King and Country: Reflections on the Costs of Market Misconduct

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.”

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

FSA’s Response to Fixing LIBOR

The Financial Services Authority’s Response to the Treasury Committee’s Second Report of Session 2012–13, Fixing LIBOR: some preliminary findings was published by the Committee on 21 February 2013. It is worth recalling that the Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Services Authority (FSA). And, of course, the FSA’s response makes rather interesting reading (see below).

But prior to setting out the FSA’s responses, it is apposite to note the Committee’s Chairman Mr Andrew Tyrie MP (Conservative, Chichester) comments who said that:

• Our inquiry uncovered appalling behaviour and serious failings at many levels in Barclays; on the trading floors, on compliance desks and amongst senior management.

• It is now clear that these failures were not limited to a single institution. The systemic rigging of important rates appears to have been pervasive in the banking industry over a long period of time.

• Serious regulatory shortcomings also came to light. It is only right that the FSA has had to shoulder its share of the blame for this scandal.

The New Governor From Canada

Canada’s Mark Carney has had a long and successful career in global banking, finance and regulation. Yet prior to George Osborne’s announcement – just two days ago on 26 November 2012 – that Carney would replace Mervyn King (upon his retirement on 30 June 2013), the Canadian who has become the first foreigner to rise to the position of the Governor of the Bank of England was virtually unknown to the Brits. But Carney, who relishes a challenge, has had a very distinguished career and is currently the Governor of the Bank of Canada and is credited with guarding the Canadian economy against the worst of the global financial crisis. And, since last year, the celebrated regulator with a Goldman Sachs’ background, has also served as the head of the Financial Stability Board: a role which requires his oversight in respect of the regulatory agenda of the Group of 20 leading industrialised and emerging economies.

Here are some of the thoughts that Carney has shared with the media:

• Global systemically important banks have been identified and will be subject to higher capital requirements and mandatory recovery and resolution plans. This framework is also being extended to other systemic financial firms.

Wheatley: Libor Needs Strengthening

The Wheatley Review (the “review”) commissioned by the Chancellor of the Exchequer published its initial discussion paper earlier this month. The Chancellor commissioned Martin Wheatley, the Chief Executive designate of the Financial Conduct Authority to review how the current framework for setting and governing Libor could be reformed. The options included (1) making participation in the setting of Libor a regulated activity; (2) using actual trade data to set Libor; and (3) enhancing transparency in the governance and setting of Libor.

The review’s initial paper – spread over five chapters and three annexes – identifies Libor’s failings and how the benchmark rate could be strengthened. Equally, the review considers the alternatives to using Libor. Moreover, the paper considers the current mechanism and governance of Libor, the criminal sanctions for its manipulation and ends with consultation questions. The questions, which are chapter specific and total fifteen in number, range from do we agree with the review’s analysis of the issues and failings of Libor to should there be an overarching framework for key international reference rates? Responses are requested (within four weeks) by 7 September 2012 to be sent to wheatleyreview@hmtreasury.gsi.gov.uk