At the Mansion House on Wednesday the City’s own caped crusader, Mark Carney, continued his straight talk about how public authorities and private market actors must engage continuously to ensure that market infrastructure improves and keeps pace with inevitable market innovation. His (speechwriter’s?) turn of phrase is strong, likening the City’s recent travails to the Great Fire of 1666; both disasters caused by a spark falling amongst poor infrastructure. In the modern example the markets, particularly the FICC markets, were lacking in ‘soft infrastructure’ such as codes of conduct that too few had read and too many ignored and ‘hard infrastructure’ like interest rates and benchmarks that were literally fixed. This allowed the spark of the US subprime crisis to cause a conflagration.
He highlighted the work of the Fair and Effective Markets Review in identifying five specific causes:
- Structural defects eg poor benchmark design vulnerable to collusion.
- Poorly understood standards of acceptable practice (also lacking teeth).
- Internal control systems incapable of prevailing over close knit trading staff.
- Individual incentives skewed towards short term returns.
- Personal accountability lacking and a culture of impunity developing.
He welcomed much of the good work already being done on ‘tone from the top’ and conduct training and the focus on accountability of the Senior Managers Regime but the Governor wants to see the regime extended to all firms active in the wholesale FICC markets, making seniors answerable for the training, certifying and monitoring the material risk takers. When he puts it like that, you can sort of see his point about poor infrastructure. It seems so obvious that someone should be accountable for those things. Carney’s view is that the industry is responsible for establishing common standards and he wants those standards to be global (as many of the players in the markets are). He also advocates the use of the sort of clear and readily understandable language that he himself uses.
The Governor also repeated his consistent message that everybody earning their living in the financial markets must recognise their crucial societal role: serving the real economy. Every individual is responsible for the whole system, “for too many the City stopped at its gates though its influence extended far beyond.” He has always been refreshingly honest about previous failings, including those of his own Bank of England. He welcomed the increased scrutiny now on the Bank of England in what could be seen as a ‘we’re in this together’ statement.
To underline the point about the impact of financial markets on the real economy, he also dropped in a stat to focus the mind: the $150bn of global fines imposed on banks will have reduced lending by $3tn. Which is a lot of money!