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From monitoring every word a banker types to banning mobile phones in dealing rooms and infiltrating trading books with false orders, banks have gone to great lengths in their bid to stamp out rogue trading, market manipulation and other employee misdeeds. Those overseeing projects know theirs is a battle that will not end with a victory lap.
“You can never eliminate the possibility of people doing bad things and banking tends to attract the type of people that are inclined to push the boundaries — people who are greedy and stupid around money,” says one long-time compliance executive.
Most banks are so afraid of tempting fate by talking about their beefed-up compliance processes that they refuse to discuss their strategies. Still, compliance is a battle that banks must fight because regulators are breathing down their necks and past breaches have carried such a heavy cost.
Investment banks have paid billions in penalties for manipulating interest rates, retail banks in the UK have been hit with even bigger penalties for mis-selling scandals, and individual banks including Société Générale, JPMorgan and UBS have lost billions at the hands of rogue traders.
Against that backdrop, it is little surprise that consultants at PwC say banks are undertaking “huge programmes” of operational work to minimise the risk from rogue trading and other misdeeds.
PwC’s Ruk Permal and Graham Ure say steps include prohibiting traders from trading outside the office, embedding compliance staff on trading floors, simplifying trading platforms so it is harder to obscure risks taken, and banning mobile devices from trading floors.
Bank insiders say they are selectively using other tactics, too. These include putting false trades into the system to see if they will be caught, and monitoring the behaviour of compliance people to make sure they are not colluding with traders or making improper use of the sensitive information they see.
Then there is controlling the flow of people into banks. This can be by using behavioural testing and other kinds of enhanced vetting to weed out potential problem hires, and monitoring the comings and goings and other behaviour of staff more closely once they are in situ.
Jeremy Arnold, Nomura’s chief risk officer for Europe, the Middle East and Africa, says: “There is no single strategy that will prevent poor conduct.”
Mr Arnold advocates a “combination of education, strong and clear pre-trade controls, robust policing and low tolerance to any conduct-related issues”. Such strategies sound sensible but they are not without risk and cost.
Increased surveillance is expensive and can hurt morale. Peter Rossiter, chief risk officer at UK challenger bank Starling, says it is necessary to balance “the cultural need to trust and empower employees to do their job responsibly, versus creating a fear or distrustful culture from heavy-handed preventive controls”.
There is also a danger that banks can become overconfident in their new tools and neglect the basics.
“The smart use of technology has a key role to play,” says a second chief risk officer. “However, good old-fashioned common sense plays an important role.”
“It was well known that the margin in PPI [payment protection insurance that UK retail banks widely mis-sold] was the only way certain retail banking service lines made money,” the risk chief adds. “That was a total failure of management, but also by regulators that permitted those practices and only later changed the rules.”
Another risk executive says banks can sometimes “get a bit too sophisticated in some of the things we look at when the indicators [of fraud and rogue trading] are in plain sight”. He notes that a sharp improvement in the profit a trader is producing can be “a really good clue”.
The risk executive adds that misbehaving traders’ tell-tale traits will vary depending on the misdeeds they commit. When people conceal trades then “leaving the office late or coming in early is a pretty obvious trait”, he says. “They need to do more; they need a bit of privacy.”
On the other hand, you can only rig rates like Libor when markets are open, so “if you’re manipulating a market, standard working hours are fine”.
When it comes to hiring, traits of a potential fraudster will not necessarily show up by vetting an individual’s social media accounts or putting them through behavioural tests.
“The simplest and most frequent — and most depressing [sign] — is that people are liars,” says the first compliance executive.
“People have lied on their CV quite often about something quite minor,” the executive adds. “People rationalise it by saying it was only a lie about something small and they forget the critical lesson that . . . if someone lies and gets away with it, then before they even go through your compliance training they’ve been taught that they can lie and get away with it.”
Once they are employed, experts say bad behaviour typically manifests itself quickly, and it is almost unheard of for someone to go from being a good trader to a rogue one mid-career.
All of the risk officers press the case for zero tolerance for dishonesty or cover up. One investment bank docked bonuses for anyone who had assistants carry out fire training on their behalf. Several compliance executives told the Financial Times that they would see such an action as a sackable offence as it showed dishonesty and that was unacceptable.
“Mistakes happen,” says Mr Rossiter. “They should be identified and corrected. The failure to do so is an error of principle and should not be tolerated.”
“Without the right culture you will always be fighting a losing battle,” says the second chief risk officer.
“To be clear and unambiguous about what is acceptable or unacceptable behaviour is essential — and to establish a reward system that syncs to that.”