Fiduciary Role - Responsibility Kicks In


The fiduciary role has been time and again abused and there is a deep trust deficit between people who entrust it with the people who enact it. At a macro level, the theme was that it encompasses clear responsibility, especially with people in banks and financial institutions to maximize the returns of the investors and also ensure that the allocation of resources propels growth and well being in the economy. The latter part of the above definition eroded and what was left was maximization of returns. The fiduciaries conveniently stretched it a step further from maximizing the entrusted entity's return to personal returns, in terms of bonuses, carry and payouts. This encouraged outrageous risk taking with ‘short-termism’ in mind. And the Wall Street executives were partying on their yachts at the expense of the unassuming investor. The firewall of regulation, which was either late in catching up or was hand in glove with the perpetrators. Like always, tax payers and investors had to bear the brunt.

Before we legislate 

However,  the line is very thin in doing something ‘wrong’ (read poor decisions) and doing something ‘criminal’. The ‘intent’ is not easy to define and then prove. Legislation do bring in deterrence but should not be at the cost of scaring away skills.  

There is also argument that people blithely presume that those working in banking (or finance, broadly) are “immoral” because they are self-interested, and that this “immorality” must invariably cause disastrous economic results, on occasion, even though nearly everyone else, in nearly every other field, presumably also pursues a self-interest.

Brand new legislation - Senior Managers regime, UK

While the Senior Managers Regime will ensure that senior managers can be held accountable for any misconduct that falls within their areas of responsibilities. Senior managers at UK banks, building societies, and certain investment firms can be jailed for up to seven years if their decisions cause an institution to fail under new legislation that came into force. According to the chancellor George Osborne it is one of the toughest sanctions in the world. The new regime comes as the City has failed to regain trust following the financial crash. 

From banks to behind bars

American financial history has generally unfolded as a series of booms followed by busts followed by crackdowns. After the crash of 1929, the Pecora Hearings seized upon public outrage, and the head of the New York Stock Exchange landed in prison. After the savings-and-loan scandals of the 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks. In the ’90s with the bursting of the Nasdaq bubble revealed widespread corporate accounting scandals, top executives from WorldCom, Enron, Qwest and Tyco, among others, went to prison.

However, all the executives who headed powerful American firms in the run-up to the 2008 economic crisis remain wealthy, powerful, and free. In Iceland, after 2008 crash, jail sentences handed out bring the number of bankers imprisoned over the meltdown to 26 with a combined sentence of 74 years.

Getting the correct mix of deterrence through an effective legislation without holding back talent will always remain elusive. Its a slow and  iterative process involving crystallizing the fiduciary definitions, interpreting accountability requirements and their acts that can attract ramifications with in the legal framework that can be tried and implemented quickly.

The other side of story is more behavioral. Regulation can make you aware of the risk you are getting into but cannot ask you to forsake 'greed' before you invest and the 'quick money' syndrome is from timeimmemorial.   

As I understand that many bankers have asked to ‘juniorise’ their position to escape the new legislation in UK. Now that sounds like the crafty banker, we all know next door.

American financial history has generally unfolded as a series of booms followed by busts followed by crackdowns.

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