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Regulators are cutting their nose off to spite their face

In another conversation, I gained a new dimension as to how
the regulatory and governmental influence is changing a bank’s outlook.

I was talking with a very senior manager in a bank.  This person heads up risk, audit and compliance.  He is a member of the bank’s executive
board.  A heavy hitting player.

He had been with the bank for a long time and had experience
of every aspect of the bank’s business. 
He knew the key people in every part of the bank, the foibles and fundamentals
of all aspects of the business.

But he told me it meant nothing, was worth nothing and was
no longer relevant.

All that experience, knowledge, understanding … for nought.

His point became an interesting one.

The bank was now crawling with regulators, supervisors and
government representatives breathing down the necks of all of the bank’s
management team, but particularly the bank’s most senior management involved in
implementing rules and regulations, specifically the heads of risk, audit and
compliance.

He was now far more accountable for past actions and
activities, and had recently seen his every email being analysed by lawyers to
see if he had said anything over the last two decades that might incriminate
him, should a legal action be filed against the bank.

This is what had sent him from being a confident decision
maker to a shivering wreck.

His point was that, as a bank decision maker, he followed
the rules of the time.

At the time, the rules, procedures and practices allowed
activities that are now, in retrospect, viewed as wrong.

There are many examples: LIBOR, money laundering, OTC
Derivatives and more.

These are all being reviewed with a magnifying glass by the authorities
with a view to restructuring and reorganising the industry practices, processes,
procedures and operations.

All well and good and it needs to be done, particularly
where there were fraudulent or immoral activities taking place such as insider
trading and LIBOR fixing.

But some areas are a little greyer.

Take the example of a bank dealing with money laundering.

The rules are continually changing and developing, and a
bank’s legal team try to comply with all of the authorities globally and locally.

The rules change and so the bank implements change.

But should a local activity break the rules, the bank’s
system needs to monitor and report this rapidly and accurately, and that’s
where it all breaks down as, historically, the systems and controls were not
good enough.

The local activity was not managed effectively locally, even
though the global and remote leaders sent orders to manage and change.

And the systems were not good enough in the past to deal
with real-time global reporting of controls.

So who’s accountable? 
The global leadership or the local management team?

It’s a difficult one, as both are accountable, but should
the remote manager now be fined and possibly jailed for their lack of ability
to manage the remote operation effectively?

That’s the question this manager asked me, and my immediate
response was ‘yes’.

On reflection, this is the right response but is it a fair
one?

A manager sitting in London, dealing with people in other countries
and continents and trying to make them deal with requirements through a complex
matrix management structure with no direct authority or control.

A manager sitting in London, who makes sure that all of the
requirements are communicated and works through the organisation to ensure
these requirements are implemented to the best of their ability.

Hmmm …

The point that really hit home was that he then said to me
that it is probably better to change banks every few years, rather than being
with one bank for life.

I thought that’s what most CEOs, CIOs , traders and others
did, as you can then leave the crap behind for the next manager to sort out.

And that is his point.

The way in which regulations are driving the banks is to
ensure that those responsible for enforcing regulations within the bank regularly
leave and change banks, as they don’t want to be accountable if the regulations
are breached for reasons outside their control.

Today, many of these banks senior management team are being
investigated for the breakdown of rules in the past, even when the breakdown
was outside their control.

This is what has made them shivering wrecks and is the
reason why bank teams will change far more regularly than they ever did before.

I’ve certainly seen this in some banks recently, where the
heads of risk, compliance, audit and related functions just switching roles
between organisations.

The Head of Risk at ABC Bank becomes the Head of Risk at XYZ
Bank, and so the Head of Risk at XYZ Bank becomes the Head of Risk at ABC Bank.

That’s ok, but it means that all the knowledge of the nuts
and bolts of the bank leave and are exchanged every four or five years.

Surely it would be far more in the regulator’s interests to
have the people responsible for enforcing the rules being those most knowledgeable
about the practices, processes, procedures and operations of the bank.

Hmmm …

Definitely some food for thought there.

Voldemort

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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2 comments

  1. An interesting comment, but once again, redolent with special pleading. Yes, it is true that the regulations dealing with money laundering controls have changed intermittently in the past, and different jurisdictions have slightly different issues to contend with which need regular monitoring, but the basic, fundamentals of AML compliance have not changed since the laws were first enacted. Banks have certain priorities to perform with regard to AML compliance and first among those is the requirement to disclose bona fide suspicious transactions. Of course there are KYC issues to apply, there are sanctions issues to oversee, and there are transaction monitoring requirements to maintain, but, at the bottom, is the requirement to disclose the suspicions of criminal activities, including those of the bank itself, LOL! Nothing has changed with regard to that basic premise, and I and my colleagues in NCIS and the Metropolitan Police spent many months working with the banking industry, spelling out in words of one syllable, what needed to be done to maintain and perform a best practice regime. The role of MLRO is a difficult one, but it is not as hard as this gentlemen seeks to maintain, and with proper systems, structures and controls, coupled with some common sense, and a great deal of moral integrity and courage to stand up to the finance people, and tell them to their face ‘You can not do that’, the job is a workable one. Unhappily, I know too many MLROs who will say ‘Yes, but I would never get the backing of the Board to do that’, and that is the problem.

  2. Rowan, good comment and I look forward to following this debate.For anyone who has been glued to the evidence coming out of the Banking Standards Commission over the last few weeks a lot of scared cows are being unearthed at long last.There seems to be a role for a whistle-blowing system.I would be interested to hear your views on how effective this could be.As Michael Cohrs said yesterday in the first public discussion from the Financial Stability Board- let there be more open conversations shining light on the issues.

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