Friday, 10 August 2012

More Early Warnings - Now!

Last year I cheekily suggested we should allow financial regulators to short-sell the stocks of companies that are subject to the slow grind of enforcement action. Refreshingly, the Treasury seemed to acknowledge such concerns and the Financial Services Bill includes a power for the Financial Conduct Authority to disclose that a warning of enforcement has been issued to a firm - a so-called 'early warning notice'. The Standard Chartered 'wire stripping' saga provides an excellent illustration of the issues.

Radio silence on enforcement actions is explained as investor protection. Yet it leaves innocent investors to continue piling into stocks they might have avoided had they known of the alleged misconduct. Instead, enforcement action should merely be about regulatory penalties, and the fact an action has been commenced should be disclosed as a material fact about which investors (and customers) can draw their own conclusions. Short-selling has a similar effect. Generally speaking, short-sellers go looking for mismanagement and/or misconduct and back their suspicions with a market price. I gave the example of Greenlight's campaign against Allied Capital (and later Lehman Brothers), and noted that DE Shaw had a £100m short position in Barclays in February 2011. That at least acts as timely opportunity for long-only shareholders to consider selling, and would-be investors to steer clear.

Our banks, in particular, continue to present examples of long term operational misconduct that show why early warning is a good idea, the latest being the saga of Standard Chartered Bank's alleged 'wire stripping' activities. A key issue is whether $250bn or $14m in US dollar transactions were rendered invisible to the US authorities, preventing scrutiny to establish whether they breached sanctions against Iran. SCB claims that it's been working with various US federal authorities to settle allegations about its practices for some time - precisely the sort of cosy arrangement that leaves everyone else in the dark. But the New York State Department of Financial Services has decided to go it alone. In April it notified the federal authorities in April that it would pursue SCB more widely than the $14m in transactions that SCB say are in issue. The resulting allegations were published on Monday - perhaps not exactly an 'early warning' to the market, but it will do for argument's sake. SCB's share price dropped significantly on the news, later recovering somewhat, so these are clearly matters of concern to investors.

SCB has naturally reacted defensively in the face of the NY State regulator's broader allegations. It's running the traditional defence of cosy enforcement activity, saying its reputation with investors has been harmed before all the facts are out, and people have lost money 'unfairly'. It claims the NY State regulator is wrong on the merits of the case, and should thrash it out in a settlement quietly like the Feds. But the fact that the share price recovered somewhat from the initial fall might suggest that investors are still making up their minds. In other words, the 'early warning' has not been the unmitigated disaster some might claim. Similarly, short-sellers often need to incur the cost of holding their positions for many months - even years - before they're ultimately proved right or wrong.

Personally, I think the merits of whether or not the relevant transactions were affected by sanctions and should have been subject to scrutiny pales into insignificance beside SCB's apparent approach to that issue. It's one thing for the bank to take the view that the transactions are out of scope and argue the toss with the authorities while complying with scrutiny procedures in the meantime. There are also instances where regulation is clearly outdated, flawed or unduly awkward and a pragmatic 'fix' is acknowledged by the authorities as acceptable. But would be quite another thing to apparently make a judgement call privately and then deliberately alter transaction data - or require it to be altered - to shield the transactions from scrutiny. That sort of attitude to compliance risk makes you wonder what other risks are being run and at what scale. And the initial impact on the share price shows that at least some investors are just as interested to know that such risks are being run as the regulators. Neither investors nor regulators like surprises.

Interestingly, the City's propaganda machine has chosen the SCB saga as a point from which to launch a counter-attack on behalf of banks generally. The Financial Times, 'reports' a "backlash against naming and shaming of banks" - a kind of backlash against a backlash, if you will. The FT cites a proposal by Lord Flight to amend the Financial Services Bill to prevent the Financial Conduct Authority being allowed to give early warning notices. Interestingly, Lord Flight has introduced an extra note of moral panic that pension funds have lost money as a result of the NY regulator's disclosure of its allegations against SCB. Any time you see a gratuitous populist reference like that you should smell effluent. 

Let's be clear: investors have lost money because they didn't realise that SCB was running a risk of enforcement activity on a grand scale. That kind of problem seems to be particularly rife in banking. We need more early warnings - now!

Tuesday, 7 August 2012

Of Wire Strippers And Banking "Culture"

Perhaps one doesn't ordinarily associate Standard Chartered Bank with stripping, but the recent filing by the NY State Department for Financial Services makes fascinating reading. And in telling the story of SCB's U.S. dollar-related "wire stripping" activities through its own internal emails and operations manual, yet again a bank's "culture" is exposed as ultimately self-interested, regardless of the potential cost to society:
"Lest there be any doubt, SCB's obvious contempt for U.S. banking regulations was succinctly and unambiguously communicated by SCB's Group Executive Director in response. As quoted by an SCB New York branch officer, the Group Director caustically replied: “You f---ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians.”"
Coming hot on the heels on the news of HSBC's sanction-busting activities, these revelations inevitably raise concerns about the practices of other banks.

"When will it all end?" I hear you ask.

It probably won't. 

Scandal after scandal after scandal after scandal related to numerous banks' dealings with their consumers, corporate clients and regulators, tells us that banking as we know it is culturally, socially and economically flawed.

It's high time the politicians focused on how to encourage new entrants and alternative models.

Monday, 6 August 2012

Dead Simple Financial Products

Little wonder that the UK Treasury is still trying in vain to persuade financial institutions to supply 'simple' financial services. The recent report shows that the government is relying on the same old players and the same old view of the marketplace to come up with the same old result. The challenge for new entrants will be whether they will be able to cut through the wall of spin and marketing noise to reach consumers with truly cost effective services that are adapted to their day-to-day activities.

The Simple Products Steering Group's recent interim report continues to view the financial services market through the lens of traditional products, providers and consumer segmentation. Its working groups are drawn exclusively from existing providers. The report refers to the so-called "mass market" and believes that simple products "should not be tailored to individual needs". It equates 'choice' with complexity. It seeks to balance “a fair deal” for consumers with “a viable commercial proposition for [existing] providers". Perhaps worst of all, for simple financial products to succeed the Steering Group believes “it is essential to improve the awareness and financial capability of UK consumers.” The report recommends two types of savings accounts (at-call and 30 days’ notice) and life cover. Apparently, millions of us will pile into these things on the basis of a little consumer education, a kite-mark, feel-good messaging and… certain choices embedded in default settings.


If retail banks and life insurers were capable of delivering cost effective, useful financial services, there would be no need for the Simple Products Steering Group.

When will the authorities realise they’re flogging a dead horse?

As explained here, the route to simplicity and transparency lies in first understanding the complexity of the consumer problem being addressed, then figuring out the simplest, most consumable service that will solve it. That's the role of a facilitator. By contrast, those producing complex products are unlikely to be focused on the consumer's problem in the first place, let alone understand it - they're focused primarily on solving their own problems at consumers' expense. Trial and error, testing and learning, flexibility and adaptability are vital steps in this process. Yet our financial services framework is intolerant of them. A new service should be able to launch and undergo several iterations in the time it takes to get through today's authorisation process. Tiny factual differences have seismic regulatory implications in the type of permission or licence needed, and this adds to the time-lag and legal advice involved.

Image from Worth1000.

Wednesday, 1 August 2012

Of A 900 Year Old Dwarf, Trinkets And Baby Steps

Voda Yoda
How apt that Vodafone has settled on a film character from 1980 to advertise the ability to... [sound of trumpets]... charge your phone in a taxi in 2012, when we've been charging phones in our own cars for many years. No wonder the little fella appears a bit non-plussed. Sadly the TV version doesn't record why he fires up his lightsabre, but I'm guessing from all the inane chat that it might be to dispense with the cabbie.

Such trinkets as in-cab charging are perhaps a small sign that Vodafone recognises at least one of the day-to-day hassles associated with mobile phones usage. So let's acknowledge them for a baby step in the right direction. The fact that London's black cabs hadn't already provided a 'free' charging facility to passengers tells you how great that particular monopoly is working for the consumer. 

Yet I still can't download my mobile phone billing information from the virtually useless "My account" section of the website. In fact, despite numerous calls to customer service over the years - usually around tax time - the most they've been able to do is send me physical copies of my bills free-of-charge. So 1980.

Image from DigitalSpy.
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