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Dangerous liaisons

20 December 2012 By Dominic Elliott

UBS’s Libor shame points to a new concern for financial firms – relationship risk.

One legacy of the financial crisis is that investment banks have been forced to accept that using depositors’ funds to finance proprietary trades is often risky and rarely acceptable. Most banks have curtailed or shut such businesses. Instead, they trumpet the way they put their clients at the heart of all they do. That’s welcome, even if it’s the minimum customers might have expected pre-crisis. But strong client relationships can be risky too.

Client businesses force the service provider to strive to be the most loved. Take the interdealer brokers that helped UBS traders in their attempts to rig Libor. One sent a breathless email to his client at the Swiss bank asking whether he thought he was “the best”. And clients know their power. A senior yen trader at UBS threatened to take business away from a brokerage firm if it failed to falsify Libor submissions. The broker concerned eventually acceded to the demands after pressure from two colleagues.

Of course, in this instance it was UBS in the role of the client. But the case has implications for all client businesses, including those where investment banks are the service provider. Boundaries between appropriate and unethical practices can be blurred when large sums are at stake. In any client-based industry, it makes sense to get close to the hand that feeds. But in financial services, colossal monetary incentives make it easier to overlook ethical concerns. Brokers received quarterly backhanders of 15,000 pounds over 18 months for helping UBS to rig Libor.

Market regulators are to an extent aware of the danger. Watchdogs require financial institutions to implement “know your client” (KYC) policies – an industry standard that HSBC failed to observe when it turned a blind eye to money laundering in Mexico. Know your client inside and out. Seek their love by all means, but not too much.


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