Reputations take a pounding from regulators’ firing squads

A review of 2012 highlights one lesson that must be taken to heart for 2013: that reputation is everything. Indeed 2012 was a year not just of regulatory upheaval, but also of regulatory onslaught. As a result, reputations were battered.

By the time the $1.53bn (€1.16bn) fine was announced in December for UBS for its involvement in Libor manipulation, more than 25 other scandals in the sector had been uncovered. The resultant fines worldwide for the year totalled $4.7bn. To be clear, these are fines on institutions with significant private client operations, or (worse still) directly relating to misdemeanours in handling private client business.

Given the importance of reputation in securing private client business, the damage in terms of lost net new money to the industry could well be many times the total figure for the fines.

It is worrying how many conversations about financial institutions now turn to the subject of corruption. This marks an escalation from mere jibing at the cultural clumsiness or moral turpitude of the financial sector to concerns about institutional crookedness. What, clients muse, does this mean for them?

What has been missing so far in this financial fines’ roll call has been a consistent and cogent response from the institutions in question to explain why certain actions were taken and why mistakes were made. The default position for most institutions through 2012 has been ‘mea culpa’.

A case in point is the response to the Libor scandal, which has seen a number of global banking giants dragged through the dirt. Barclays dealt in June with UK, US and Swiss regulators. It received a hefty $450m fine and took the brunt of the media backlash.

Back then, Barclays chose to jump first as they sensed the size of the fines would only become greater. They have not been proven wrong so far. UBS followed in December. And, 2013 will likely see up to 14 other banks drawn into the centre of the maelstrom. It is a poorly hidden secret which banks are under scrutiny and most have private client businesses.

News rhetoric has focused on the ‘scandal’ of the ‘manipulation’ of interbank lending rates. Few reports have considered in detail the different levels of manipulation and how and why they were allowed to occur.

A low interest rate submission is a sign of creditworthiness, something banks were keen to demonstrate at the height of the financial crisis. Bear in mind, that UK and US government bond markets have been operating for some time on the basis of interest rates that some might argue are being held artificially low, given current economic circumstances.

Barclays’ fine was comparatively low, because its traders’ activities were broadly judged to fall into this category of misdemeanour. Whereas the traders at UBS were more openly manipulating rates for profit, by putting information into the market that caused other banks to submit their rates one way or another so they could benefit from market moves. So far, 36 employees have been fired and two are facing criminal charges.

As other banks are drawn into the Libor firing line, it will become increasingly important for firms to be clear about the level and nature of their involvement. As 16 banks that submit for Libor have been implicated, there are questions yet to be answered about how these activities became commonplace.

The alternative will be a domino effect, as reputations fall, and the taint of institutional corruption spreads.

Of course, Libor is not the only scandal dominating news headlines. Rogue traders, weak anti-money laundering protocols and even incorrect billing have all resulted in multi-million dollar fines in the last two years.

Due to the historical nature of many offences, again a number of firms have simply held their hands up and taken the pain. Few have spent time explaining how things are done differently now.

There has, however, been one interesting exception to this rule. When Standard Chartered was described as a ‘rogue institution’ by the New York State Department of Financial Services (DFS) last summer it gave a spirited defence of its position, which even now provides useful context for the scale of its misdemeanours which appear to have been dwarfed by the subsequent penalties.

At the time, the DFS alleged that the bank had hidden $250bn of transactions with the Iranian government and falsified records. Standard Chartered maintained that 99.9 per cent of the transactions disclosed to regulators complied with rules and that the infringements involved just $14m.

Four months after the DFS’s allegations, the Office of Foreign Assets Control ruled that a vast majority of the $250bn’s worth of transactions under investigation were not transgressions of regulations and that those which violated US transactions rules amassed to just $133m.

Even so, the bank has now paid penalties of $667m. These statements and associated figures serve to highlight the magnitude of the punitive damages when set against the wrong-doing that can be clearly identified.

As there is little evidence that 2013 will see any respite from such regulatory scrutiny, it is vital that firms get onto the front foot about reputation management. This is important across the sector, but even more so for wealth management firms, whose clients value their good name.

Above all, the challenge of institutional corruption has to be tackled head on, which will require far more proactive external communications than has been witnessed so far. And for wealth managers a good new year’s resolution would be to provide more thorough explanation of their conduct in relation to the market practices under scrutiny, and explain how these are changing for the better.

Catherine Tillotson is managing partner at wealth management thinktank Scorpio Partnership