Thursday, September 26, 2013

Why I assert that the UK financial regulators have failed the investing public!

A few readers have asked me why I am so outspoken in my criticism of the financial regulators in this country.

I am happy to explain.

I am happy to explain because I have been a Fraud Squad detective with a string of successful convictions of crooked City practitioners; a financial regulator with a long track record of turning over dishonest financiers, and as a lawyer advising financial institutions on the proper way to comply with financial regulations, while still operating profitably, although it is true to say that most of my clients wanted me to show them how to make the money while getting round the law!

I have also written legal text books on the operation of the anti-money laundering laws; I have published widely on the subject of City Fraud; and I have taught at Universities and Law Schools on the proper function of the financial services laws, as well as teaching financial regulation and global best practice in many countries around the world.

So, I am happy to explain!

The primary function and purpose of a financial regulator is to ensure that those who seek or who are required to obtain regulated status to operate in a financial market, are fit and proper to be granted that licence to operate.

They must always bear in mind that the privilege of 'regulated status' is literally, 'a licence to print money', and it is their duty to ensure that it doesn't become a 'licence to steal!'

In order to ensure this, they have to provide themselves with an holistic view of the activities of the market, and they have a duty to ensure that they employ men and women who have the skills, wit and wisdom to be able to understand the implications and impose the arcane rules of the regulatory requirement, while managing their role and function with wit, tact and good humour!

I believe implicitly in the importance of well-run, properly regulated, financial services providers, but I believe that any provider who behaves in the way that all too many banks and financial services companies have behaved in recent years, belongs behind bars.

I am unrepentant in my well-founded belief that a couple of decent convictions for fraud, coupled with a selected series of relevant punishments would do the UK financial services sector a power of good, and would undermine some of the more pompous, self-serving Chief Executives, who, pumped up on their own bombast and their arrogance, believe that they are answerable to no-one, least of all their shareholders. We have had a long procession of such men in the last few years and they have done their industry sector nothing but great harm.

Mind you, theirs was not the sole responsibility for the mess we have found ourselves in, although they bear a significant part of the blame, no, the politicians went along with the snake-oil and the smoke and mirrors which the City pumped out. Gordon Brown believed the manipulated figures so much that he would ritually trot down to the Mansion House dinners and massage the delicate egos of the Masters of the Universe with massive hyperbole, all the while spending their elusive profits like a man with no arms!

The Great Financial Crisis was a combination of greed, hubris and wilful blindness and no contributor, financier, politician or regulator came out of the event with any credit.

As I have said, I am not worried about making this assertion, as indeed, I asserted with confidence to the Commission on Banking that the banking sector in the UK had become synonymous  with an organised criminal enterprise. Perhaps it is not surprising that they made great efforts to suppress my contribution, and in the end, I had to literally force an admission out of Andrew Tyrie, the Chair of the Commission that my report had been circulated to all members of the Commission. I don't know how many contributors have received a personal letter from the Chairman of the Committee confirming that their report was considered properly and circulated properly to all members, but I have one, and that fact alone speaks volumes.

My confidence to make these assertions stems from the fact that I must be one of the very few people left still operating in this field who has had the privilege to study at first hand with real and effective financial regulators, and to have seen just how proper financial regulation could be carried out.

In 1984, I had the great fortune to be sent by my Police Commander to the USA to study how the Americans regulated their financial markets.  I was very concerned at the time by the changing nature of the sort of criminal allegations being brought to our door at the Fraud Squad. Many of them involved investment methods and techniques which were very alien to our understanding and knowledge, involving new models of financial activity, particularly in the areas of derivatives and securitisation.

I was sent to America to observe and report back on US models of regulatory conduct to see if there were lessons we could learn from their experience.

I studied first with the Securities and Exchange Commission (SEC) in Washington, spending nearly a month with these excellent and committed regulators, before spending a similar amount of time down the street with the Commodity Futures Trading Commission (CFTC). I also spent time with the Self Regulating Organisations, before spending time with the regulatory divisions inside the various financial exchanges in Chicago, Philadelphia and New York.

At first, the Americans were bemused by the presence of a 'Scotland Yard Cop' in their midst, because in the US, the roles I and my colleagues in London played were largely not undertaken by detectives, but were left to the respective regulatory agencies, or the FBI in conjunction with the Justice Department.

However, they were very kind and forthcoming and they taught me a great deal about the regulatory process as it was then practised in the United States in 1984. Remember, this was before the days when Regan, Clinton and G.W.Bush conducted their de-regulatory spree, driving whole swathes through the US process, and pulling the teeth of the finest regulatory agency in American history.

I learned that the agencies hired men and women with good business, legal and accounting skills, and then trained them to become dedicated regulators. This was not as difficult as it might at first sound because the kind of people who sought jobs with these agencies at that time, were keen and enthusiastic and had benefited from the 'American Dream', which had seen hundreds of thousands of ordinary working-class kids from all across America, who had grown up in the post-depression financial climate. but who had all managed to get a college education, thanks to the financial stability and the broad-based financial prosperity which had been ushered in by the post-depression financial and business reforms in Roosevelt's 'New Deal Era'.

The New Deal ensured that the US financial markets, which had been undermined and ultimately destroyed by rampant greed and criminality in the early 1920s, were enabled to be re-built by men and women who understood that good and effective regulation can ensure that the financial markets can thrive and prosper when regulated properly, ensuring that crooks and wise-guys, who would otherwise congregate there, were not allowed to flourish.  Not everyone who works in the financial sector is a decent and honourable practitioner, a large number of them have strong criminogenic  tendencies, and accepting this fact is an important step in providing a strong regulatory environment.

This recognition meant going after those who would damage the reputation of the markets, and who would seek to acquire an unfair advantage through their dishonest conduct. It meant that the US was able to build an economy which underpinned a financial stability for a wide cross-section of working people; enabled America to win the Second World War and fund the re-emergence of a shattered Europe from its post-war depression; and ensure the financial and social stability which would provide a new generation of Americans with sufficient means to enjoy a secure economic lifestyle.

These young people understood the vital importance of a well-regulated economy and were keen to take their part in maintaining the effectiveness and efficiency of their markets, realising and recognising the importance of such controls. They were keen and willing to go after those crooks and wide-boys who would threaten the smooth-running of these systems, and so they were hugely motivated to undertake strong enforcement measures against rule-breakers. In addition, their careers would benefit from being seen to be dynamic and hungry for successful convictions and regulatory findings, and there was significant competition between the young staffers to bring home big cases!

The long-term outcome of this environment was that crooks and wise-guys knew that they would be prosecuted and legally challenged at every turn by men and women who were keen to chase them out of the market. They knew that none of them were too big to be prosecuted, that none of them were beyond the reach of the Justice Department, and that every effort would be made to hunt them down. This recognition saw the successful prosecutions of Dennis Levene, Ivan Boesky and Michael Milken for one of the biggest insider dealing and market manipulation episodes in the market's history, and all three men went to jail.

When I left America to return to the UK, I was encouraged by my US friends to put my new skills and knowledge to better use in the new regulatory climate which the British Government purported to be introducing through the regulatory changes being undertaken in 1986.

My biggest mistake was ever to believe that such a regulatory programme could be effectively introduced in the UK. It was naive of me then to suppose that the British would ever introduce any form of regulatory regime which would even begin to match that governed by the US model, yet I came home full of hope that such a structure could be successfully imposed.

I was so wrong!

What I had not then fully understood was just how powerful the City of London, as an independent and hegemonic institution was. I had not fully appreciated just how much the City would do to undermine and emasculate the best intentions of the Government proposals in the Financial Services Bill. I had not fully thought through the implications of the relationship the City has with the organs of Government, and just how much the UK is dependent on the City being willing to continue to pay a form of 'Danegeld' in order to be able to continue operate unmolested. What I had not fully understood was that Government only has a very limited degree of control over the activities of the Square Mile, and what the City fathers do not want to do, they simply will not do, and no Government agency will force them to comply!

This is why, for example, the anti-money laundering laws are generally not enforced as far as the big institutions are concerned. The regulators keep pointing out control weaknesses, in report after report, and the institutions continue to ignore them, secure in the knowledge that the regulators will not take them to task too closely.

What we have inherited is a bastardised remnant of what originally started out with such good intentions. Successive governments originally staffed the new lead regulator with the usual detritus of failed Government departments such as the Department of Trade and Industry (DTI), thus ensuring that the failed regime of earlier control which the new regime replaced was staffed with the same failed staffers who would otherwise have been out of work. The same policy has been observed most recently in the move from the FSA to the FCA!

I have seen how markets can be regulated by good men and women with fire in their souls, who really want to ensure that their markets are clean from the criminal activities of those who would undermine their effectiveness. I know just how powerful the bringing of criminal action is against those who truly deserve it, and I am aware of how the threat of criminal action will make practitioners think twice before they take the wrong road.

We have recently experienced an era of organised criminality in our financial and banking sector which stretches our capacity for credulity to the limit. I simply cannot comprehend how so many of these organised criminals have been allowed to get away with their dishonesty and no-one has done anything about it. The lead regulator has stood by and watched while major criminality has been carried out in world markets, and all they have done is to impose agreed fines, whose only impact is upon the hapless shareholders.

Our major banks have become a by-word for sharp practice, and their criminal excesses should have caused a tsunami of prosecutions and convictions. The fact that our regulators have failed to grasp this nettle and deal with these criminals properly is a cause for great regret, but the agencies themselves are simply not staffed with men and women of the right calibre, skills or degree of moral fibre which their predecessors at the SEC and the CFTC possessed.

It has now become fashionable to assert that financial regulation can be carried out in a hands-off way, and that fining banks is an effective way of dealing with them.

This is complete and utter nonsense!

In order to get any kind of compliance, we need to demonstrate to the banks that we have the stronger hand than they do, and we need to be prosecuting most of the worst offenders. The City of London needs to be brought to heel. We want them to be effective and efficient, but they cannot be allowed to carry on running a quasi-autonomous criminal jurisdiction in the way they have been allowed to succeed for so long!

It is the only way that the public will finally get back the confidence that something is finally being done about these organised mafias who have been allowed to run our banks for so long.


lifeafterdebt said...

Really excellent post which I have shared. Well said Rowan.

Demetrius said...

Yup! Says it all.

Jason said...


What do you think of the idea that there is an underlying curve here, to do with the maturity of the society?

When you went to the US they were still on the upswing of the curve, where you can make money and be tightly regulated. You can also do things like redistribute -- remember, America was at its richest in the 50s with a top tax rate of 70%.

But as the curve proceeds and asymptotes heave in sight, you can make money or regulate, not both. With monotonous regularity, at that point societies will choose to deregulate and keep raking in. That translates to creaming off the top of decreasing productiion and widening the wealth gap; the wealth created is largely illusory with nothing backing it, and eventually will collapse.

Here in the UK we passed that point well before the US -- we were the imperial power before they were. Consequently we were never going to go back in time and adopt US procedures -- on the contrary, they were going to go in our direction, and since then, have done.

Any good?

Rowan Bosworth-Davies said...

Jason, your fascinating enquiry leaves a lot to debate, and needs far more space than I have available here. I am persuaded that the speed with which the collapse has happened is due more to a reduction and removal of regulatory controls, than other more natural economic historical causes. Not an expert in this field however!

Jason said...

I understand Rowan, don't want to slow you down.

Just for the record, I'm not suggesting an entirely determined curve -- just that at this point legitimate profits will be less if the regulation you want comes in. And that's what everyone really doesn't want.

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