The modern financial system continues to have its doubters among rank and file investors and savers. The painful memories of the volatility and dislocations caused by the global financial crisis are still very fresh in many people’s minds.
Recent stringent measures - including possible jail time - drafted by a British parliamentary commission and backed by Chancellor of the Exchequer, George Osborne will hopefully raise that standards by which bankers operate.
British developments are broadly in line with changes being attempted in the United States, where the Securities and Exchange Commission (SEC) recently announced their desire to push for more admissions of guilt in enforcement actions as part of settlement negotiations.
The need for accountability is strong, and unless the banks regain popular trust then it will be difficult for them to perform their roles as effectively. But a major complaint of many observers has been that despite the egregious behaviour that has been identified in a number of financial institutions, there has been very little individual accountability for these bad acts.
Under the British proposal, senior men and women in a bank could be subject to the criminal offence of “reckless misconduct,” although details about the scope of the offence are still to be worked out.
The threat of prosecution might go some way to focus the minds of bankers who may be so motivated by short-term pecuniary gains that they disregard the long-term consequences of their actions. Of course, the ability of prosecutors to actually convict individuals who are involved in acts of fraud or malfeasance will depend on the manner in which the offence is defined in the new law and what burdens of proof are required.
The trial in New York against ex-Goldman Sachs trader Fabrice Tourre - who famously referred himself in emails as “Fabulous Fab” - provides a useful reminder of how complicated and counter-intuitive many of the elements of modern banking are, including both the arcane terminology and the complex flows of funds that any particular transaction might involve.
Tourre is facing civil fraud charges brought by the SEC alleging he misled investors over sure-to-fail collateralised-debt obligations, although critics claim the mid-level executive has been made a scapegoat.
Still, asking jurors to come to grips with the inner workings of Goldman Sachs, or any large, multinational financial institution for that matter, is a daunting task. Critics might point out, slightly sarcastically, that there are even unanswered questions over the ability of these banks’ own senior management to completely understand what is happening on their watch each and every day. Perhaps, though, this is precisely what the British proposals are most concerned about.
Banking should be understandable, both to the banks, their employees and their customers and to regulators and the taxpayers who will ultimately be forced to bail out the financial system whenever it seizes up again.
The British proposals reflect a desire for more accountability at every level of financial decision-making. The global financial crisis demonstrated that today’s banking system is not quite as safe and secure as most practitioners once believed.
A steady stream of scandals have not been followed by a steady stream of criminal, or even disciplinary, actions against those men and women involved. Instead, stories about eye-watering bonuses continue to fill news reports and allegations of a “heads I win, tails you lose” remuneration system abound.
In essence, the culture of the entire sector is under question. A widespread lack of trust among the general public is raising awkward questions about how exactly these financial conglomerates actually support the real economy and drive growth. People are looking for signs of hope that things are “back on track,” but stubbornly high unemployment and mixed signals from the markets leave room for much doubt.
Some frustrated taxpayers are even asking what general benefit was gained from spending billions to bail these banks out five years ago.
Should these legal and regulatory trends continue, government officials in other developed countries, such as Australia, will be able to reconsider the bargain that they have made with their banks and bankers in light of the tougher approaches being taken by their British and American counterparts.
Previously, concerns over the ease by which financial firms could move their operations across borders and around the world served as a de facto limit on how aggressively banks were policed.
With the two leading international financial centres taking a significantly stronger stance against banker wrongdoings, it should be easier for regulators elsewhere to push harder for higher standards of conduct, as well.
Together with remuneration packages that better align interests and link consequences to actions, these changes may be a meaningful step down a long road towards restoring credibility to a financial system that has disappointed so many in recent years.