Quis custodiet ipsos custodes?



I am glad to see that Sam Broadbeck of Pensions Insight has not allowed the State Street scandal to fall off the radar just yet. Writing in Pensions Insight, Sam points out that while Transition Management is not the sexiest of topics, like the plumbing it is vital and like the plumbing, when it goes wrong it can make a very bad smell.


He quotes from the FCA report that State Street “Executed a deliberate and targeted strategy to overcharge certain UK Transition Management clients and to conceal those charges.


Sam goes on to re-publish certain e-mails published by the Regulator which will make uncomfortable reading at State Street HQ


“Did they (legal) look at the original agreement?”


“Absolutely not. Nor did they look at the periodic notice. This can of worms stays closed!”


“Btw- there is no way we can disclose our spread”






Within this interchange we have the three aspects that underpin almost all the financial scandals of recent years


  1. Abuse of trust- a custodian bank is paid to execute in the clients best interests – clearly this trust was abused.
  2. Legal complexity- the original agreement and periodic notices were not checked- frankly most legal agreements of this nature take too long to check and are written without the brevity or clarity needed for them to be effective
  3. Lack of transparency; the perpetrators of this fraud thought they could get away with it by keeping a lid on disclosure.


When you have complex issues, no transparency and people who feel they can abuse the trust of clients with impunity, you have a recipe for fraud. That recipe has been used again and again and is why the City has become so detested by the general public.




So how do we guard against this happening again, how do we guard against dodgy custodians, Quis custodiet ipsos custodiet?






There is not going to be an easy answer. We cannot dismantle the banking system and rebuild it overnight. We can only hope for incremental change brought about by better governance. It is not just the banks who are a party to this kind of thing, the same can be said of the fund managers who are complicit and of the consultants who are effectively “asleep at the wheel”. This kind of abuse happens because of a serial failure of governors (as David Blake points out in the Pensions Insight article.


The T-charter concocted by the TM practitioner to which Banks such as State Street signed up, is clearly not enough. A voluntary code of best practice cannot withstand the commercial pressure of sales targets (especially when they are not being met from Business As Usual). If you can meet your targets legally- fine- if not –cheat!


Having been on the sell-side myself, for most of my life, I know the deterrents. This is not my mind set, but I recognise it and it has certainly been in the culture of some organisations I have worked for.




“If the value at risk is my career, my reputation, even my liberty and the probability of me being found out is high enough, I may be tempted, but I will not cheat. If I see the chance of being found out and the consequences acceptable, I will cheat”.




The problem with the FCA’s fine is that though it is meaningful, it has not touched the perpetrators of the fraud, they are still well-off, have their reputation intact and have their liberty. There was no real stick to stop the people in that email chain.


The fundamental problem is that the “can of worms” could stay shut. The perpetrators were confident about that. Until consultants (Inalytics) blew the lid on them, they were getting away with this and it took some pretty special consultancy and some good work from within the clients to explode the fraud. There is insufficient of this forensic analysis to go round and I am quite sure that those swanky buildings in Canary wharf which house the custody sections of these Global Banks are paid for as a result of the low level of scrutiny on the custodian’s activities.


The ongoing problem is that problems like this are likely to be forgotten as “just another banking scandal”. Each time something like this happens, it causes a furore for a couple of weeks and is then swept under the carpet.


State Street will continue to be the custodian for a large number of UK occupational pension funds, the pooled funds into which smaller funds invest and the fund managers into which our personal pension contributions are paid. If you are investing with NEST or Scottish Widows, chances are State Street are investing your money.


I have written to the CEO of Scottish Widows and the CIO of NEST, I have not heard back from Scottish Widows and I have had a placatory email from the PR department of NEST.


But neither organisation has, as yet, made a public statement on the State Street custodial scandal. It seems to me that unless big state owned organisations are prepared to apply their own sanctions and either state their disgust at this corporate theft or in extremis, sack the managers, State Street will get away scot free.


The message will go out to the City that white collar crime carries a low tariff, that the risks are acceptable, the accountabilities low, and the chances of getting caught nugatory.


The culture of governance that should apply in the City of London, should be driven not just by Regulators, but by customers and by all who care about the reputation of financial services. It is simply not good enough to call this someone else’s problem. I am quite sure that those who read this within State Street will not be inviting me to any more conferences, I am sure I will not be asked to interview again for any of their jobs and I suspect that I will continue to be regarded as a pariah by those in the City who wish to maintain the current status quo.


However, ultimately the answer to the question Quis custodiet ipsos custodiet?


…………Is that we all do.secrecy



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Quis custodiet ipsos custodes?

  1. Andy Heath says:

    Henry – what an educated old bird you are…’Quis custodiet’…’nugatory’… such educated eloquence over my Saturday breakfast coffee. The great problem with regulation, compliance, and (when it fails) forensic investigation, is the cost of doing things properly.

    I don’t know the answer to that, but public opprobrium can punish, at least. So – what are the names of the people in that email chain? Why doesn’t anyone who claims to run an ethical pensions business publically declare that they are moving their business away from State Street. Who does business with that company now? If we knew that, it could inform our recommendations as to where our clients should put their money.

    I am also depressed by the strange absence of criminal prosecutions in these scandals.

    It seems to me that the above two points might go some way to shift the shall I/shan’t I choice towards ‘maybe not’. Maybe.

  2. Con Keating says:

    Reputation is no source of comfort in situations such as these. The abuse of trust will occur if the gains are large enough and in particular when competition is merely oligopolistic. If everyone is “at it” in some way or other, there really is no choice.

    It is part of a larger issue that relates to compensation – when people are very highly paid, they have no need for trust – they see themselves as being able to buy whatever they want, let alone need. They also do not believe that the rules apply to them and they are more likely to lie and cheat. They will also tolerate more lying and cheating among those they see as their peers and equals. I have overstated this situation which of course in reality is probabilistic. This is also the root of the “cultural” issue in banking.

    The quis custodiet issue is generically one of infinite regress. Don’t worry, I am not going to take you to Thomas Aqinas’s five proofs. Most people know this as the infinite number of images of themselves which appear when they stand between two mirrors. In fact, this can illustrate the solution, which is to make the images coincident. In a pensions context this is to give all agents explicit fiduciary responsibility. This will among other things serve to discipline trustees as there would now be others with responsibility to the members; they will become more intensive monitors of fund managers and advisors because they are themselves subject to degrees of monitoring by those agents. It is a question of closing the process of regress and that is done by turning it into a closed loop.

    The answer most definitely does not lie in greater transparency or disclosure. To start with that presumes that the disclosure is intelligible, relevant, accurate and honest, and it is clear that these presumptions may all be breached in practice. The reason that so many fund managers and advisors like the idea of transparency has nothing to do with Brandeis’ “Sunlight is the best disinfectant” but rather more that these disclosures serve to facilitate the transfer of liability from the manager back to the Trustees, and members. It is clear that for fiduciary responsibility to work it needs to be impossiblt to contract around it – which will bring with it a green and environmentally friendly benefit – less paper wasted on contracts.

    • henry tapper says:

      I take your point about governance v regulation v fiduciary responsibility. In the case of State Street they clearly felt they were able to get away with it. If you have a 400 page contract- you’re right, who is going to read the clause on page 275 – ultimately all fiduciary responsibility reverts to a duty of care and when quite clearly, that duty is broken- the answer is guilty- governance can of course involve the forensic examination to ensure that all is well and the sledgehammer to crack a few nuts.

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