Following recent scandals and allegations
of market manipulation, can financial services adopt
industry-wide culture changes and sweeping reforms, and what
have fined firms done to demonstrate their commitment to
change? Alice Attwood reports.
Reverberations of the Libor and foreign
exchange benchmark fixing scandal can still be felt throughout
the market and the creation of a regulator focused on conduct
is indicative of the focus on employees and the culture
embedded within companies operating in the space.
Principles or Rules?
Regulators have been shifting focus from a
rules to a principles approach to ensure that impending rules
are appropriate for the industry they are governing, as part of
an industry drive to change the culture investment banking.
Tracey McDermott, director of supervision
and authorisations at Britain’s Financial Conduct
Authority, told FOW: "The idea of principles-based regulation
is not new. It has been a key part of the regulatory approach
in the UK for many years.
"What principles-based regulation seeks to
do is to focus on the core outcomes. This approach recognises
it is impossible to set out detailed, prescriptive rules for
every situation in a fast-moving market and that rules can,
themselves, encourage some people to play to the letter, rather
than the spirit, of what they are trying to achieve. It places
more responsibility on firms and those that run them," she
"A universal, one-size-fits-all approach
to regulation works best for principles based conduct,"
suggests president of ACI - The Financial Markets Association,
"This leaves no room for uncertainty and
means market participants all over – regardless of
geographical location – are abiding by the same rules
and held to the same standards of ethics and behaviour. When
regulation is introduced on a national or regional level, you
run the risk of ethical arbitrage," he added.
As documented over recent years, some
financial institutions have failed to keep to this
responsibility. The fallout of the Libor scandal alone lead to
shock and awe, and increased scrutiny over financial
Since then, industry bodies have been
working to ensure more effective checks and balances, as well
as market-wide reviews to ascertain the real scope of the
The Bank of England’s Fair
and Effective Markets Review (FEMR) - established in June last
year - seeks to tackle malpractice and restore confidence in
the fixed income, currency and commodities market, and was born
from the realisation end-users are largely ill-suited to the
task of combating market misconduct across the fixed income,
currency and commodities (FICC) markets.
Opinion has been divided over how best to
strengthen oversight of wholesale markets, what approaches are
most appropriate and which regulatory body should lead the
The FEMR’s consultation
report released in October last year detailed what needs to be
done to reinforce confidence in the fairness and effectiveness
of the FICC markets, and to restore trust, following high
profile cases of abuse.
Established by UK Chancellor George
Osborne, he said of the FEMR: "I am determined to deal with
abuses, tackle the unacceptable behaviour of the few and ensure
that markets are fair for the many who depend on them."
Martin Wheatley, chief executive of the
FCA said: "Much has been done to tackle the underlying causes
of past misconduct, but the perception remains that too often
private interests are placed ahead of fair competitive markets.
Rebuilding trust in these markets will take time and requires
firms and the authorities to take action... Given the essential
role of these markets, it is vital that we get this right."
ACI’s Bailey told FOW:
"Regulators are rightly stepping up efforts to tackle trader
misbehaviour and place ethics at the heart of their market
reforms. There is a clear and urgent need to reform the culture
and conduct of the financial services sector."
McDermott told FOW the FCA will be looking
at codes of conduct in greater depth as part of the FEMR.
The review’s consultation
period ran to the end of January this year, with final
recommendations set to be made in June.
Extraterritoriality has been a stumbling
block for regulators for years. The FCA has been working to
meet the challenge of co-ordinating across borders with
international regulators while also forging ahead with plans to
combat abusive behaviour in Britain.
McDermott said: "We recognise
international solutions are often better than national ones in
"However, we also believe that
London’s role as a leading market means that it
should be seen to be taking the lead in driving for the highest
standards of conduct," she added.
Cross-border issues remain and the
challenge of extraterritoriality casts a shadow over the
market. Yet, while regulators have committed to working
together, there are requirements and standards that vary
between jurisdictions which have conspired to make this an area
of debate for years to come.
While these issues need attention,
operating across different jurisdictions ultimately means that
greater cohesion between regulators is imperative, ACI
FMA’s Bailey told FOW. "We believe a
one-size-fits-all code of conduct, covering important
principles would be appropriate for adoption by all financial
markets participants but are mindful that regional codes have
also been developed across the world which are sometimes
tailored to specific markets."
Wheatley has said the FCA’s
new Senior Manager Regime approach is better than the current
flawed model but the CEO conceded there are some practical
issues: "The challenge is one of practical implementation.
It’s not straightforward, frankly, to manage the
behaviour of many tens of thousands of individuals across
complex, global organisations."
ACI FMA’s Bailey added:
"Levelling the playing field internationally in this way will
provide much needed clarity for financial market professionals.
It is also beneficial for regulators, as they can measure the
behaviour, ethics and conduct of all participants by the same
criteria – regardless of geographical location
– and any misdemeanours can be immediately identified
Fines over Libor are still coming;
Deutsche Bank in April was slapped with fines amounting to more
than $2.5 billion over the manipulation of London, Euro and
Tokyo benchmark interest rates.
The bank was ordered to pay the biggest
fine yet over Libor and to terminate and ban individual
employees who engaged in misconduct. Deutsche was also required
to commit to create a benchmark and index control group which
oversees the bank’s Ibor submissions.
The German bank subsequently ramped up its
focus on compliance in recent years. Deutsche’s
’Strategy 2015+,’ announced in June
2012, included an 'Operational Excellence’
programme. Within this, €3.6b has been invested to upgrade
technology and operations across the business, including
instilling its "three lines of defence" against future conduct
issues, and upping its front-office supervisory headcount.
Results from an employee-wide survey in
2013 – some 52,000 employees – asked for
opinions and expectations. These results, as well as senior
management discussions, led to the creation of
Deutsche’s six 'core values’:
Integrity, Sustainable Performance, Client Centricity,
Innovation, Discipline and Partnership.
Strategy 2020, updated and launched in
April this year, includes a focus on embedding "deep-rooted
cultural change," said the bank, with controls, risk
governance, compensation deferral and diversity on the
Barclays was hit hardest by global
regulators when it was fined over $2.5bn in late May as part of
bigger action against six banks over foreign exchange benchmark
manipulation which saw them fined over $5bn.
The bank has in recent years taken steps
to 'Transform’ the business, that is: Turnaround,
Return Acceptable Numbers, Sustain Forward Momentum.
"Transform" included a new code of conduct
for employees, The Barclays Way, which included training to
meet their working requirements: "Every colleague must abide by
this and annually attest to having read and understood it,"
said the bank.
In a speech on 'Trust and Trustworthiness
in Banks and Bankers’ in New York last year,
Barclays chairman, Sir David Walker, said the
bank’s culture is taking shape as it works to
embed its values.
"This is a journey to which the best
support from the regulator is likely to be in the form of
high-level and relatively detached encouragement rather than
prescriptive rule-making, which is all too likely to be
counterproductive," echoing sentiment from across the industry
that a step away from a rules-based approach may be more
appropriate for the modern trading landscape.
More costs to come
Earlier this year a report for Morgan
Stanley analysts said Europe’s banks are facing an
estimated $52bn in fines and litigation costs over the next two
years, with RBS and Barclays set to pick up the biggest
"FX settlements underscore (the) need to
prove culture and business models are transformed before
returns and payouts can rise," analyst Huw van Steenis said in
the bank’s note.
At the time, Morgan Stanley estimated that
UK government majority-owned RBS, will have to pay another
$10.6bn on top of the $12.6bn already paid or provisioned for,
while Barclays, could have to pay another $8.3bn, HSBC $7.7bn,
Lloyds $6.1bn and Deutsche Bank $5.1bn.
They also estimated that future litigation
costs for European banks would include $6.5bn for interest rate
benchmarks Libor and Euribor, and $9.4bn related to US
Accountability has been creeping up the
agenda for regulators. Britain’s FCA in March
outlined the thinking behind next year’s proposed
Senior Managers Regime, with Wheatley stating that the SMR is
important because it demonstrates an acceptance that
professional accountability is a priority because it makes
Under the SMR, the FCA has urged City
firms and managers to embrace the reform that forces
individuals to be more accountable for conduct on their
Increased professional accountability -
for both individuals and companies - has only increased as a
result of high profile scandals.
US Commodity Futures Trading Commission
commissioner Sharon Bowen highlighted in March the increased
focus on culture in the industry.
"It’s not just that we need
to disincentivise people from going against the rules. I think
we also need to improve the culture of communication within
financial firms. In a world as complex and convoluted as
finance, it is easy to make mistakes," said Bowen.
"Every company needs to make it easy to
fix or mitigate those mistakes, and that requires a culture
where information about mistakes easily travels from the bottom
to the top and vice versa," she added.
The link between regulation and conduct is
inextricably linked, Bailey, president of ACI FMA, told FOW,
and professional accountability is imperative.
"Ultimately, it comes down to the
behaviour of individual market participants, and the ability of
their supervisors to enforce the standards required through
oversight and governance. The actions of this relatively small
and unrepresentative minority have damaged the reputation of
the market in the eyes of the public, and the industry must now
support regulators to drive positive cultural change and
demonstrate that bad behaviour isn’t widespread
across the market," he said.
Regulation vs Culture
But what is more appropriate - a focus on
prescriptive regulation itself, or the conduct of employees and
the culture within businesses themselves.
The two go hand in hand, but regulators
are implored by industry participants to consider the
practicalities of potential rules ahead of implementation.
Speaking at The ACI UK - The Financial
Markets Association’s Square Mile Debate in March,
Gavin Wells, global head of LCH.Clearnet’s
ForexClear and CDSClear businesses, warned: "You cannot be
prescriptive with regulation. Rules should not be so specific
that creativity is lost from within a market, there needs to be
a balance between conduct and regulation, and at the centre of
this balance is people."
David Clark, chairman of the Wholesale
Markets Brokers Association, said: "Behaviour has changed more
than people think. The fines, especially the scale of the fines
has scared people. The subsequent impact on individual
behaviour has been huge, and on the whole, underestimated by
McDermott conceded that while the industry
has come some way, conduct has to remain the key focus for
financial professionals: "The issue with FX or Libor was not
the technology, it was market participants working together in
an attempt to game the market. In many ways, it was very
traditional misconduct simply carried out in a different way as
a result of different technology."
Bailey told FOW: "Regulation alone will
not stop bad behaviour, as it is rarely ever harmonised across
borders. This means codes of conduct have a key role to play,
and the best scenario would be for such codes to be implemented
and backed up by legislation," he said.
A trader code?
The foreign exchange and derivatives trade
body recently launched its updated code of conduct, the Model
Code, and called for international co-ordination between
national regulators to ensure against abusive behaviour by
bankers and traders.
ACI FMA has said FX market participants
should consider adopting a process under which managers
periodically supervise FX policy compliance by their staff,
indicating the trade body’s focus on conduct and
transparency across the FICC markets.
"There is a clear and urgent need to
reform the culture and conduct of the financial services
sector," said Bailey.
The trade association has acknowledged
that there is more to be done to ensure behaviour changes and
global institutions are clear on what is and isn’t
"The idea of the ACI’s Model
Code being used as a 'stamp of approval’ adopted
by the industry, is worthy of consideration," a source told
FOW. "At a high level, this already happens, and this framework
is already used by central banks. Official adoption of the code
would be a positive thing as it would create a level playing
WMBA chairman Clarke backed the idea but
noted: "The potential power in a code of conduct is still not
fully exploited. Regulators have realised the potential
positive impact that a code of conduct can have on trading
Another market source, who did not wish to
be named, told FOW: "Codes of conduct have always existed but
they must be updated and evolve to suit our evolving
"In the traditional voice-trading
environment, a trader’s word was his bond; there
was an expected and accepted 'gentleman’s
agreement’ that was kept to," he added.
"Many firms have adopted their own
internal codes of conduct, and are required to complete
frequent training to ensure they are up to date with
requirements; this is common practice nowadays," said Darryl
Hooker, head of Icap’s EBS Market.
Indeed CFTC Commissioner Bowen has called
for employee requirements to "become part of the DNA of the
Failure to comply
What is abundantly clear is that the
repercussions of failing to meet internal and industry
requirements should be severe, through fines, dismissal, or, if
appropriate, imprisonment, to protect companies and the
industry from future violations.
The responsibility to meet such
requirements lies with individuals and companies.
Bowen said: "Each organization should have
codes of conduct, rules of ethics, and conflicts of interest
that are clear. Failure to adhere to this standard, absent
significant extenuating circumstances, should result in
termination of employment."
Indeed, following the record fines that
Deutsche was served in April, the bank was ordered to terminate
and ban individual employees who engaged in misconduct; ten
employees who were involved in the misconduct have already been
terminated, according to documents from regulators.
However, while fines have been issued over
compliance failures, there have been reoffenders.
"If a company has a number of violations,
the sanctions for future violations would inherently have to be
more severe to discourage recidivism, and it is possible that
more than one person at the company among senior management
would also be on the hook," said CFTC Commissioner Bowen.
Bowen noted in March the effect that
reoffenders have on the market as a whole. "Too many times,
these settlements and alleged violations are coming from large
actors who have previously run afoul of the rules, endangering
the reputation of those actors and the trust that undergirds
the larger financial system," she said.
"We have a culture problem in finance,
full stop, and it’s getting to the point of
endangering firm’s profits and our
system’s sustainability and stability," she
Compliance is now the biggest hiring area
in financial services. A recent PwC study, the 'State of
Compliance,’ said that compliance officers are
still facing challenges in understanding the full scope of
PwC supports industry calls for greater
education of participants to ensure they are adhering to
requirements, noting: "To be effective, compliance oversight of
industry-specific regulations requires both knowledge of the
regulatory requirements and associated
expectations—and deep familiarity with the business
The survey also noted that in financial
services, the top skillset required when hiring for corporate
compliance teams is 'compliance or ethics,’
beating applicants with a legal background and industry
"These [compliance] teams are tasked with
care-taking the whole business," EBS’s Hooker told
The PwC study said 64% of financial
services organisations reported increased compliance staff
levels in the past year.
This is now a requirement for operating
within financial markets. "While additional checks and balances
around compliance may have started out as frustrating, they are
now woven into the fabric of operations. In fact, it would
almost be abnormal not to have this focus now,
it’s a part of daily life," added Hooker.
A source told FOW: "Protecting banks from
employee behaviours is now the name of the game, and this is
why we’ve seen such an increase in investment into
surveillance and compliance divisions. Banks would much rather
spend £100 million on infrastructure and compliance to
protect themselves than billions on fines."
While positive steps are certainly being
made, WMBA’s Clark warned: "An unintended
consequence of over-exuberant regulation is the hit on
liquidity. I expect to see this during 2015."
McDermott told FOW: "There has already
been significant regulatory change, the most obvious example
being the establishment of a regulator focused on conduct. But,
ultimately, a cultural change cannot be brought about by
"Looking ahead, scrutiny will only
continue and increase. It remains to be seen what effect this
will have on trader behaviour," warned a former head of FX
"We have come some way," concedes the
FCA’s McDermott. "Certainly when I speak with
senior figures in the industry I know conduct is at the top of
When considering whether an industry-wide
shift in focus for regulation – from rules to
principles-based – market participants suggest that
both can work: "It is the lack of understanding that creates
regulatory uncertainty – this is the enemy and is very
damaging to the market," said the WMBA’s
EBS’s Hooker said, "The
difference is rules are definitive and principles are open to
interpretation. This therefore causes a struggle; running both
in tandem, not contradictorily."
McDermott warns the battle is not yet over
and that changes to the culture of an industry is no mean
Thus the future challenge is change:
"Ultimately unless this change in culture becomes part of the
DNA of firms, unless the front line owns this change and buys
into it, it won’t happen, no matter how many fine
words there are from those at the top and no matter how many
thousands of compliance staff firms employ."
culture at financial institutions will be discussed indepth at
FOW’s Regulation 2015 event on 8 September. For
more information and to register, visit www.fow.com/events.