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08 January 2020

Reflections on Regulation



This article was written by Clem Danin. All views and opinions expressed are strictly his own.

Let us go back again to the new LME employee in 1960.  It was a time of patronage and great loyalty. The employee was welcomed to the company as a new member of the family.  He would, in general, be given the opportunity for development and after a few years a decision would be made as to his (only ‘his’ in those days) future.  The directors would make a considered judgement. 

“We like this young man, let’s groom him for promotion.  Get him to join the LME Golf Association – maybe pay for his membership at Sunningdale Golf Club and the Sackville. Or: “He is a good lad, but although obviously very loyal, he is never going very far. Let’s make him Chief Assistant Librarian until he retires.”

So the system continued happily as it had done for many decades. The employees knew where they were and the companies were able to mould their staff to their needs.

All until the late 1970s and early eighties. 

The influx of Americans and accountants saw a plethora of acquisitions and mergers leading to the refining of companies and the subsequent pruning of dead wood. Suddenly there was a large pile of ex Chief Assistant Librarians.  

This brought with it a significant change in loyalties. Apart from the unhappy ex Chief Assistant Librarians, the survivors, having seen their long term colleagues so easily disposed of, began themselves to wonder at their own security. Before, it had been a job for life and too many changes were regarded with great suspicion. This was no longer the case and both the companies and the employees realised it. Several individuals who had, through company loyalty, rejected the temptation to look elsewhere in the past were now thinking in terms of possible improvement and/or self-preservation.  From the employee point of view there was almost a freelance attitude developing as the companies, many being absorbed into large conglomerates, had local employment decisions taken by remote boards.

During this time the Government was formulating some sort of regulation for the City. The Financial Services Act was in embryo. Professor Gower was a leading advisor to the Government and through him a very promising White Paper was produced. By the time the civil servants, the lawyers, the MPs and the vested interests had pooled their talents, a pig’s ear of a statute was enacted in 1986.

Naturally the Act called for regulators and most of the senior people in the City who were approached tended to react in disgust at the abomination. An Act which categorised the LME as an investment organisation. An Act which required the Managing Directors of LME Brokers to write letters through their lawyers to the Managing Directors of RTZ, BHP, RST and all the others, so that they could legally confirm through their lawyers, that they (who had been digging holes in the ground for metals and minerals over the last couple of hundred or so years) were aware that the price of metals could go down as well as up. 

So where else could we look for experienced City people to act as regulators?  Fortunately there was an abundance of ex Chief Assistant Librarians readily available.

Thus at the beginning we were being regulated by the unemployable. The man or woman whom we had removed from the company last year was now telling us how to run our businesses.

The Act (the FSA) brought with it layer upon layer of bureaucracy and lots of lovely initials. SIB, FCA, RIE, SRO and of course we were all members of the AFBD. The Association of Futures Brokers and Dealers.

We received visits from the senior people of the AFBD (one or two of whom had probably never taken an ‘O’ Level, let alone passed one) to advise us on compliance. To explain to them that the only real head of compliance in a company was the chief executive would have been somewhat foolhardy with the Tower of London being within the Square Mile.

There evolved the need for registration of dealers who were required to pass examinations proving their competency as ‘fit and proper persons’. Those intellectual academics with the heavy responsibility to devise the penetrating questions were gathered together and paid £5 for every question that was used. Questions like “What is the length of an American Long Bond?”  So important for an LME Ring Dealer.

Commendably, the FSA required that the brokers should ‘know their client’. One of the tragedies was that the SIB seemed to know very little of the LME and its members.

After a year or two of this the powers that be saw their failings and suddenly many ex Chief Assistant Librarians were now also ex regulators. The result was possibly even more disastrous. What was needed was qualified regulators. So the authorities went to the universities and to the law schools. Suddenly the regulators were highly qualified accountants, solicitors etc., most of whom had no business or City experience and some of whom had no experience whatsoever.

Somewhere along the line, instead of working with the City, the regulators and their spawned offspring seemed to be working against it.  A prime example was the Sumitomo affair (culminating in 1995) when Yasuo Hamanaka manipulated copper and the regulators, although aware of the misdeeds, did not have the power or the inclination to warn the industry and thereby save it from massive losses.

It is recently reported that one currency trading company is advised by its compliance team that the company, having dealt on the market may then allow the client to confirm the price before the execution is made. Thus the client can now choose to take the deal if it suits or leave it to the company if it doesn’t. 

Bring back insider trading. It seems more transparent and certainly doesn’t involve so many people.




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