Outlook How could it happen again? That is the obvious question to ask as news breaks that a rogue trader has cost UBS as much as $2bn. But the truth is that it happens all the time. Take a look at the website of the Financial Services Authority, where you can look up all the announcements made by the City regulator over the past few years, and you'll find fines have been handed out for compliance failures in the banking sector in each and every month for as long as you care to go back, right up to the present day. There are scores of them – and these are only the cases the regulator found out about.
For all the talk of the banks cleaning up their act in the wake of the crisis three years ago, their disciplinary record suggests compliance standards remain far too lax. Losses on the scale that UBS now fears are mercifully rare, but many of those cases uncovered by the FSA could have resulted in very significant write-offs for the banks involved or, much worse, for their clients. That those losses did not occur was often a matter of luck.
What is it about the financial services industry that generally well-educated, professional people so frequently break the rules despite the potentially disastrous consequences? It is hard to escape the conclusion that the remuneration policies of banks, so geared towards short-term performance, are partly to blame. A pity, then, that the reforms of bankers' pay address only the most egregious examples of such excess.
Also, financiers earn a living from taking calculated risks in order to maximise returns – if they conclude the risk of being caught is slight and the returns on offer are generous, it is no surprise that it happens. Especially given the sense of entitlement in the City – a survey by the Capstone Partnership last month revealed that 80 per cent of investment bankers do not believe their pay fully reflected the efforts they made.
The challenge for regulators is to recognise they are policing a constituency that is particularly vulnerable to temptation – and to stay one step ahead of the opportunities for bankers to succumb.
In that sense, it is disappointing that European watchdogs have been so slow to address the question of exchange-traded funds, which appear to feature heavily in the UBS case.
It is not as if there have not been frequent warnings about the growing dangers posed by ETFs. Not least, the UK's own Financial Stability Board said in April that it was concerned about the rapid expansion of ETFs, which now rival hedge funds in their scale and have certainly been growing much more quickly than that asset class for several years now.
The scary thing about ETFs, an industry now worth $1,200bn, according to the FSB, is that they have the potential to cause systemic problems, which is exactly why the board has been worrying about them. Many analysts attribute the wild swings in commodity markets this year, for example, to the boom in demand for ETFs offering exposure to metals. This may be just the sort of artificial valuation bubble we have seen in the past – and we know what happens when such bubbles pop.
In Europe, however, nothing has been done to prevent the ETF bubble expanding further, or even to monitor its expansion more closely. In the US, the Securities and Exchange Commission began cracking down on ETFs two years ago – this side of the Atlantic, they are still regulated under the less demanding rules that cover collective investment schemes.
We should not jump to conclusions about what has happened at UBS. But by admitting it has been damaged by unauthorised trading, the bank has already conceded a serious compliance failure. And whether ETFs are to blame or not, the failure to heed the warnings about these assets suggests financial regulators are still not sufficiently fleet of foot to prevent trouble before it occurs.
The airports row that is stuck in departures
The wheels of competition law grind so slowly one can barely see them moving. More than two years after the Competition Commission first ruled BAA should have to sell Stansted and one of its Scottish airports, the wrangling still has not been concluded. The airports operator will today seek a judicial review of the decision, meaning more delays in its implementation.
One can hardly blame BAA, which has already been forced to sell Gatwick, for playing for time. Forced sales do not net the best prices, particularly at a time when the wider economic context is not supportive. It must do what it can to defend shareholders' interests.
Still, BAA is unlikely to win the day. Even assuming it gets its judicial review and then prevails in the courts, the decision would be referred back to the Competition Commission. The regulator has already had one fresh look at the case and concluded there have been no material changes to warrant a U-turn. BAA insists Stansted and Heathrow, which it also owns, are not competitors, but the regulator is not persuaded.
The row is, in any case, a distraction from the more important question about airports in the South-east – what to do about their lack of capacity. One of the Coalition's first acts in government was to announce it would not sanction the building of any new runways at London's airports. There were arguments in favour of that decision, but capacity constraints will still have to be addressed – hence the inquiry into the matter announced by Transport minister Theresa Villiers last month.
It may be that ministers are happy to see capacity capped at current levels, though there will be economic downsides to that view. If so, they should say so – and concede that enhanced competition between airports, if that is what we eventually get, will not change the fact that only so many planes can land and take off.Reuse content