interested in personal gain at the cost of the company.

From this perspective “market forces are neither sufficiently finely tuned nor sufficiently powerful to compel” the conventional view of corporate governance which assumes that executives will be rewarded for performance and not failure. It is therefore not surprising that in order to win voters’ support, governments everywhere in Europe are making promises to reform the dynamics of the pay and power equation.

The Secretary of State for Business Innovation and Skills (Mr Vince Cable, “the business secretary”) is keen to be seen as a promoter change in the business world and is hence proposing reform which strengthens shareholder democracy and promote the public interest. Read the rest of this entry »





Shareholder Democracy, Corporate Governance and Future Reform

25 09 2012

Writing on the corporate governance blog earlier this month, Bob Tricker observed that “serious”  interest in corporate governance is a recent phenomenon which only came to the fore following Sir Alan Cadbury’s 1992 Report. The dichotomy is that despite the existence of regulatory bodies such as the US Securities and Exchange Commission since the mid-1930s, it was not until problems such as the Enron scandal, the sub-prime crisis and more recent Libor scandal – that “corporate governance” became a buzzword in the business sphere, company law and regulation.

For Tricker, corporate governance  – to which constructs such as marketing, production, finance, operations research, and management information systems have only recently ceded ground – is quickly becoming the focus of a company’s organisational chart. Themes such as the board of directors, executive directors’ remuneration and their relationship with management are all now very much at the apex of the debate about issues such as shareholder democracy, accountability and transparency in the corporate sphere. It is often said that good corporate governance is about promises kept: Macey, Corporate Governance: Promises Kept, Promises Broken (2010). Conversely, bad corporate governance is considered “promise breaking behaviour”. Read the rest of this entry »