- Gerry Harvey and Mark Yallop, of the FICC Markets Standards Board and Bank of England’s Prudential Regulation Committee, talked to Business Insider about banking culture and malpractice.
- The same 26 patterns of misbehaviour repeat over time in 25 year cycles, they said.
- Post-financial crisis, said Yallop, “people are not interested in scoring points anymore.”
LONDON — Misconduct in financial markets comes in 25-year cycles and in 26 guises.
Over the last 200 years, all cases of market misconduct in the UK have fallen into
26 patterns of illicit behaviour, according to a study done by industry body the FICC Markets Standards Board (FMSB).
This repetition is fuelled by a “generational-type problem,” Mark Yallop, Chair of FMSB and a member of the Bank of England’s Prudential Regulation Committee tells Business Insider, in which younger generations fail to learn from the mistakes of those that came before them.
“Somebody said to me things happen on a 25-year cycle,” he says, because “people’s careers are 25 years long… It was a flippant remark, but actually there is some truth in it.”
But this problem can be exploited, says Gerry Harvey, CEO of FMSB, since cycles makes future problems predictable.
“We’re not dealing with cases when a genius comes along and reinvents things,” he says. “By nature of the beast, by nature of the structure and operations of the market place, people are roughly doing the same thing, so it’s not unusual or startling these things repeat,” he says.
In order to break this cycle, he says, the debate about how to address malpractice needs to “reformulate,” from being reactive to “forward-looking.”
An ambitious goal
FMSB is working with international banks, investors and other stakeholders to create a set of clearly-worded global standards to address conduct problems revealed after the financial crisis, which everyone in the sector can understand.
“No one has ever been able, in the past, to write down what should be happening to stop this stuff happening in an enduring way,” says Yallop. “It’s ambitious.”
From the early 1980s, he says, there has been a “one way trend of increasing globalisation,” which, alongside the rise of technology, has “exploded the scale of trading in markets.”
As a result, he says, many more people are involved in financial markets than were even 30 years ago, increasing the potential for malpractice.
During the financial crisis, he says, the “levers that connect the tops of firms” to individual traders on the floor of banks broke. “People in retail bank branches in Dartmouth… had no idea what the Chief Executive of their banking group in London thought about life,” or what he wanted to achieve, he says.
One major cause of this disconnect was a “conduct void,” or a lack of granular, day-to-day guidance on best practice. This gap has also entrenched the 25 year cycle.
Addressing conduct in wholesale financial markets requires “a different approach,” says Yallop, which must be “market-driven” rather than regulator-driven.
Regulators, he says, “are always on the back foot:” they have less information and fewer experienced people, and their concerns are “bounded by the economy that they’re trying to protect.” Meanwhile, markets are global, and take no notice of “borders between the EU and London, or whatever might be the geographical border of interest at any particular time.”
Is banking culture ready to change?
The financial crisis, says Yallop, was a “disgraceful, utterly appalling set of events.” But, he says, banks, investors and others working in the sector now seem keen to discuss how to improve market conduct. “To my surprise,” he says, stakeholders he speaks to around the world “lap this stuff up with great enthusiasm.”
Although he’s wary of using expressions like “genuine cultural change,” Yallop says over time there is likely to be a “cultural bi-product” of improved standards, “namely, changes in people’s behaviours on the trading floors.”
“People are not interested in scoring points any longer,” he says. “There’s a widespread recognition that the aftershocks of the crisis are just mind boggling, and no one wants to play games with theories of how you should regulate firms that potentially risk some repeat.”
Harvey agrees that FMSB’s efforts to engage key international players have so far been broadly successful, and is optimistic about developing a global set of standards to fill the everyday “conduct void.”
“People don’t want grey,” he says. “I spent my life on the trading floor with people saying, ‘Gerry, so and so wants to do this, what’s the answer?’ I don’t get that from looking in a statute book, I don’t get that from looking in a rule book, it’s from experience, it’s what you know about markets.”