Banking and Misconduct: A Critique of the Cure of Culture

28 03 2018

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. Read the rest of this entry »





Court of Appeal Opens the Door to LIBOR and Benchmark Misrepresentation Claims

21 03 2018

Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2018] EWCA Civ 355 (02 March 2018)

Infamously, the London Inter-bank Offered Rate (LIBOR) used to be a code word for corruption in the world of finance. In more ways than one, it is still a dirty word from the point of view of ethics. However, even now, despite planning to phase it out by 2021 and replacing it with a proxy, the FCA calls LIBOR a “systemically important benchmark”. Property Alliance Group (PAG) appealed Asplin J’s decision to dismiss its claims against the Royal Bank of Scotland (RBS) arising out of interest rate swap agreements. RBS advanced funds to PAG at interest rates referenced to LIBOR, which was published relying upon submissions from panels of banks on borrowing rates. These proceedings arose out of four swaps that RBS sold to PAG between 2004 and the spring of 2008. The first swap had a trade date of 6 October 2004 and a notional amount of £10 million. The second swap had a trade date of 25 September 2007 and a notional amount of £15 million for 4 years and then £30 million for a further six years. The third swap had a trade date of 14 January 2008 and a notional amount of £20 million. The fourth swap had a trade date of 16 April 2008 and a notional amount of £15 million. The global financial crisis of 2007-2008 trigged a fall in interest rates. All the swaps were tied to 3 month GBP LIBOR which plummeted and stayed low. The upshot was that the rates of interest that PAG was paying under the swaps far exceeded what it was receiving under them.

One consequence of the prolonged period of unusually low interest rates was that the swaps had a very large negative market-to-market value (MTM) from PAG’s point of view. The break cost incurred by PAG in 2011 was correspondingly substantial. PAG issued proceedings in 2013 seeking relief by way of rescission of the swaps and/or damages. The claims were divided into three categories: “the swaps claims”, which involved allegations of misrepresentation, misstatement and breach of contract on the part of RBS in connection with its proposal and sale of the swaps to PAG; “the LIBOR claims” which rested on RBS’s knowledge of and participation in manipulation of LIBOR rates; and “the GRG claims” by which PAG complained of breaches of contract arising out of its transfer to, and subsequent management within the controversial Global Restructuring Group to which RBS transferred its relationship with PAG in 2010. Asplin J dismissed the claims in their entirety. However, despite dismissing the onward appeal, light of the circumstances Sir Terence Etherton MR, Longmore and Newey LJJ were satisfied that RBS did make some representation to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR. Read the rest of this entry »





Habib Bank Expelled From New York

9 09 2017

The case of the Bank of Credit and Commerce International (BCCI), which had fairy tale beginnings and patronage from the ruler of Dubai, is a historic example of a global private Pakistani bank that was shut down because of large-scale financial crime and money laundering. BCCI gave other lenders “bad vibes” and quickly acquired the nickname “the bank of Crooks and Criminals”. The closure of BCCI gave rise to the most costly and extravagant litigation in a generation. Indeed, as the late Lord Bingham discerned, investigating BCCI’s global malpractice “if a possible task, is one which would take many years to carry out”. Now the story seems to be repeating itself with Habib Bank – Pakistan’s largest bank headquartered in Karachi with $24bn worth of balance sheet assets and $1bn in annual revenue – which has been fined $225m because its New York branch failed to comply with New York laws and regulations designed to combat money laundering, terrorist financing, and other illicit financial transactions. Compliance failures were said to have “opened the door” to financing Saudi sponsored terrorism. Transactions were “batch waived” and management was unable to explain their actions. The news comes just days after the announcement that the Department of Financial Services (DFS) is seeking to enforce a civil monetary penalty of $629.625m on the bank. These enforcement actions by the DFS are a grim reminder of the poor culture plaguing banks and misconduct besetting financial institutions. DFS said it would not let the bank “sneak out” of the US without due accountability. In terms of culpability, the failures can be classified as “corporate integrity-related regulatory breach” and/or “imputed breach” events.

Because of significant weaknesses in the its risk management capabilities, the branch received the lowest possible rating of “5” in the latest compliance assessment conducted in 2016. The case for using conduct costs as a framework for analysing in the banking sector in Pakistan has already been articulated on this blog. If anything, the fines imposed by DFS certainly make Habib Bank the foremost – i.e. number “1” –financial institution for poor conduct in Pakistan itself. But of course it is equally true that Habib Bank’s delinquencies are surpassed by the toxic level of failings connected to the £264bn in conduct costs incurred by the world’s foremost international banks including Bank of America, JPMorgan Chase, Morgan Stanley, Lloyds Banking Group, Barclays, HSBC and so forth. As Lord King aptly puts it a decade after the global financial crisis: “Very smart people thought it was fun and completely acceptable to exploit less smart people.” The scale of poor conduct in the New York branch, which processed banking transactions worth a total of $287bn in 2015, raises serious questions about the state of affairs in the banking sector in Pakistan itself where corruption is widespread and regulation is diluted in comparison to the West. Read the rest of this entry »





Supreme Court: Equity’s Darling and Guidance on Enforceability of Trusts where the Institution is Unknown

3 09 2017

Akers & Ors (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6 (1 February 2017)

In this appeal, Lords Neuberger, Mance, Sumption, Toulson and Collins unanimously held that a trust could be created, exist and be enforceable in relation to assets located in a jurisdiction where the law did not recognise trusts in any form. Many of the issues in earlier proceedings fell away. But nonetheless, because of the shifting focus of submissions, Lord Mance prefaced his lead judgment by describing the issues as “novel and difficult”. Proceedings were brought against Samba Financial Group (Samba) by Saad Investments Co Ltd (SICL) and its Joint Official Liquidators (the liquidators) who were appointed in winding up proceedings in the Cayman Islands which were subsequently recognised in England as a foreign main insolvency proceeding under the Cross-Border Insolvency Regulations 2006. Samba sought to stay the claim on the ground that rather than England “there exists another forum [i.e. Saudi Arabia] which is clearly and distinctly more appropriate”. Over the course of time, the ground morphed into the argument that SICL’s claim had no prospect of success and the case proceeded in the Supreme Court on that basis. Similarly, the appeal was presented to the justices on certain assumed facts. Shares valued at approximately $318m in various Saudi Arabian banks were held by Mr Al-Sanea (AS) on trust for SICL which went into liquidation by virtue of which Mr Stephen John Akers came to be one of its liquidators.

AS was the registered owner of the shares in the Saudi Arabian Securities Depositary Centre and SICL claimed that he had agreed to hold these Saudi Arabian shares at all material times on trust. Six weeks after the liquidation, in a series of six transactions, the shares were transferred by AS to Samba to discharge personal liabilities he owed them. Two other assumptions were made. Firstly, that Cayman Islands law governed the trusts. And secondly that the law of Saudi Arabia, the “lex situs” of the shares, does not recognise the institution of trust or a division between legal and proprietary interests. Saudi Arabian law does, however, recognise the institution of amaana – a kind of bailment construable as a trust – but its precise effects remained unexplored in evidence. Relying on section 127 (avoidance of property dispositions, etc) of the Insolvency Act 1986, SICL and the liquidators argued that the transfers of shares were and are void as a result of the “disposition of the company’s property … made after the commencement of the winding up”. The English law doctrine of “equity’s darling” is missing from other jurisdictions where a transfer to a third party might override beneficiaries’ rights, possibly overlooking any equitable interest at all. Read the rest of this entry »





Conduct Costs on the Rise (2012-2016): No End in Sight

25 08 2017

The latest findings on misconduct in financial services reveal an upward trend in conduct costs. During the five-year period 2012-2016, the world’s 20 leading banks have paid £264bn for bad behaviour. This represents an increase of 32pc on the period 2008-12. A worrying aspect of adverse bank behaviour is reflected in the uninhibited expansion of conduct cost provisioning. The key question, explains Chris Stears, relates to the average level at which these costs will settle. “We find ourselves wondering when, if ever, the level of conduct costs will start to decrease,” is how Roger McCormick puts it five years after publishing the first league table for international bank fines. These concerns can only be magnified by new developments such as the Royal Bank of Scotland’s recent $5.5bn settlement with the Federal Housing Finance Agency to resolve toxic mortgage claims in relation to the lender’s issuance and underwriting of approximately $32bn of residential mortgage-backed securities in America. Equally, the fact that the US Federal Deposit Insurance Corporation is suing major British banks for $400bn cannot possibly alleviate people’s worries or instil confidence in banking institutions. Brought on behalf of 39 rescued American banks, the US government’s claim in London relates to LIBOR “lowballing” and the defendants include household names such as such as Barclays, Lloyds Banking Group and Royal Bank of Scotland. Even partial success in a claim of this nature could radically enhance the present level of conduct costs.

But still all this is only the gentle way in punishment. Conversely, the Qatari crisis that has hit Barclays may well trigger the beginning of the end for high-powered management personnel who have thus far generally enjoyed immunity from criminal justice. Ongoing fraud investigations against Barclays and John Varley (former CEO), Roger Jenkins (former Executive Chairman) and Richard Boath (former European Head) must have sent shockwaves through out the banking industry. The trio’s trial will undoubtedly be a closely watched and studied event and if they are convicted the game-changing Qatari fiasco shall define things for future times. The US authorities have also charged two managers from Société Générale, for participation in a scheme to rig US dollar LIBOR. Danielle Sindzingre and Muriel Bescond boosted Société Générale’s creditworthiness by submitting false information in relation to the rates at which the bank would be able to borrow money. As we already know the “numbers tell a story” and since the risks are very great “in the case of bank behaviour, they speak louder than words, and they tell a big, and scandalous, story.” Read the rest of this entry »





Supreme Court Clarifies the Law on Security and Enforcement of Foreign Arbitration Awards

21 08 2017

IPCO (Nigeria) Ltd v Nigerian National Petroleum Corporation [2017] UKSC 16 (1 March 2017)

These proceedings involved the question whether the appellant Nigerian National Petroleum Corporation (NNPC) should have put up a further $100m security in English enforcement proceedings connected to a Nigerian arbitration award for $152,195,971 plus 5m Nigerian Naira plus interest at 14% per annum arising out of an agreement under which IPCO (Nigeria) Limited (IPCO) contracted to design and construct a petroleum export terminal for NPCC. The Supreme Court unanimously allowed the appeal. Giving the sole judgment, Lord Mance reversed the Court of Appeal’s decision and imparted much needed guidance on the provisions of the Arbitration Act 1996. He also said that rule 3.1(3) of the Civil Procedure Rules 1998 was not relevant to the appeal. The recognition and enforcement of foreign awards is addressed by sections 100-104 of Part III of the 1996 Act and these provisions implement the UK’s obligations under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Lord Mance explained that section 103, which sets out conditions for refusal of recognition of enforcement of awards under the Convention, was key to resolving this case. His Lordship construed the provision to hold that the court has no power to impose security when making orders under section 103(2) and section 103(3). Instead, only an order made under section 103(5) can be made conditional upon the provision of security by the award debtor.

IPCO is a turnkey contractor specialising in the construction of on-shore and offshore oil and gas facilities. The arbitration was conducted pursuant to a contract made in 1994 which was subject to Nigerian law and provided that disputes would be settled in accordance with the Nigerian Arbitration and Conciliation Act 1988. IPCO has been seeking to enforce the award in this jurisdiction since November 2004. In 2009, evidence tendered by a former IPCO employee enabled NPCC to challenge the entire award on the basis that IPCO inflated quantum by using fraudulent documentation. The English courts accept that NNPC has a good prima facie case regarding IPCO’s fraudulent behaviour and realistic prospects exist for the whole award to be set aside. NPCC’s challenges to the award are still pending in Nigeria for non-fraud and fraud reasons. Notably, however, NNPC’s application to amend its pleadings in the Nigerian proceedings to raise the fraud challenge was adjourned by consent and never determined. Read the rest of this entry »





FSMA and Third Party Rights: Victory for FCA in Supreme Court

17 08 2017

Financial Conduct Authority (Appellant) v Macris (Respondent) [2017] UKSC 19 (22 March 2017)

The FCA emerged triumphant in this appeal and the outcome has altered the fortunes of persons regulated by the City watchdog. Reversing the Court of Appeal’s judgment, the Supreme Court held by majority that Mr Achilles Macris (M) had not been identified in the Final Notice given to JPMorgan Chase (JPMC). Accordingly, any “third party rights” under section 393 of the Financial Services and Markets Act 2000 (FSMA) were not engaged because the notice did not identify M when interpreted by information readily available in the public domain. Lord Sumption found the analogy with the law of defamation to be unhelpful. Lord Mance said that this was “a difficult case” and Lord Neuberger said it was “difficult to resolve” the meaning of the word “identifies” in section 393(1)(a) despite the provision being a “good example” of Parliament’s enactment of generally lucid statutory language. Lord Wilson entered a note of dissent and he would have dismissed the FCA’s appeal. In 2012, the Synthetic Credit Portfolio (SCP) operated by JPMC had lost $6.2bn because of the rogue “London Whale” trades. Because of the notorious losses the Final Notice entailed a financial penalty or “conduct costs” of £137.6m. Between 2012-2016 the world’s 20 foremost international banks paid a total of £264.03bn in conduct costs of which JPMC’s share was £33.64bn. As the head of the Chief Investment Office, which managed excess deposits including the portfolio comprising the SCP’s traded credit instruments, M’s functions as JPMC’s employee were “controlled functions” under section 59 of FSMA.

The losses were linked to high risk trading tactics, feeble management and failing to react to information alerting JPMC to the SCP’s problems. The appeal, explained Lord Sumption, turned on the meaning of “identifies” and on the meaning of the notice to which that word is being applied. The section 393 procedure aims to enable identified third parties, such as M, working in financial services firms to make representations to the regulator and take the matter to the Upper Tribunal (UT). Persons not party to regulatory settlement but discredited in enforcement notices are protected from unfair prejudice via the mechanism in section 393. A copy notice must be served to the third party but M was not given one. M had not been identified by name or job title but only as “CIO London management”. M argued that since he had already been identified by name in a US Senate Committee report on the SCP’s losses, the FCA notices enabled anyone to deduce the identity of the person known as “CIO London management”. M was not a party to the FCA’s settlement with JPMC. He was separately fined £762,900. Read the rest of this entry »