Financial Crime Expert Consultant
The City is fighting back against many of the regulatory constraints designed to keep them as honest as it is possible so to do.
The Chief gamekeeper, Martin Wheatly has been told discreetly that his post as head of FCA will not be renewed in March 2016, and he has resigned.
Why has he gone?
He is stepping down early in a move which has been interpreted as a sign that the government was keen to take a less confrontational stance towards the financial sector and banks in particular.
Wheatley, viewed as a hardliner in regulatory terms (although only a banker could see his work in these terms) resigned after the Chancellor, George Osborne said that different leadership was required to take the regulator to the next stage of its development.
The decision showed a definite change in tone from ministers.
Having divested themselves of the Lib-Dem Coalition, the Conservative Government now feels free to adopt a more traditional Tory view of City dealings.
They have been under significant pressure from major banks who have been threatening to move their business to other jurisdictions where the regulatory regime is perceived to be less confrontational towards bankers, and particularly with regard to so-called ‘ring-fencing’ provisions, whereby retail banks are required to be separated completely from the control of their investment bank colleagues, and operated as independent entities.
These challenges to Government from the City elites, are not unusual!
There has always been a constant friction between the City of London and the Government.
When you strip away the bombast, the ‘traditions’ and the smart suits, much of membership of the ‘City’ is comprised of a cross section of spivs, wide-boys, buccaneers, shady entrepreneurs, crooks, freemasons and get-rich-quick merchants.
There should be no surprise at this, it has always been thus, right from the earliest beginnings.
People go into the City to make money, lots of money. Again, there is no surprise in this, the City is a profit centre all to itself. It is a private club whose arcane rules are instinctively known to all its adherents, and if you have to be told what they are, you are immediately identified as ‘not one of us’!
In the very old days, men went into the City to risk their own fortunes, in the hope of returns of even greater profits. They sponsored ships to sail beyond their home horizons to explore distant lands, in the hope of returning home carrying rare commodities worth many times their weight in gold.
These men believed that if they were willing to risk their own money to make a profit, and to bring back widely sought-after cargoes, then the Government had no place telling them how to manage their own affairs.
The first thing any new incoming King in the 15th century did after taking control of the Crown, was to reassure the City fathers of the continuance of their long-held freedoms and privileges. Medieval Kings knew only too well that they relied on the merchants of the City to help them pay for their wars and run their affairs, and there was always a cost.
Many people who read this blog are firmly of the belief that I am too harsh in my criticisms of the City. They haven’t seen the amount of wrong-doing and the law-breaking that I have experienced, nor the way in which the ‘Establishment’ will close ranks to protect members of the club.
When I was a detective at the Fraud Squad, I had a lot of dealings with the denizens of the Square Mile. I learned quickly that the ordinary rules of social engagement did not appear to apply when it came to dealings in the Square Mile.
I worked in the area of Commodity Futures, Options and what we later came to call ‘Derivatives’.
Men in competing commercial houses routinely engaged in conduct which would, in any other walk of life, have been considered utterly dishonest.
But no-one complained, even some of the most egregious behaviour was tolerated, on the basis that if you rip me off one week, I will find a way to get you back next week.
Later, when I became a regulator, it was made very clear to me by colleagues and members that my job was not to root out wrong-doing or to criminalise practitioners and members who broke the law, stole client monies, or cheated others. Our perceived role was to permit the appearance of well-ordered market, while covering up a great deal of utter criminality.
As long as the City remained a professional’s market, where competing practitioners were only dealing with each other, routine skulduggery was considered to be fair game.
It was only when the financial sector began to market itself to the private sector as a place wherein to hazard their personal money, that the rules of engagement began to change.
The era of the South Sea Bubble in 1720 saw many hundreds of private investors ruined by the collapse of the company as a result of fraud and insider dealing.
The administration of the Square Mile has gone through many changes in its history. Even the motto of the Stock Exchange, ‘Dictum Meum Pactum’ or ‘My Word is my Bond’, is not what it seems.
After the South Sea Bubble, the Government sought to prohibit short selling. This didn’t stop the spivs of the time from carrying on with this profitable practice, but they were ow prevented from writing down the terms of the trade because it would be evidence of law-breaking. So where a man entered into a short trade, he had to stand by his word, even if the deal went against him.
The motto thus interpreted becomes not a statement of utmost integrity, but is merely a thieves charter.
What we are facing today is a reiteration of previous examples whereby the City is letting its political masters know that they have gone too far in their regulatory zeal. They don’t want Government and regulators getting in the way of their making money, and they are letting George Osborne know, quietly, but effectively, in their submissions to the Treasury and other Government Departments that they are not going to put up with any more controls.
As I write, Treasury officials are considering plans to weaken the controversial ring-fence scheme that will split retail and investment banks.
Senior City and Treasury sources are wobbling and are letting it be known, ‘through channels’ that proposed governance rules, under which independent boards would be installed at retail lenders, could be watered down.
Senior bank executives are having weekly behind-the-scenes talks with the Bank of England. They want the rules changed so that control of their banks is in the hands of one board.
Of course they do, then they can use the existence of the balances held in their retail client accounts to obfuscate the true picture of the capital adequacies held in the Investment banking arm. They will engage in a wholesale exercise in creative accounting in order to make things look good, and yet again, retail customers’ money will be put at risk.
Don’t forget, and this is precisely what the banks want us to do, but it is only a couple of years since the House of Commons Treasury Select Committee reported on Banking Standards. Regarding ring-fencing, this is what they said;
“…”Parliament took the unprecedented step of creating its own inquiry into banking standards, in the wake of the first revelations about the Libor scandal. The latest revelations of collusion, corruption and market-rigging beggar belief. It is the clearest illustration yet that a great deal more needs to be done to restore standards in banking.
The Government asked us to look at one of its main proposals for increasing financial stability – ring-fencing – as part of our work.
The Commission welcomes the creation of a ring-fence. It can, in principle, contribute to the Government’s objectives of making the banking system more secure. It is essential that banks are restructured in a way that allows them to fail, whether inside or outside the ring-fence. Ring-fencing can also help address the damage done to culture and standards in banking.
But the proposals, as they stand, fall well short of what is required. Over time, the ring-fence will be tested and challenged by the banks. Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ring-fence.
For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to…”
Those were official findings, and they are instructive, particularly the words, “…The latest revelations of collusion, corruption and market-rigging beggar belief…”
Nothing has changed in the interim. The Banks have not been disincentivised from gaming the rules yet again, nor in maintaining a separate retail banking structure.
There is too much money at stake in the retail arm not to tempt the spivs and the cheats from making use of it.
The City Grandees have succeeded in getting rid of the man who was in charge of the regulator. One report states that Martin Wheatley was considered to be ‘too public sector’ in his outlook. That is Cityspeak for being too consumerist, or on the side of the customer too much, when what the City wants is someone who feels more like they do and understands how the game is played.
We must stand by for more relaxing of the rules and regulations. The banks have not learned from their past crimes, they have not yet paid enough in terms of knowing not to do it again. Until such time as a senior bank executive grips the rails at the Old Bailey knowing that he is going to be spending some time as a guest of Her majesty, we must continue to operate in the suce and certain knowledge that the spivs and wideboys are back.
They know they cannot make money in the environment that was being created under the previous government, and the financial proposals, particularly ring-fencing, fill them with horror. We should be prepared for a less rigid enforcement regime to follow.
Your money will increasingly be at risk in the future, and you should think very carefully before engaging in any financial venture, because there is certain to be a flaw in it as far as you are concerned.