FSA fines UBS: Who's banking on wholesale change?

This week the FSA issued one of the largest fines in its history, following the conviction and sentencing of rogue trader Kweku Adoboli for two counts of fraud by abuse of his position. In addition to Adoboli’s seven year prison sentence, UBS has been fined £29.7 million for system and control failing that allowed Adoboli to lose the bank £1.4 billion. The FSA’s view that UBS’s controls were “seriously defective” is an understatement.

This equates to the third largest fine the FSA has ever issued, beaten only by Barclays, which was fined £59.5m over the Libor scandal in June 2012 and JP Morgan which was hit for £33.3m in June 2010 for failing to protect client money.

In court, the jury was told the way in which Adoboli lost the money was “unprotected, unhedged, incautious and reckless”. In Adoboli’s defence argument, his lawyers made the point that the Swiss bank’s attitude to risk depended largely on how profitable it was and the culture was to ignore risk so long as it paid. But Perry Stokes the Deputy Chief Inspector outlined how this has become the “UK’s biggest fraud, committed by one of the most sophisticated fraudsters the City of London Police have ever come across.”

Adoboli’s actions cost fellow traders their jobs, prompted the resignation of the Chief Executive Oswald Gruebel and wiped £2.7bn from the UBS share price.

The lack of awareness Adoboli had for risk highlights major flaws in the banking sector, in terms of rogue traders themselves and the negative public image of banking as a whole. There is clearly a fixation on profits at any cost in the actions of Adoboli and an encouragement on behalf of the management for him to take greater risks – just until the house of cards came tumbling down.

These issues need to be addressed if the sector is going to be considered credible and trust worthy. The threat of an imposing prison sentence and fines for potential rule breakers will help develop this. Unless the current underlying culture within banking is addressed, nothing will change. In order to reduce the risk of future rogue trading, there needs to be a change in values, where risk management is prioritised over a yearning for profits at any cost. As well as this, a personal approach where individuals take more responsibility for their actions is required. Additionally the FSA should continue to issue fines and sanctions in the event of future misconduct.

Senior managers of such institutions must review the pressure they put on junior members to succeed, seemingly at any cost.


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FSA rules strain relations between City and press

As the Financial Services Authority (FSA) continues to clamp down on strategic leaks to the media, and journalists lash back at the new proposals, new debates are sparked over the impact these transaction reporting plans could have on market integrity and the overall flow of accurate business information.

A dramatic increase in FSA activity to clamp down on controlling leaks follows recent findings which showed suspicious trades before takeover announcements were not only up on the previous year, but now account for nearly a third of all deals. The FSA’s Market Division has recently issued its “best practice” recommendations, which aim to prevent improper disclosures of inside information contrary to the market abuse regime. Yet, the second recommendation, stating all media enquiries are to be directed to the firm’s media relations team, who will be fully responsible for monitoring all media enquiries, has been met with strong criticism from UK journalists.

This week, editors of four leading national papers wrote a letter of complaint to the FSA to publicly expose their concerns over the potential damage such restrictions could bring to current media handling practices between City firms and journalists.

For the FSA, “Strategic leaks – designed to be advantageous to a party to a transaction – are particularly damaging to market confidence and do not serve shareholders’ or investors’ wider interests.” However, while accepting the need act strongly to deter market abuse, the editors claim “a wilful misunderstanding” in the relationship between the City and the press will be brought about as firms hide behind their media relations personnel, thereby making it easier to distort the flow of reliable information.

Unfortunately, rumours and speculation will invariably affect share prices and damage company profiles. Yet, the online media and the fast pace of our digital environment have changed how information is now conveyed and received. Today, journalists have an extended role to ensure they convey their messages not only to national readers but more increasingly to global audiences in an increasingly timely fashion.

In essence, corporate communication relies on a strong relationship between journalists and the finance market and the recent stir serves to highlight how more constructive engagement and close collaboration between the press and financial regulators will be important to counter future cases of market abuse. We will watch this space!

Click here to read the letter sent by Lionel Barber, Editor, The Financial Times; Alan Rusbridger, Editor-in-Chief, Guardian News & Media; David Schlesinger, Editor-in-Chief, Thomson Reuters and James Harding, Editor, The Times.

Claire

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