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GRC Professional : GRC Spring 2012
12 GRC Professional • Spring 2012 WHAT WENT WRONG? OF ALL THE FICTIONS IN FINANCIAL services, the Libor scandal has to be the most unpalatable. Libor (London Interbank Offered Rate) is an interest rate published by the British Bankers' Association, created by averaging the interest rates banks pay to borrow money from other banks. It is an essential tool in financial markets as it is a benchmark for setting rates for mortgages and other loans. In the past few years it has come to light that there has been widespread manipulation of Libor by banks, to make them seem stronger than they really are and to manipulate markets, particularly to profit from betting on interest-rate derivatives. Ba rclays, the poster child for this problem so far, paid £290 million ($A449 million) in fines to UK and US financial markets authorities following an investigation into the submission of various interbank offered rates. A dozen more banks are being investigated. It's a jaw-dropping and worrying scenario for compliance managers, and begs the question as to how such deceit could have proliferated throughout financial markets. So how can compliance and risk managers in financial services ensure a similar problem does not impact their enterprise? University of NSW academic and business ethics expert Dr Tracy Wilcox says this sort of transgression is generally related to the culture of organisations and the financial system at large. "Newspapers and the media like to focus on rogue traders as bad apples but they forget the barrel the apples are sitting in," she says. Wilcox says part of the problem is the link between risk-taking behaviour and reward within the global financial system. "If an organisation's culture reinforces ethical behaviour, individuals are less likely to act unethically," she says. "If the culture is 'kill or be killed', or 'do-whatever- it-takes', then it's more difficult for people to exercise moral agency." As to why no-one came clean about the Libor situation sooner, Wilcox says part of the reason is the 'do-whatever-it-takes' culture was the norm across the whole sector for some time, and this was compounded by a lack of adequate legislation. "A key role of governments is to put interests and wellbeing of citizens first. We are unrealistic in expecting the corporate sector to do this," she says. "In the Libor case the 'harm' is abstract. People involved would have needed what we call 'moral imagination' to bring the possible 'victims', that is, loan- holders, onto their radars. "And no one person probably felt responsible." Unethical behaviour Nicky Wakefield, head of Deloitte's hu man capital practice, says maintaining an ethical culture requires more than just robust guidelines. "Issues around improper or unethical behaviour are complex, and are often predicated around human reaction to specific environmental issues," she says. Responses are usually assessed in hindsight. "Most organisations focus on getting the hardware right -- the rules and processes -- but don't pay enough attention to the software -- people's mindset and behaviour -- when presented with an opportunity to act unethically," Wakefield says. Newspapers and the media like to focus on rogue traders as bad apples but they forget the barrel the apples are sitting in. Curbing a culture of greed: The Libor fallout Libor, the interest rate benchmark under investigation in the UK since 2009, has put banks on notice over greedy practice. BY ALEXANDRA CAIN
GRC Winter 2012
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