Comment: Why we need a close watch on the watchdogs

THE blame game over who was responsible for the banking crisis has claimed some notable scalps, but there are still those who have remained under the radar of public criticism.

It emerged yesterday that there is to be closer inspection of those whose job it was to detect cracks in the system: mainly the internal auditors, those employed by companies, who were found to be asleep on the job at a number of banks.

Two years ago Royal Bank of Scotland’s internal auditors told the Financial Services Authority (FSA) that 
issues raised by a review of Libor setting were being addressed and 
“adequate systems and controls” were in place. Last week the bank was find £391m over Libor fixing.

The FSA fined Swiss bank UBS in December for similar abuses, saying the “routine and widespread manipulation of submissions was not detected by compliance, nor was it detected by group internal audit, which undertook five audits of the relevant business area”.

US regulators ordered JP Morgan to improve internal auditing after it ran up huge losses in 2012 linked to its “London Whale” trade that went wrong. Internal auditors are not subject to direct external regulation, leaving them exposed when those they are supposed to be controlling take matters into their own hands, too often recklessly. It is no wonder they have suffered reputational damage.

To help address this, a draft code for the industry, written by the Chartered Institute of Internal Auditors in consultation with the Bank of England and the FSA, goes out to public consultation until mid-April. Some are said to have admitted that putting them under tighter control will make them more relevant.

Publication of the code coincides with a public consultation launched yesterday by the Financial Reporting Council (FRC) over when to ban external accounting firms from using internal auditors in their work.

Hopefully, these twin moves will help plug some gaping holes in a supervisory system that has been found wanting once too often.

A banking morality tale that leaves a bad taste

THE roll call of victims of the banking scandal is steadily mounting and two of them appeared before the standards commission yesterday to admit to failings that are also growing in number.

Johnny Cameron, former chairman of global banking and markets at Royal Bank of Scotland, was one of the first to fall on his sword in the immediate aftermath of the bank’s near-collapse that, as we now know, was rooted in more than over-zealous deal-making.

Yesterday he sat alongside the latest casualty – John Hourican, chief executive of markets and international banking, who has taken responsibility for the Libor scandal, which to the man in the street is an obscure financial mechanism synonymous with manipulation and mischief.

The numerous inquiries are fundamentally aimed at two things: to discover what went wrong and how the culture of banking can be improved. A drip-drip emergence of more detail generally confirms a culture of misbehaviour that will be difficult to eradicate.

Cameron told the commissioners yesterday that you cannot impose moral standards on those who do not wish to be moral. It may summarise perfectly the cause of the crisis and the challenge facing those trying to bring about change.