Tackling Symptoms and Ignoring Sources

I'm not going to sugar coat it─the transcripts from the London Interbank Offered Rate (Libor) fixing indictments, and other rate-related cases, make for appalling reading. The open corruption on display is, frankly, disgraceful, and anyone who says otherwise either hasn't read them, or must be paid to say so.

The central lynchpin for a lot of these cases rested on communication logs from popular chat used by traders in banks and brokerage houses, and without them, while the cases would still have been prosecuted successfully in most instances, they probably wouldn't have been quite so damning. The understandable knee-jerk reaction from the banks, therefore, is to ban their use altogether. This is more a case of attacking the runny nose, though, rather than the virus that caused it.

I've covered the areas of market surveillance and compliance extensively in the years that I've been a staff journalist at Waters, and if there's one common thread that runs through nearly every conversation on the topic, it's one of culture. On the sinister, Orwellian end of the scale, some say that a culture where you know that you're being watched will change your behavior, and at the very least mitigate the likelihood of widespread fraud taking place.

I've never, personally, believed that to be the case. While the initial implementation may frighten employees into not saying a word out of line, after a while, routine takes over and human independence naturally asserts itself. As an example, for those of you who read this column but don't work in such a heavily monitored environment as a bank trading floor─how many times per week do you break your company's IT policy, knowingly? Without meaning to invite disciplinary and censure from my senior editors, I certainly do, whether that's checking Facebook during down moments, or sending an e-mail to my mum through my company address, or printing out the occasional coach ticket.

It's a far different end of the scale, but the essence of the argument is the same. After a while, you pretty much forget that you're being watched, even if subconsciously you do know it. I suspect that psychological reason, more than anything else, is the answer to why these chat records even exist in the first place.

Effective culture and the avoidance of fraudulent behavior is engendered in an environment where everyone understands the rules, and the reasons behind them.

Culture Vulture
The point here is that you can have the most overarching surveillance possible, but that doesn't put a culture in place, it puts a regime there. Culture comes from belief in the way in which things are accomplished, not the achievement of goals because you do what you're told to.

And this is why the banning of chat rooms, outside of an instant reduction in possible liability and record on the part of the banks, seems peculiar. Effective culture and the avoidance of fraudulent behavior are engendered in an environment where everyone understands the rules, and the reasons behind them. The true spirit of compliance, therefore, is fostered when education, rather than sanction, is the preferred means of enforcement.

Banning chat removes a tool that is actually useful for traders, and sure, it removes a weapon from the arsenal of regulators when it comes to future action. But it doesn't get to grips with why rate-rigging activities took place to begin with. For that, a deeper look inwards, rather than outwards, is necessary.