October 30th, 2012 / Insight posted in

Industry Highlights – July

Barclays fines lead to high profile resignations

The UK fine of £59.5 million, the largest ever issued by the FSA and the combined US regulatory fines of £231.5 million hit the headlines last week.The firm breached three key FSA requirements, regarding the Euro Interbank Offered Rate (EURIBOR) and the London Interbank Offered Rate (LIBOR) reported to be:

•making submissions which formed part of the LIBOR and EURIBOR setting process that took into account requests from Barclays’ interest rate derivatives traders.These traders were motivated by profit and sought to benefit Barclays’ trading positions;

•seeking to influence the EURIBOR submissions of other banks contributing to the rate setting process; and

•reducing its LIBOR submissions during the financial crisis as a result of senior management’s concerns over negative media comment.

Since the fines hit the headlines last week, Barclays has seen the resignation of its Chairman of 5 years, Marcus Agius.Most recently Bob Diamond, Chief Executive Officer of the bank has also resigned and his leaving package is the subject of much debate. He has, however, still given evidence at the Treasury Select Committee’s enquiry into the matter. The bank leader claimed to have not known the full extent of the Libor-rigging until this month and to have felt “physically sick” at the news. Agius will now continue as full time Chairman and will head the search for a new Chief Executive.

Latest reports indicate that at the material times Diamond was corresponding with the Bank of England’s Paul Tucker. Barclays have launched a full internal investigation, and its expected a forensic review of all e-mails will take a huge amount of man hours. Tucker, a candidate for the next Governor of the central bank, is reportedly keen to put his side of the story to the Treasury Select Committee as soon as possible. Aside from checking D&O insurance policies, all boards should examine their own incident management policies. How long is data backed up? How quickly can it be accessed? Is there an agreed crisis management plan in place?

Several other banks are being investigated, in the UK these include Royal Bank of Scotland and Lloyds.

Natwest computer failures continue

As many as 17million customers of RBS, Natwest and Ulster Bank have been affected by the IT problems faced by the banking group over the last two weeks.The group have had to draft in staff to keep branches open over the weekend and may be responsible for millions in compensation, but of far more concern to their relationship managers is the cancelation of their corporate hospitality over the period, including seats at Wimbledon (they did generously decide to allow the clients who had been invited to still use the tickets however).

It has been reported that problems have included money not appearing in accounts, double mortgage payments being taken and the potential to cause fines and damage to individuals’ credit ratings.

Accusations have been made that cuts to the IT teamthat manage the batch scheduling as well as the outsourcing of much of the IT may have resulted in the mistakes that caused and continue to cause the issues for the group. Another report indicates the issue may have been the incorrect deployment of a patch upgrade to the batch scheduling system – but it was only discovered days later, after all the ”system back up” had been deleted. Fingers are being pointed at the IT auditors, who should be verifying the processes. In any case, its clear that a wholistic approach to IT governance could have prevented a relatively simple technical issue spiralling out of control. The bank’s reputation has arguably reached a new low.

Advice has been issued by the Financial Ombudsman’s Service to consumers to keep thorough records of problems that they suffer over this period whilst the issue is being rectified and they have been reminded that in the first instance complaints must go directly to the bank.Andrew Tyrie, the Treasury Select Committee Chairman has written to Stephen Hester, Chief Executive of the RBS Group about the bank’s crisis and requesting an explanation. The Financial Services Authority are to launch an investigation once the issue has been resolved for the customers. This is of little comfort to bank customers who are out of pocket.

What are the procedures in your organisation? Do you utilise specialist IT auditors? Is your board or senior management engaged with IT governance, or is it seen as a matter for the IT department? These are the types of questions regulators will be asking as they look to act following the problems at RBS/Natwest. For a confidential discussion on how to deal with these issues, please contact Mark Child or Nick Alford.