Rogue traders of the past got away with their actions because no one really knew what they were supposed to be doing
I recently attended a conference where Nick Leeson, known as the man who brought down Barings Bank in the 1990s, was the keynote speaker. The conference was focused on ethics, culture and conduct, in light of the 10th anniversary of Lehman’s collapse and the financial crisis.
The key question posed was whether the regulatory system, coupled with an improvement in financial institutions’ culture and senior management behaviour, would prevent a recurrence of another financial crisis.
Leeson, who, by his own account, remains embarrassed and remorseful over his actions almost 25 years ago, is broadly positive that the conditions now in place across major financial centres, in particular, are robust.
Bearing in mind he spends his time talking to global institutions and regulators about his experience from the 1990s, and how the culture then was one of profit at all cost, he is pretty close to the situation.
However, he added this improvement will not necessarily stop a sophisticated rogue trader or individual, group or board with a wilful disregard for making markets work well. There will always be scandals; it is the systemic nature of them that creates the industry trust compromise, like payment protection insurance
and pension transfers.
At Barings, Leeson ran a very profitable department that senior management looked at as a flagship. In reality, though, no one really knew what he was doing and how he was doing it.
This meant he was able to cover his tracks and pull the wool over the eyes of his seniors and compliance department. Ultimately, his trading positions caused over £800m of losses which broke the bank.
He believes that if someone had taken the time to challenge his trading strategy with reasonable knowledge of the technicalities surrounding his operation, he would have been stopped very early.
If that had happened, he may not have lost his job, a bank may not have collapsed and he certainly would not have ended up in a Singapore maximum security prison for four years. As he pointed out, he paid a high price for his actions, not that he was courting sympathy or ignoring the fact many people also lost their jobs as a result.
Fast forward to 2008 and the lack of challenge and understanding of significantly profitable parts of financial organisations led to multiple failures and a global crisis.
Studies show people generally like to conform and, while many say they would speak out if they witnessed inappropriate behaviour or potential misconduct, the reality is they do not because they fear reprisals or the fact no one would take any notice.
Ten years on from the crisis, there is no doubt that progress is being made in improving the standing of the industry as a whole. But we are not out of the woods yet.
The current issues surrounding pension transfers and continuing instances of phoenixing show there are still areas where further development needs to take place.
Individual accountability will be in the spotlight over the coming 18 months in preparation for the senior managers and certification regime coming into force from December 2019.
The FCA’s expectation is that standards of behaviour across all individuals within a firm should rise to meet the conduct rules. For senior individuals, the expectation is to see proactive and effective leadership.
What does that mean in practice? Well, as Leeson suggests, lifting the bonnet on outliers in a business returning spectacular results is a prudent step in managing conduct risk, maintaining a sustainable organisation and further enhancing the trust in financial services for consumers, employees and regulators alike.
Simon Collins is managing director, regulatory, at Eversheds Sutherland