Punctilious dissection takes in Barings, the Big Bang and the failures of regulation
One of the most interesting insights in Oonagh McDonald’s new book on regulating behaviour in the financial services sector is her personal recollection of 1995. The academic turned Labour MP had become a regulator. Having witnessed the collapse of Barings, McDonald recalls vain efforts at the Securities and Investment Board to hold the bank’s management to account: “I was both a board member of the SIB and a member of its enforcement committee at the time, but we lacked the powers to [pursue them].”
This was more than a decade before the global financial crisis, from which the world emerged with a similar complaint: why were so few bankers prosecuted despite the mayhem caused by the crisis itself
— and the market manipulation scandals that it laid bare?
McDonald’s main focus is those manipulated markets: particularly the Libor interest rate benchmark and foreign exchange prices. Early on she bemoans the lack of rigour evident in other books on Libor. But for all her punctiliousness, McDonald’s analysis could do with more colour. There is, nevertheless, much to recommend the book — especially for the student of City of London history.
Particularly engaging is the way McDonald traces the evolution of regulation — from the roots of the Big Bang to the modern day. The 1986 liberalisation of City rules harked back several decades to legislation that sought to end similar anti-competitive practices in manufacturing. It ushered in a 22-year banking boom.
She argues compellingly that the Big Bang capped off an existing market shift and was, in any case, not the rabid deregulation of simplistic portrayal. It succeeded in professionalising the City — though Libor’s amateurish administration by the banking sector trade body continued, making it ripe for exploitation.
If the Big Bang itself was not responsible for softening regulation, latter-day political intervention was. New Labour’s “light-touch” approach is neatly evoked in McDonald’s citation of a gushing 2004 speech from then chancellor Gordon Brown, delivered at the opening of Lehman Brothers’ European headquarters. Lehman, he said, was “always . . . an innovator, financing new ideas and inventions before many others began to realise their potential”. Four years later it had collapsed.
New Labour’s creation of the Financial Services Authority “could have worked well”, she says, but “the chancellor then wrecked any chance it had of being effective with the ‘light touch’ approach to regulation”. That may be true. But the former regulator — she was an FSA executive director until 1998
— also seems keen to excuse the watchdog from any culpability for the looming crisis. The Bank of England also escapes opprobrium.
Some readers will find this book dry. The big dramas — from the collapse of Lehman to the imprisonment of arch Libor manipulator Tom Hayes — are skated over. Indeed, the rich colour of all the manipulators’ conniving is conveyed through lengthy extracts from regulators’ penalty notices. It is coherent but pallid: more academic thesis than rip-roaring yarn. Of course, that is what McDonald set out to write. And, while it might limit her readership, anyone with a keen interest in regulation will learn a lot.
On a handful of occasions McDonald does succeed in making the analysis more human with a personal reflection. She also nails what facilitated abuse of the foreign exchange market: the advent of technology meant that most, but not all, trading was done by computer. The number of remaining “voice” brokers who interacted to set prices had dwindled to “probably less than a dozen”, all friends or former colleagues. Collusion was easy.
In the wake of the financial crisis, the UK finally introduced the Senior Managers Regime, designed to put the onus on chief executives and directors when staff are found guilty of serious rule-breaking on their watch. As Macdonald rightly says, it should have been there when Barings collapsed, and certainly should have been put in place in the aftermath. The test now will be whether the SMR — and its equivalents around the world — serves the twin purpose of deterring wrongdoing and holding miscreants to account when deterrence fails.
Patrick Jenkins is the FT’s financial editor
Holding Bankers To Account: A decade of market manipulation, regulatory failures and regulatory reforms, by Oonagh McDonald, Manchester University Press, £25, 304 pages