Recently we did a blog article covering the presentation Nomi Prins made at annual conference hosted by the Federal Reserve, IMF, and The World Bank. We noted that events like this were a good sign because it meant those inside the system were willing to listen to credible voices outside the system. This speech recently given by Bank of England Governor Mark Carney is another sign that perhaps some healthy soul searching is taking place inside the system.
This is a fairly long speech that I think would be good for readers to read in its entirety. Below are some quotes from the concluding paragraphs that show the concern inside the system that public trust has been lost. Mr. Carney sounds somewhat like Nomi Prins in some of his comments.
. . . .
"We must break the back of these issues, and the Fair and Effective Markets Review shows the way forward.
With its publication today, all the main building blocks are now in place for the real markets we need.
I want to pay tribute to my colleagues Charles Roxburgh, Minouche Shafik and Martin Wheatley, who so ably led the Review. And to salute Elizabeth Corley, who so expertly chaired the Review's independent Market Practitioner panel, canvassing and coalescing views from across the industry.
The importance and complexity of their task is illustrated by the multiple root causes of the misconduct in FICC markets. Specifically, the Review identifies:
- Market structures which presented specific opportunities for abuse, such as poor benchmark design, and which more generally were vulnerable to conflicts of interest, collusion, and thin markets;
- Standards of acceptable market practice that were usually poorly understood, often ignored and always lacked teeth;
- Firms' systems of internal governance and control that were incapable of asserting the interests of firms - let alone the wider market - over those of close-knit trading staff;
- Individual incentives that were skewed, with pay packages stressing short-term returns overlong-term value and good conduct;
- And personal accountability that was lacking, with a culture of impunity developing in parts of the market.
All these factors contributed to an ethical drift. Unethical behaviour went unchecked, proliferated and eventually became the norm. Too many participants neither felt responsible for the system nor recognised the full impact of their actions. For too many, the City stopped at its gates, though its influence extended far beyond. A good start has been made in addressing these deficiencies."
. . . . . .
"But major gaps remain.
These are evidenced by enforcement actions which continue to appear with depressing frequency. These sanctions, while necessary, aren't the solution, not least since the $150 billion of fines levied on global banks translates into more than $3 trillion of reduced lending capacity to the real economy. . . .
In these regards, I welcome the Review's recommendations that:
First, individuals must be held to account. Doing so requires new, common standards, cast in clear language; better training and qualifications for FICC personnel; and mechanisms to ensure that when individuals are fired, their history will be known to those who consider hiring them.
Second, firms must take greater responsibility for the system by improving the quality, clarity and market-wide understanding of FICC trading practices. I welcome the industry's leadership in drawing up plans for a new FICC Market Standards Board. The Board's mandate will be to establish readily understandable standards, keep them up-to-date with market developments, and promote adherence to them. Crucially, the Board will be dynamic, and will monitor and address areas of uncertainty in specific trading practices. . . . . .
Third, regulators should extend the coverage of market abuse regulation to include every major fixed income and currency market. And criminal sanctions should be updated, with market abuse rules similarly extended and maximum prison terms lengthened.
Finally we need global standards for global markets. I welcome the FICC Markets Standards Board's intent to be as global as possible in its membership and influence." . . . .
'With the main building blocks of reform in place, now is the time to take stock.
It's vital that we - public authorities and private market participants - work together to reverse the tide of ethical drift. This cannot be a one-off exercise. We need continuous engagement so that market infrastructure keeps pace with market innovation.
That's why the Bank is announcing that it will hold an Open Forum this Autumn which will bring together all stakeholders in FICC markets. Our goal is to discuss the prospects for market functioning, where regulations might overlap or conflict, and whether enough has been done to build the real markets the UK deserves.
To prompt an open discussion, we are publishing a detailed paper which reviews these issues and draws out such questions. 5
Everyone has an interest in the future of financial markets, so I would strongly encourage you to engage with our Open Forum process online and at the conference itself. An Open and Accountable Bank welcomes your input.
Our response to recent failings should be as ambitious as those of our predecessors to the Great Fire: renewed prosperity built on private markets and public market infrastructure.
Let our legacy be the earthly equivalent of Wren's ethereal genius, real markets so that the City can do what it does best: transact and innovate for the good of the people of the United Kingdom and the world.
My added comments:
We all understand that words only go so far and must be followed up with actions to mean anything. But's let give some credit here to Mr. Carney for his very honest assessment of the failings inside the system leading up to the last big crisis and his call to do better. In parts of this speech, he sounds very much like Nomi Prins or Jim Rickards.
Also, any efforts made to improve transparency and access to information for those outside the system should be supported. Hopefully, we are seeing genuine signs that those inside the system want to be true to their calling, which is the role of a public servant. My own research suggests that there may an information gap between those inside the system and those of us on the outside. Any efforts made by those on the inside to bridge that gap should be applauded. Better public access to information should lead to better decisions and more public trust in the system. It sounds like Mr. Carney might agree.