If a bank seems too big to fine, the fine needs to be bigger
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Version 0 of 1. It’s one ring-fence that no one in the City, in theory at least, objects to. One of the lessons from the Lehman Brothers’ collapse was that financial institutions need to keep clients’ money strictly segregated from their own funds. When the Wall Street titan went under in 2008 it turned out that customers’ cash was mixed up with the rest of Dick Fuld’s fallen empire. Three years of expensive litigation followed in the London courts, as an army of clients, ranging from pension funds to multinationals, tried to yank their money back from under Lehman’s heavy carcass. That imbroglio prompted regulators to tighten the fund segregation rules. And this wasn’t only about protecting clients. There’s a financial stability imperative too, since if investors think their funds might be trapped for years in a bankrupt institution they have a clear incentive to pull it out at the first, faintest whiff of trouble, potentially bringing on the collapse itself. Yet has the industry really absorbed the fund segregation lesson? And are regulators succeeding in enforcing the rules? Seven years after Lehman and regulatory fines for breaches of the rules keep coming. JPMorgan was hit with a £33m penalty in 2010 for mixing up client money with its own funds. A host of asset managers, including BlackRock and Aberdeen Asset Management, have been fined by regulators for the same offence. Barclays has been fined twice for failing to maintain the segregation, with the second £38m levy coming last September. BNY Mellon has become the 17th financial firm since 2006 to be fined for its inadequate internal fund segregation practices. The £126m penalty is the biggest yet imposed for this offence and the eighth largest in the regulator’s history. The Financial Conduct Authority said the size was a reflection of the systemic importance of BNY Mellon, the world’s biggest custody bank by assets. But what’s the point? The FCA says its financial penalties are supposed to act as a deterrent, a warning to all firms to get their systems in order. But 18 fines in the past decade do not suggest an industry that has learned much. We shouldn’t really be surprised. For these institutions even the chunkiest fines from the FCA simply aren’t that big. BNY Mellon’s parent group reported $2.5bn (£1.7bn) in profits last year. The £126m fine from London represents just 1.5 per cent of its total global expenses last year. That’s a cost of doing business – and a pretty minor one at that. Suffice to say the share price of the New York-listed bank didn’t budge at all. The Libor and forex rigging scandals did hurt the banks. But that was due to the whirlwind of negative publicity generated rather than the size of the regulatory fines. And sloppy processes when it comes to segregating client money are never going to generate the same level of public opprobrium as smoking-gun emails showing low-life traders discussing how best to rip off customers. That’s just a fact of life. The US financial regulatory system is a well-documented mess. But one thing that the Americans have got more right than regimes elsewhere is that they understand the need to hit miscreants hard in the pocket. BNP Paribas was fined $9bn by the Americans for sanctions violations last year, pushing the French bank into a loss. And JPMorgan was forced to fork out $13bn in 2013 for misleading investors. Let the FCA and politicians take note: these are the sort of sums that have at least some chance of shaping the behaviour of managements and shareholders. |