It’s been six weeks since I first posted about the goings on at State Street’s custodian business that had resulted in a £23m fine and the publication of some damning findings about the behaviour of the Bank’s transition management team.
The Bank Bonus Culture
If we try and peep behind the curtains, it’s clear that those negotiating the contracts with Clients A-E were driven by the usual motivators – need- (to keep job, status, mortgage payments and maintenance up) and greed for the caviar lifestyle expected of any BSD in Canary Wharf.
When you write a sales plan as a custodian, it can be a short document. There are only a limited number of pension and sovereign wealth funds who you can target for new business, so by and large, your strategy requires you to maximise income opportunities with existing clients. I’ve done this – the word “creative” doesn’t do justice to the process! The word “fleece” is operative and if there’s any wool left on your client’s back at the end of the year- woe betide you.
So the document will centre on “revenue targets” which are set around “fee tolerance” which is usually set at what you billed last year +inflation+ a percentage reflecting your shareholder’s wish that you grow the business.
Somewhere lip service needs to be paid to the idea of “treating customers fairly” but in the final analysis, your client is a revenue target.
Who shoulders the blame?
Which is why the employees of State Street who are being fingered as the villains, those who sent the e-mails about “parking up the truck”, feel they were only following orders and why any employee of the Bank you speak to are keen to point to them as the start and end of the problem. Jo Cumbo of the FT has been passed assurances from State Street, sent to high profile clients not affected by the events the FCA mention stating that this cannot happen again, but so long as the pressures of need and greed are at work, the risk will always be there.
Which is why institutions engaging with third parties in these complex areas of finance, need really effective governance.
Who stops this happening?
At the very highest level- the level populated by the largest occupational pension schemes and the sovereign wealth funds, governance extends beyond the narrow interests of the scheme itself- so powerful are these clients that they take on a general duty of care for all schemes. Similarly the largest fund managers employ governance experts who ensure that the companies they invest in are properly managed- the impact of their work is felt by all shareholders.
This is one of the reasons we give such credence to what the NAPF says, it speaks for these large schemes but it also exercises an umbrella role for everyone with skin in the game.
The insurance companies have a similar role, which is why it is important that the new independent governance committees due to be launched later this year, succeed. In fact we are at an inflection point for pension’s governance as DC pensions step up to the plate. In the next few months we will also see a new governance code for mastertrusts published by the DWP.
How does this work for workplace pensions?
Which brings me back to State Street, who are the primary fund managers for NEST and for Scottish Widows. How NEST and Scottish Widows react to the fraud at State Street is most important.
- It demonstrates the tolerance within institutions for this kind of behaviour
- It sends a signal to State Street and all institutional players about the consequences of poor behaviour
- It sends a signal to Government as to how far the City can be self-regulated (and to what extent governance can be outsourced to the private sector)
- It sends a signal to members of NEST, to policyholders of Scottish Widows and to the wider constituency of those in workplace pensions, on what will be tolerated.
And how have they fared with State Street?
On February 2nd I wrote to the CIO of NEST and the CEO of Scottish Widows asking that they make a public statement about State Street. I did not call for State Street to be sacked but I wanted both institutions to publicly condemn the Banks’ behaviour. I have since spoken to the Chairman of NEST who has told me that it is not in the public interest, that this matter is given external publicity.
In my view this sends all the wrong signals. If the justification for NEST’s approach is that members may be alarmed, that is a good consequence. If members engage in the management of their pensions and ask some serious questions about whether they want their money run by an organisation that was fined for appropriating client monies- that is good. If they simply note that those guarding their money are “on the case” – that is good. If they ask the question- how was all this going on as late as 2011 when NEST were setting up the Investment Management Agreement with NEST- that is also good.
NEST and Scottish Widows may argue that exposure of State Street’s behaviour may cause some bother but it will be nothing compared with the bother that they would bring upon themselves if they keep quiet about this. And every day that clicks by without action from NEST and Scottish Widows, makes it more likely that they will get pilloried in the national press with much worse consequence.
What more can be done?
So I call upon NEST and Scottish Widows and any other fiduciaries using State Street to make it absolutely clear where they stand on State Street, what measures they have taken to protect their policyholders/members should this happen to them and the reassurance they have received from State Street that the underlying risks are mitigated.
State Street need something better than the “need and greed” culture that fostered these frauds and Mastertrusts and IGCs need something better than the toothless response to these excesses.