FSA shows naivety in response to Soc Gen fiasco

The reaction by the FSA to the Soc Gen disaster is just not enough! The recommendation for banks to tighten up systems and controls are laughable! I can guarantee you that the minute the news broke every bank had already instigated a review of its systems, controls and procedures. I know because this happens after every Soc Gen like situation. It's a knee jerk reaction and a natural thing for the banks board to do, however, this reactive management will not prevent another such disaster from occurring at some time in the future. I know because of the catalogue of financial disasters over the past twenty years where the reaction is always exactly the same as per the latest FSA recommendations. It's simply not enough and more thought needs to be applied on how to be proactive in detecting issues before they become a problem and to apply sanctions at board level. Its pointless taking the Soc Gen route and sacking line managers when the responsibility lies with the board.

The FSA's other recommendations this time are even more comical with the ground breaking news that failed and cancelled trades are to be reviewed by senior management. How senior is senior? Cancelled and amended trades are already reported and monitored by line managers, as the board would not know one type of trade from another. Senior Management under my definition would probably stop at the head of the dealing desk, rather than the overall head of trading. Also it's more than likely that the dealing room management is organised by financial product and cross trading products within client accounts/portfolios/strategies and may therefore not have a single holistic view of what's going on.

It is farcical that the FSA idea that a high percentage of cancelled or amended trades, could be a sign of fraud or some other misdemeanour, shows little or no understanding of the industry they have to regulate.

Evidently the bank is to consider if the front office culture is designed to prevent rogue traders. Do the FSA really believe that any bank creates a culture for rogue traders? This is puerile statement from the FSA!

We now get down to an FSA recommendation that is pure Monty Python. We are to believe that traders should be required to take two week continuous holiday so that any potential rogue activity can be detected by the replacement. I could write volumes on this lunacy! However, I'll try and be concise. A successful trader making huge amounts of money for a bank and where their personal commission or commission for a valued client is dependent on their attendance is not going to be given or take any break. Traders and sales people will never leave their posts when the going is good. Can you imagine it? A top trader at Goldman's is told he has to take two weeks holiday just as he is in the middle of executing a large order and where the market is moving favourably against his trading position. He has to hand over to someone who maybe not up to speed with the transaction/position. He meekly leaves his desk position wishing everyone well as he departs for a happy holiday. No chance!

People moving between front and back offices need to be monitored say the FSA. Now I have never known anyone move from the front office to the back office. They are more likely to be sacked, but let's take the occasion of a back office person moving into the front office. I presume the FSA have made the connection between Barings and Soc Gen where both protagonists came from the back office. This is simply a coincidence and just because someone in the back office happens to have more operational knowledge does not mean they are a high risk. Often a front office person with an in-depth knowledge of operations prevents errors and is a very welcome improvement. The FSA stance could well prevent the promotion of back office people in the future and actually cause more problems and errors.

The FSA also mention the need for password protection of systems and controls of access. Well I am not going to comment greatly on this, sufficient to say it's just unbelievable that the FSA thinks that all financial services firms do not have this very basic security already in place.

These recommendations are simply puerile, featherweight and where responsibility sits do not go far enough. Naturally the FSA has to be seen to be doing and saying something but the result is disappointing and will not go anyway near to preventing another Soc Gen.

What are required are tough sanctions that focus on individuals at board level. The board needs to have a deeper understanding of the business from front to back and have an ongoing relationship with their line managers. The current trend for sacking line managers only creates a fear factor that instils a cover up culture, where people are scared to raise any concerns. More man management by the board, more promotion and reward for good business practice will build employee loyalty to the bank and will engender a positive response, where employees feel part of the business rather than under the cosh. But this can only be brought about if boards are forced to be more aware of their business and create an environment of solidarity. They have not been doing this in the past and we have seen the result.

My recommendation to the FSA is that, as a matter of some urgency, they should learn and understand more about the industry and culture they are meant to regulate and then they can make proactive recommendations accordingly but in my view this should be with a concentration on individual board member responsibility with sanctions for failure.