Community blogWho will guard the guards? |
Investor (and media’s) responsibility for policing indiscretions within the Financial Industry.
Quis custodiet ipsos custodes?
The translation of the above is literally "Who will guard the guards" and it is a subject that is likely to come up for vigorous debate in the current investment climate.
As an investor you will typically assess your risk appetite and then select a service provider to manage that risk accordingly. Typically an investor with a low appetite for risk will look at traditional "fire and forget" type investments such as a Money Market fund which operate in a fairly tightly regulated environment. These funds will normally have a very strict mandate on which to operate and this mandate will be managed by the fund manager according to his fund specific mandate.
Rumours are a nasty thing when it comes to the media, particularly when they relate to big financial institutions who often will not hesitate to throw "legalese" at anybody who might suggest improper activities so I'm not going to go down that route.
However one has to hypothetically ask the question:
"If I, as an investor, have entrusted my funds to you (as the legal guardian) - and your employee makes the decision to operate outside of the mandate of that fund - are you not liable for any shortfall?"
The ABSA money market fund has been in the news a great deal over the last few weeks as the company has attempted to clarify to the market exactly what went wrong and how their fund went from being one of the top returns in their sector, to one of the lowest.
This article is not aimed at ABSA because we know for a fact that they reacted quite quickly and took action against the employee, I have simply used a recent event at ABSA as a high profile example to try and reinforce my point. However we, as the media and as investors, have to look at this situation in quite an aggressive light. Investors have enjoyed nearly 10 years of very solid performances from pretty much all asset classes (property, debt and equity) - nobody is going to complain or dig deeper when their investments are flying. But things are changing - Fast! When markets are being hit with double digit declines on the equity front and consumers and corporate debt is being reviewed, the "Guardians" are being asked to account for their actions.
Banking and investment professionals will quickly point to their relevant Ombudsman and say that their actions are being policed. But let's cut to the chase - if each segment of the financial services industry was being aggressively policed as they suggest, then we wouldn't have the sub-prime mess or the likes of Fidentia and Enron or Northern Rock.
Compliance departments need to turn in on the organizations they manage. We talk about how "recklessly" the likes of Fidentia were able to trade and how "clever" they were in being able to dupe the regulators and their own "doctors' of finance by simply shuffling paper and pointing to their amazing returns. In the Financial industry in particular, regulatory controls should be stringently managed irrespective of how the overall business is being performing.
We all threw up our hands in collective disgrace about the widows and children who had been potentially left destitute because of the Fidentia activities. Yet there were many occasions when we were didn't feel the need to aggressively follow-up on minor indiscretions simply shrugging our shoulders and feeling pleased with our own personal returns.
It might be an overly melodramatic conclusion but the excesses and decadence of the Roman Empire were what ultimately led to its downfall. The guardians had become complacent in their duties and they failed to uphold the standards that had created such a powerful empire. The deeper somebody probed, the more weaknesses were exposed. If you look at your own organization - Who have you got safeguarding and managing your business? A business is only as strong as it's weakest link. If you look at your own guardians - ask yourself a question - Who is guarding them?
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