UK financial chicanery creates unenviable reputation

An editorial by the Guardian concludes that the UK has earned its unenviable reputation because it has permitted financial chicanery and that something needs to be done to restore its reputation.

Regular readers know that the way for the UK and the City of London to restore its reputation is by ending its love affair with opacity and setting itself up as the global standard for transparency.

Opacity encourages bad behavior as it hides the activities of the participants.  When opacity is combined with 'light-touch' regulation, the result is a hot bed for financial chicanery and a bad reputation.

Transparency encourages good behavior as sunshine is the best disinfectant.  Transparency is the basis for the best reputation as it permits the strictest form of regulation:  market discipline.

Your humble blogger has advocated bringing transparency to all the opaque corners of the financial system.

For banks, this means providing ultra transparency and disclosing on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

For structured finance securities, this means providing observable event based reporting on all activities like payments or delinquencies involving the underlying collateral before the beginning of the next business day.

Recently, the BoE Financial Policy Committee highlighted why banks should provide ultra transparency.  It wants banks to clean up their on and off-balance sheet exposures and to provide the data so that market participants can independently confirm that all the losses have been realized.

Britain is at the extremes of the business of financial chicanery.

This is a conclusion growing in acceptance among economists and policymakers. In 2007, a working paper from the International Monetary Fund drew up a list of offshore financial centres that included the Caymans, Switzerland and the UK. The IMF's definition of an offshore centre was "a … jurisdiction that provides financial services to non-residents on a scale that is incommensurate with the size and the financing of its domestic economy" – and thus acknowledged London's position as one of the most advanced places in the world for ingenious tax planning and financial services. 

The other side of this coin is a relaxed attitude to regulation and risk, from officials and some businesses. Think of the financial scandals that have emerged in just the past few months: the Libor-fixing affair; JP Morgan's $9bn (£5.6bn) loss in derivatives trading; the downfall of the rogue trader Kweku Adoboli. These debacles all have one thing in common: they happened in London's financial centre. Other cases come up elsewhere, of course – think Jérôme Kerviel in Paris or Bernie Madoff's Ponzi scheme in Manhattan – but the Square Mile is too often the location for the greatest fiascos. 

As US congresswoman Carolyn Maloney observed this summer: "It seems to be that every big trading disaster happens in London." 

In other words, the offshore, light-touch regime that many have argued gives London a competitive edge is now earning it the kind of black reputation that might make it unviable. Allowing financiers too much freedom may now be doing them more harm than good. The same surely goes for our offshore industry....

And the secretive behaviour of some organisations and individuals risks doing immense harm to the reputations of others – and to the public supervisors. 

It is surely in the interest of advisers and participants and regulators to have a thorough clean-up of the system. Yet the offshore industry is marked by the same combination of sleepy watchdogs who have rings run around them by those gaming the system.... 

It is no good officials and advisers arguing that all such behaviour is perfectly legal; that merely implies the law needs changing.