Barclays – Another Code of Conduct failure!

Another day, another banking scandal!

Just this week, the New York State Department of Financial Services (NYDFS) hit Barclays bank with a huge fine of US$ 150 million, as a result of the bank admitting it had “engaged in certain misconduct regarding the trading of benchmark foreign exchange (“FX”) rates from at least 2008 through 2012 in violation of the New York Banking Law and other laws” [1].

Is this deja vue all over again? Sure is!

Just a year after Barclays was fined over US$ 2.3 billion for being part of a cartel that manipulated the FX benchmark used by pension funds around the world [2], traders have found a brand new way to defraud clients. One would have thought that such a huge sanction and the opprobrium that followed would have caused Barclays to change its behaviour. It did, traders just moved the manipulation into cyberspace (where no one can hear you scam).

Of course here, we do not mean Barclays the corporate nameplate or the tens of thousands of Barclays’ staff that were not involved in this misconduct but the many people who misbehaved and importantly the many who knew something was wrong and kept quiet. How many were involved? We don’t know, but at least one senior manager has been ‘terminated’. But as yet no-one on the Board has fallen on their sword, not likely either?

A number of points are notable in the announcement of this fine. First, the scandal happened after the LIBOR scandal for which Barclays was heavily censured, and was still being conducted up to 2012 (and sometimes until 2014 according to the NYDFS). Most particularly, the events were occurring after the ‘conduct’ revolution started by the recently sacked CEO, Antony Jenkins, who aimed to turn Barclays into the Go-To Bank’ for customers.

To cut a long story very short, Barclays’ staff put a piece of computer code, called Last Look, into their automated High Frequency Trading (HFT) system. This code was designed to hold up customer orders for a few milliseconds and if the FX rates moved against Barclays in that instant, the system would reject the orders and send them bank to the client as “Not Acknowledged” (NACK).

‘Last Look’ was initially intended to be ‘defensive’ but pretty soon it became obvious to some managers that the bank could make a tidy profit out of rejecting quite reasonable trades that would lose the bank money while, on the other hand, accepting trades that benefited Barclays. So they did just that!

And Barclays’ staff knew about this illegal practice. The NYDFS consent order against Barclays provides examples where customers complained about quite valid orders being rejected but were told outright lies.

One manager told staff, “If you get enquiries just obfuscate and stonewall.” Another Barclays’ employee wrote to a trader: “for the future, sales absolutely 100% do not know about the existence of last look and it shouldn’t be a concern for them.” A manager ordered “Do not discuss Last Look with Sales. If there has been a spurt [in rejected trades] just blame it on the weekend IT release and say it’s being fixed.”

In another bank this might be somewhat ‘ho hum’, but Barclays’ management have made such a big deal about their brand new Code of Ethics and how staff were being trained in the new approach to Treating Customers Fairly (TCF). In its 2014 annual report, the Board crowed that in the Investment Bank, home of the scandal, some 6,800 staff, including over 99% of all front office employees, had attended training it its ‘Conduct College’. This effort in Ethics training was repeated across the whole bank, so Barclays can hardly be faulted for trying.

If the misconduct was by the elusive ‘rogue trader’ one could say that it’s not surprising that a ‘bad apple’ slipped though. But it wasn’t. It was managers and staff at all levels, from traders, sales, operations and all ‘three lines of defence’. Did no-one blow the whistle (or in Barclays speak – call the ‘raising concerns’ hot line)? Obviously not. Or if they did, they were ignored (or worse?).

What does this say about Codes of Conduct or Codes of Ethics?

Despite a well-communicated policy of being ethical in dealing with customers fairly, Barclays’ Code of Ethics and expensive training regime fell on deaf ears.

The Open Compliance and Ethics Group (OCEG), a not-for-profit group that aims to improve corporate governance standards, identifies what it calls the ‘Code of Conduct Conundrum’ [3] in which firms spend considerable time and effort crafting codes of conduct but do not understand nor measure what value such codes actually have. If corporate Codes of Conduct are constructed merely to comply with regulations, they are little more than an expensive waste of time.

This particular scandal is (or should be) a watershed for how such Codes are viewed. Human Resources (HR) professionals construct beautifully written Codes of Conduct and bemoan the fact that, if only staff were to read and ‘live’ them, the culture would change and everything in the garden would be rosy.

Barclays tried really hard and it didn’t work. We have no evidence either way that the training may or may not have made a difference elsewhere in Barclays. But we have evidence from banking scandal after banking scandal that Codes of Conduct are not worth the paper that they are no longer written on.

A new approach to Codes of Conduct, such as creating Personalized codes, is needed [4].

People Risk Management
The risk that an employee or group make bad decisions is a People Risk as it can lead to significant losses even the bankruptcy of the firm. In this case, decisions to program computer systems to disadvantage customers has resulted in significant damage to the reputation of Barclays and a considerable fine also.

This blog is one of a planned series that will discuss facets of People Risk in general and bad Decision-Making in particular [4]. It is obvious that managers and assurance functions, such as Risk Management, Audit, Compliance and Human Resources, must understand the concept of People Risk, particularly the influence of individual and group biases on decision-making, because badly-made decisions may result in significant damage to the firm.

References
[1] See NYDFS report http://www.dfs.ny.gov/about/press/pr1511181.htm
[2] See http://www.ft.com/intl/cms/s/0/a255cd2a-fef8-11e4-84b2-00144feabdc0.html#slide0
[3] See ‘The Code of Conduct Conundrum’ at http://www.oceg.org
[4] See Blacker and McConnell, 2015, ‘People Risk Management’, Kogan Page, London http://www.koganpage.com/product/people-risk-management-9780749471354