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.

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