Lansons Conversations

One sinking Galleon doesn’t make the entire fleet unseaworthy

Doubtless the fallout from the various Galleon-related incidents will reverberate around the asset management industry for some time. Friday’s full page spread in the Financial Times presents some of the recent developments in fairly extensive detail. For those of us who only became familiar with the US hit TV series “The Wire” this year courtesy of BBC2’s exhaustive showing, all this talk of wiretaps, codenames, disposable mobiles and such like would have been surprisingly familiar – only this time it’s hedge fund managers, lawyers and various money men who are in the frame rather than drug dealers, dodgy stevedores and corrupt senators.

Let’s be frank. Insider dealing happens. And it isn’t just limited to hedge funds and the institutions which serve them, but it happens across the financial services world. And it’s wrong. And yes, locking up the perpetrators is a good thing.

But that really isn’t the heart of the issue. Nor is the fact that there are worst crimes being perpetrated which don’t warrant wiretap investigation and maybe don’t even count as crimes or regulatory breaches in the technical sense.

Closer to the heart of what I want to address is the reputation of the regulators, on all sides of the Atlantic. One commentator in the FT remarked that “regulators now want to be feared”. That’s true. But I think it goes deeper than that. Regulators are desperate for any sort of credibility, with anyone that matters – whether it’s the policy makers who ultimately employ them and set their objectives or those who they [are supposed to] regulate. However one viewed the SEC and the FSA a couple of years ago, what’s happened in the ensuing financial crisis has wreaked severe, if not terminal, damage upon the reputations of such organizations within the industry, within the legislature and among the general public. Who would be a regulator? It must be a tough enough job in the good times, but in bad times it seems to be near impossible.

But the industry itself has to take some of the blame for that (and finally we get to the nub). Talk to anyone senior in the investment world about the state of the sector today and eventually talk will come round to the regulator. They will regale you with horror stories about visits from a clueless regulator who needed to be told what to look for and who clearly doesn’t know how the business works. They will bemoan pointless and expensive rules which are designed to meet esoteric ends but cannot cope with the most obvious likely sources of failure. Ultimately, they will say, the regulator does not know what its doing because it does not understand how this industry works. Some might pipe up that the regulator needs better funding to employ better people – but even that, good idea as it seems, may not really resolve the problem.

Regulators have to be set up by someone, and ultimately that tends to fall to public policymakers, elected and otherwise. And that’s another problem. Why? Because policymakers don’t have any more of a clue about how the industry works than the regulators. Truth be known, it’s the policymakers who are dependent upon the regulators for knowledge and insight. Despite the fact that, for example, UK parliamentarians contain a notable number of people from the financial services world – including fund managers, hedgies, stockbrokers, investment bankers and current and former board members of various investment companies, it appears the fund management industry and its machinery, are poorly understood in the corridors of power – and if the traditional end of that is not clearly understand you can hardly expect the more “sophisticated” or alternative end of the spectrum to be understood well either.

The investment industry – in all its varied glory – needs seriously to engage with and educate the legislature on a global basis. This won’t just reduce the likelihood of prohibitive and destructive legislation (AIFM Directive, anyone?) but will it should actually create a much more conducive and cohesive framework in which the industry (and its beneficiaries) can thrive. You can hardly blame politicians if the basis of their knowledge is drawn from reports such as in the Financial Times or from the archetypal hedge fund manager lifestyle pieces so beloved of the tabloid end of the media. But the drive to create positive change has to come from the fund management sector itself.