10 Jun 2015

Ethical drift: City to break with Jack Sparrow doctrine?

In Pirates of the Caribbean there’s a great scene where, having made a huge fuss over the rules of piracy, Jack Sparrow breaks them, commenting – “they’re more like guidelines.”

In “Pirates of Canary Wharf” that went on for years. It was un-ethical behaviour that “became the norm” – Mark Carney will say tonight. The Bank of England admitted today that a string of crimes, frauds and scams took place in the UK’s financial markets. The argument goes that they essentially happened because most of the firms involved took no notice of any of the rules that applied to them, and interpreted principles as simply guidelines.

Now the Bank has hit back – together with regulator the FCA – with the announcement of a new regime. The maximum sentence for market abuse has been raised to 10 years; a new set of specific criminal offences will be created in the foreign exchange, bond and commodities markets; and the market abuse regime originally designed for the share market will be extended.

Firms will be forced to give accurate references to people who “move on” – breaking the current practice of getting rid of wrongdoers by giving them a reference akin to that of Mother Theresa.

Tens of thousands of city traders will be brought for the first time into a rules-based regime that is currently designed only for senior managers (and is not popular).

Mark Carney: corruption, my reputation and British citizenship

Bank governor Mark Carney will say tonight at the Mansion House that there was “ethical drift” in the City. That “unethical behaviour went unchecked, proliferated and eventually became the norm”.

The changes are an admission that a market worth trillions every day has been very badly regulated and policed.

Britain, for decades, prided itself on a “principles based” approach to all financial and professional regulation, deriding the USA where a rules based approach was seen as easy to scam.

In the end, the principles based approach failed and the experts inside the Bank signalled the UK’s regulatory culture was now in transition to a rules based one.

But there’ll still be problems. Once people have to work to strict rules, and account to their colleagues for them daily, the type of scam designed typically changes. The nod and wink culture – which in the modern age has become the emoji culture as numerous messages are revealed from wrongdoers – tends to give way to specific conspiracies to get around the rules.

Read more: George Osborne’s Mansion House speech – what will he say?

What one needs to avoid rules-based manipulation is an aggressive regulator backed by an aggressive police force. But the City’s approach will rely on a Market Standards Board, which will be created by the industry itself.

And the designers of the new regime were clear: while it will be a criminal offence if a senior manager participates in a scam by traders – if that senior manager is found to have simply “allowed it to happen” they will be punished or fined by the financial regulator, and not subject to criminal prosecution.

My sense today is that a new generation of regulators in the UK is prepared to take on the City’s culture – with a big shakeup moving it away from principles to rules. But they have no illusions. There’s a whole new generation of wide boys out there prepared to manipulate the market and flout the rules, and as markets get more global, and more automated, the challenges proliferate.

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