Reckless Bankers, Early-Data Probe, ‘Puffery’: Compliance

U.K. Chancellor of the Exchequer George Osborne backed tougher rules for the banking industry, including legislation to jail reckless bankers and giving regulators the power to defer bonuses for as long as 10 years.

In its response to the recommendations of the Parliamentary Commission on Banking Standards, the government said yesterday it plans to implement the main findings, with new laws if needed.

Pay reform is part of a program of sweeping change proposed by the commission, a cross-party group of lawmakers set up last year by Osborne after a series of scandals and five years of poor returns for the financial industry. The recommendations being adopted go further than changes introduced by U.K. regulators after the financial crisis, which forced bankers to wait as long as five years to get their bonuses.

Osborne plans to introduce legislation later this year that would make “reckless” management of lenders a crime, meaning executives of failed firms could face jail time.

The government also “strongly supports” calls that a substantial part of variable compensation for the highest earners at banks should be deferred for up to a decade to reflect the length of time it takes for profits and losses from transactions to be realized.

Other suggestions backed by the government include powers to claw back bonuses awarded by banks that receive state aid and paying staff in bail-in bonds that convert into capital to absorb losses, leaving managers exposed to losses if their firm goes bust.

Compliance Policy

EU to Toughen Creditor-Loss Rules at Failing Banks From August

The European Union is set to toughen its rules on state support for failing banks from Aug. 1, as it seeks to ensure that private creditors take a hit before taxpayers, and that bailed-out lenders face pay curbs.

The European Commission is scheduled to publish the updated bank state aid guidelines tomorrow, according to an EU official, who asked not to be cited by name because the measures haven’t been made public.

The updated guidelines, which will take effect next month, will require shareholders and junior creditors at a failing bank to face losses before any government funds are provided, according to a draft of the plans obtained by Bloomberg News in May. Lenders would also be expected to abide by “strict executive pay policies,” according to the draft, drawn up by the staff of Joaquin Almunia, the bloc’s antitrust chief.

EU governments have provided 1.7 trillion euros ($2.2 trillion) of support to their banking systems since the 2008 collapse of Lehman Brothers Holdings Inc., according to commission data. Nations have dealt with failing banks in a variety of ways.

The state aid guidelines will be published on the same day that Michel Barnier, the EU’s financial services commissioner, presents draft legislation to centralize bank resolution in the euro area.

Banks Urged by Regulators to Adopt Tougher Internal Auditors

Banks were pushed by two U.K. financial regulators to empower internal auditors to stand up to senior decision makers within the firm and oversee risk taking.

Regulators expect banks to have internal auditors that can provide a challenge to management, Andrew Bailey, the Bank of England’s top banking supervisor, said in an e-mailed statement.

Guidelines published last week by the Chartered Institute of Internal Auditors seek to improve governance within banks. Internal auditors assess whether organizations are managing risk properly and warn members of the firm’s board if they anticipate problems.

The new code creates industry-specific benchmarks that can be checked by regulators, the CIIA said in a separate statement. It also calls for internal auditors to report to the chairman of a company’s audit committee.

Compliance Action

China Ex-Rail Chief Given Suspended Death Sentence for Bribery

China’s former railway minister was given a suspended death sentence for abuse of power and taking bribes, making him the highest-ranking official convicted since Xi Jinping took over the Communist Party last year.

Liu Zhijun, 60, will be deprived of political rights for life and all his property will be confiscated, the official Xinhua News Agency said yesterday, citing the Beijing No. 2 Intermediate People’s Court. Under Chinese law, his death sentence may be reduced to life imprisonment for good behavior.

The punishment completes the downfall of an official whose case symbolized the corruption that accompanied the roll-out of the world’s biggest high-speed rail network. Allegations of graft surrounding the rail construction, along with a 2011 bullet-train crash that killed 40 people, reflect broader concern over the quality of China’s infrastructure expansion.

Liu was charged with accepting 64.6 million yuan ($10.5 million) in bribes between 1986 and 2011, Xinhua said.


S&P Argues Puffery Defense at U.S. Case’s First Court Test

Standard & Poor’s, in its first courtroom argument against U.S. government claims that the ratings service defrauded investors, said reasonable investors wouldn’t have relied on its “puffery” about credit ratings.

John Keker, a lawyer for the McGraw Hill Financial Inc. (MHFI) unit, yesterday told U.S. District Judge David Carter in Santa Ana, California, that S&P’s generic statements about its business aspirations weren’t material to the banks buying securities and didn’t meaningfully change the mix of information available to investors.

The statements, which Keker described as “generic,” don’t “make a scheme to defraud,” he told the judge, because there was no specific intent to harm the victim, in this case the investor.

S&P has asked Carter to the dismiss the government’s case, which seeks as much as $5 billion in civil penalties, on the grounds that the Justice Department didn’t adequately support its allegations that the company defrauded federally insured financial institutions by knowingly understating the credit risks of securities linked to residential mortgages.

S&P said in its request for dismissal that the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.

The company also urged the judge to take into account that the government is pressing fraud claims even though other rating companies issued identical ratings on the same securities at issue, and S&P’s views were consistent with other market participants, according to an April 22 filing.

The U.S. sued New York-based S&P on Feb. 4, alleging its credit ratings for residential mortgage-backed securities and collateralized-debt obligations that included those securities, contrary to what the company told investors, were based on a desire to win business from issuers of the securities more than on the credit risk of the investments.

The case is U.S. v. McGraw-Hill Cos., 13-cv-00779, U.S. District Court, Central District of California (Santa Ana).

For more, click here.

Thomson Reuters to Suspend Early Data Release Amid Probe

Thomson Reuters Corp. will suspend the early release of a consumer survey to select traders as part of an agreement with the New York Attorney General’s office, which is probing the matter.

New York Attorney General Eric Schneiderman is investigating the release of the Thomson Reuters/University of Michigan index of consumer sentiment to high-frequency traders two seconds ahead of other Thomson Reuters subscribers, the state said yesterday.

The two-second advantage is enough time for traders to take “unfair advantage” of access to the information, the attorney general’s office said in a statement.

Thomson Reuters is fully cooperating with the review and at the request of the attorney general will simultaneously distribute the survey to clients at 9:55 a.m. effective July 12, Lemuel Brewster, a company spokesman, said in a statement.

Thomson Reuters made the change voluntarily at the request of the attorney general, Brewster said.

“Thomson Reuters strongly believes that news and information companies can legally distribute non-governmental data and exclusive news through services provided to fee-paying subscribers,” Brewster said in his statement.

Thomson Reuters’s agreement to discontinue the release two seconds early removes a “prior distortion in the markets,” the attorney general’s office said. It will remain in effect while the state investigates, Schneiderman spokeswoman Melissa Grace said.

Bloomberg LP, the parent company of Bloomberg News, competes with New York-based Thomson Reuters in providing financial news and information. Bloomberg publishes a Consumer Comfort Index.

The Rosenblum case is Rosenblum v. Thomson Reuters (Markets) LLC, 13-cv-02219, U.S. District Court, Southern District of New York (Manhattan).


Sporkin Sees Concerns With Ending Ban on Hedge-Fund Ads

Thomas Sporkin, a partner at BuckleySandler LLP, talked about this week’s expected vote by the U.S. Securities and Exchange Commission to lift the ban on advertising by hedge-funds and private equity firms.

Sporkin spoke with Erik Schatzker and Sara Eisen on Bloomberg Television’s “Market Makers.”

For more, click here.

Draghi Says ECB Communication Sharpened by Rate Outlook

European Central Bank President Mario Draghi spoke in Brussels about the euro area economic outlook and inflationary pressures. He also discussed a single bank supervisor and the provision of guarantees.

Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee moderated the session.

For the video, click here.

Comings and Goings

Credit Suisse Hires Ex-Finma Official Zulauf for Tax Compliance

Urs Zulauf, who wwas a former general counsel at Switzerland’s Financial Market Supervisory Authority and remained a board member there until the end of January, will join Credit Suisse in February.

Zulauf will support the bank in developing and implementing its policy on tax compliance with respect to client assets.

He is expected to report directly to General Counsel Romeo Cerutti and to Hans-Ulrich Meister, co-head of private banking and wealth management, according to a statement issued by the bank.

To contact the reporter on this story: Carla Main in New Jersey at

To contact the editor responsible for this story: Michael Hytha at

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