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 »





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 »





Andrew Bailey on the Death of LIBOR

2 08 2017

The ailing LIBOR benchmark, underpinning $500-$800 trillion worth of financial contracts, has been in a state of malaise for many years. Despite the efforts of regulators to revive the sick scandal-ridden benchmark, which suffered from a series of problems related to cheating and misreporting, it is unsurprising that its slow death will finally come in about four years’ time. As the Chief Executive of the FCA Andrew Bailey recently explained the funeral is set for 2021. But some clearly want LIBOR to live longer. Bailey called LIBOR “a public good” but questioned its current usefulness. Among other things, LIBOR related misconduct resulted in civil claims and fines of £9 billion. And, of course, in the criminal context it resulted in “clustered criminality” of which convicted LIBOR rigger Tom Hayes is a prime example. Clustered criminality, which only reflects a very small part of the ills affecting financial services, is when 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.” A succinct account of bankers lying, cheating and colluding to rig LIBOR is found in The Fix where Liam Vaughan and Gavin Finch expose the ills gripping the financial world. Hayes, who operated as “Tommy Chocolate” in the midst of the financial crisis, worked in a culture where “your performance metric” is all about “the edge” and making “a bit more money” because that is “how you are judged”.

In The Spider Network, David Enrich tells the “wild story” of Hayes – who he dubs “a maths genius” – and the backstabbing banking mafia which operated a thoroughly crooked financial system. Breaking the silence in an exclusive interview with The Sunday Times, Hayes’s wife Sarah Tighe vowed to “never stop fighting for my autistic husband, the LIBOR fall guy”. Hayes, who achieved notoriety by miraculously dodging extradition to the US, was jailed for 14 years for fraud but his sentence was reduced to 11 years. Tighe is fighting for her husband’s release and said that she “went apeshit” when officials tried to seize her assets as well. Her morale will undoubtedly be strengthened by the news that former Rabobank traders Anthony Allen and Anthony Conti, who are both British and were convicted at first instance for rigging LIBOR, have had their convictions overturned by the US Court of Appeals for the Second Circuit in New York which found that constitutional rights against self-incrimination had been breached. Tom and Sarah will probably also find solace in the fact that the cycle of cheating was so extreme that even the Bank of England is now implicated in LIBOR manipulation. 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 »