Individual Accountability in the Financial Industry – Should we take the plunge?

By: | Updated: November 25, 2016 11:17 AM

In their quest for controlling market manipulation, reducing the frauds and bringing trust back to the markets and banks, regulators across the developed world are constantly re-shaping existing regulations and introducing new ones.

financial accountabilityPost 2008 crisis, banks were asked to strengthen their risk management procedures and provide real-time reporting of their transactions to facilitate monitoring of systemic risk. (Reuters)

mahima-84In their quest for controlling market manipulation, reducing the frauds and bringing trust back to the markets and banks, regulators across the developed world are constantly re-shaping existing regulations and introducing new ones.

Post 2008 crisis, banks were asked to strengthen their risk management procedures and provide real-time reporting of their transactions to facilitate monitoring of systemic risk. But this did not stop the Libor scandal or the Forex scandal. Individuals’ nerve to engage in such activities, despite all regulatory checks and balances, can be attributed to the present mode of incentives and penalties wherein, the monetary benefits of any such manipulation are huge while, if caught these banks get away with fines and the individuals are simply made redundant. They can then go on about their lives in a new role with a new organization. In addition, it is mostly an onerous exercise to identify the individuals responsible for the act as well as those who chose to look the other way. While the key perpetrators are sometimes easily established, it is still very difficult to hold the senior personnel responsible who are in supervisory or approving authority positions.

In a bid to address such structural irregularities, European Securities and Markets Authority (ESMA) in Europe has penned version 2.0 of (Markets in Financial Instruments Directive (MiFID) which seeks information on traders booking an order and the corresponding trade. Effective 2017, eligible market participants will also have to report on trade decision maker from both buy and sell side, trade advisor / broker etc.

Similarly, in the UK, draft rules have been published by the Prudential Regulation Authority and the Financial Conduct Authority (FCA) under which, all senior managers in an eligible institution are to submit a “Statement of Responsibilities” which will facilitate the identification of person-in-charge at any point in time. It will thus be easier for regulators to take successful action against the person guilty for the misconduct well as the person accountable for enforcement of correct procedures. Earlier this year, the FCA also announced “presumption of responsibility” rule which requires senior managers to demonstrate that where a firm is guilty of misconduct they “took such steps as a person in their position could reasonably be expected to take” to avoid it from happening. Wherever individual responsibility can be established, it will be deemed a ‘criminal offence’ and invite up to seven years’ imprisonment.

Intent in these steps is to create a fair and publicly trusted industry. The learning was that no amount of reporting, investigations or institutional fines can deter individuals from working for greed. The human nature is the same across the globe and it is high time for the Asian regulators to be thinking on these lines too. Technology can be of great help here with data analytics and reporting.

Not so long ago, Singapore authorities found evidence that traders colluded to manipulate NDF rates to show profits on their trading books. More recently, the China Securities Regulatory Commission (CSRC) indicated that it would probe the parties for suspected market manipulation after a slump in its stock markets since June. Alleged spoofing, which involves placing then canceling orders to move prices, has led to multiple program traders being investigated. Undoubtedly, not enough deterrents are in place to discourage these traders from engaging in this misdemeanor.

Closer to home, banking entities in India are also not untouched by scams. Rs. 15,000 Crore remittance scam, unearthed earlier this year, affected six banks and involved parties both external and internal to the banks. One of these banks is ICICI which has been identified as a SIFI (Systemically Important Financial Institution) by RBI. Top rung of some of India’s public sector banks were booked in 2010 for accepting bribes to facilitate large scale corporate loans. More recently, Andhra Bank and Odisha Gramya Bank are reeling under the investigations where some branch managers themselves allegedly sanctioned fake personal loans of value amounting in crores. Canara Bank was duped into approving loans aggregating to Rs. 1,230 Crores approximately through fabricated financial statements and suppressed information. While CBI has filed chargesheets against primary accused in all the cases, final outcome are pending with accused not brought to justice as yet. Suspended from their jobs but with their ill-gained financial advantages probably well placed to serve them as full scale of wealth amassed through such misconduct is unlikely to be exhumed by investigators. There may be more individuals involved who succeeded in avoiding the net. Stringent regulatory directions on personal liability and implications could have amplified their barriers to dare.

Regulators in emerging markets need to take a leaf out of the books of developed markets’ regulators and make individual liability a high priority. This shall hopefully snip the chances of market and procedures’ manipulation and impropriety more than any amount of long investigations and public humiliation. Let us stop the madness at its very origin – Individuals, by making them accountable and with repercussions that hurt.

Mahima Gupta, Senior Manager, Business Consulting, Sapient Global Markets

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