Ernst & Young to face second investigation

Ernst & Young (E&Y) is to face a second investigation into its auditing of failed bank Lehman Brothers.

The Accountancy & Actuarial Discipline Board (AADB) has announced details of the probe while also revealing it is to analyse the auditing work of PriceWaterhouseCoopers (PwC) undertaken on behalf of JPMorgan.

In a statement, the AADB said it will focus on “the conduct of Ernst & Young in relation to the preparation of a report to the Financial Services Authority (FSA) in respect of Lehman Brothers International (Europe)’s compliance with the FSA’s “Client Asset Rules for the year ended November 30th 2007”.

The investigation is expected to go through the advice provided to the two banks surrounding the segregation of client funds from its own capital.

Representatives from both PwC and E&Y have confirmed that the auditing firms are both cooperating fully with investigators. The AADB stated that independent tribunals are expected to be held following the separate investigations.

Earlier in the year, the Financial Services Authority (FSA) levied its largest ever fine on JPMorgan Securities for failing to keep client funds separate from its own.

The financial services provider was asked to pay a record £33.32 million for errors surrounding the segregation of capital.

Societe Generale’s rogue trader sentenced to jail

Jerome Kirviel,a former trader with Societe Generale has been sentenced to three years in prison and ordered to repay almost €5 billion after being found guilty of rogue trading by a French court.

Jerome Kirviel, 33, was convicted of abuse of trust, unauthorized computer use and forgery and also banned for life from working within the financial services industry.

The €4.9 billion penalty is the figure the trader is thought to have lost during a series of trades made during the global credit crisis and prompted executives at the French bank to label him as a “terrorist”.

Judge Dominic Pauthe said: “By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part, and whose future was threatened.”

However, Olivier Metzner, lawyer for Mr Kirviel, said that an appeal against the decision would be launched immediately and described the decision as “unreasonable”.

Mr Metzner said: “He is revolted that those that created him put all responsibility on him. Prison is unacceptable for a man who didn’t make a penny.”

The trader pleaded guilty to the charge of computer abuse but not to those of forgery or abuse of trust.

He will remain free during the appeal.

Bank corporate governance - Basel Committee on Banking Supervision issues final set of principles

To address fundamental deficiencies in bank corporate governance that became apparent during the financial crisis, the Basel Committee on Banking Supervision has issued a final set of principles for enhancing sound corporate governance practices at banking organizations. Given the important financial intermediation role of banks in an economy, the public and the market have a high degree of sensitivity to any difficulties potentially arising from corporate governance shortcomings in banks.

Corporate governance is therefore of great relevance both to individual banking organizations and to the international financial system as a whole, and merits targeted supervisory guidance. The Committee's guidance assists banking supervisors and provides a reference point for promoting the adoption of sound corporate governance practices by banking organizations in their countries. The principles also serve as a reference point for the banks' own corporate governance efforts.

Drawing on the lessons learned during the crisis, the principles, which were first published for public comment in March 2010, set out best practices for banking organizations. Key areas of particular focus include:

1. the role of the board
2. the qualifications and composition of the board
3. the importance of an independent risk management function, including a chief risk officer or equivalent.
4. the importance of monitoring risks on an ongoing firm-wide and individual entity basis
5. the board's oversight of the compensation systems, and
6. the board and senior management's understanding of the bank's operational structure and risks.

The principles also emphasize the importance of supervisors regularly evaluating the bank's corporate governance policies and practices as well as its implementation of the Committee's principles.

The full publication may be downloaded at http://www.bis.org/publ/bcbs176.pdf

Transport for London plans contactless payment system

Transport for London (TfL) has confirmed that it plans to introduce technology that would allow passengers to pay travel fares by swiping debit or credit cards.

London's transport authority said the first phase of 'future ticketing' will involve the availability of contactless payment in partnership with Visa, MasterCard and American Express on the bus network in 2012. The new system would act as an alternative to Oyster cards.

"Once introduced, contactless payment using credit and debit cards would make London's public transport much more accessible to visitors (both domestic and international) who are not familiar with Oyster or who do not carry an Oyster card, but do have a contactless credit or debit card, even if that card was issued by an overseas bank," said Transport for London in a statement.

"This should increase London's attractiveness as a destination for tourism and business and its competitiveness with other world cities," it added.

TfL also revealed that it has been working with transport operators in major international cities to develop "common standards and systems" for the new plans. It said it wants to position London at the forefront of ticketing technology and expects to see this method of paying for travel "widely adopted" in the next few years.

"These technologies have the potential to propel us into a world where travelling around London can be easier and even more convenient for passengers. The mayor is continually looking for new thoughts and ideas and that includes contactless payment," Kulveer Ranger, the mayor's transport adviser said.

"This technology is now maturing and could enable people to pay for their travel using credit or debit cards resulting in a simpler process for the customer, and reducing commission and processing costs for TfL," he said.

Ranger described the evolution of the next generation of emerging technologies as a "big step" for the Oyster card.

"Any improvements we introduce would clearly need to deliver value for money but we are excited about the potential benefits there could be for the London commuter," he added.

The fare structure for credit and debit card payments will match that for the Oyster card, for which most fares are half the rate of the cash equivalent. A spokesperson said this should encourage people to use cards rather than pay cash.

In September UK transport minister Norman Baker said the government eventually wants to implement a national transport card, like London's Oyster, that can be used in different cities across the country.

Basel III misses opportunity to break down the silo culture in banking – Algorithmics assessment

Algorithmics, the world's leading provider of risk solutions, has published a comprehensive assessment of all the elements of Basel III, and finds them lacking in their conceptual approach to capital and liquidity. In it Algorithmics questions the missing link between capital and liquidity

The raft of proposals from the Basel Committee includes the headline-grabbing tier 1 capital ratio, buffer building, and leverage and liquidity ratios, which are all significant in their own right. However, having assessed all the regulatory documents from a holistic rather than risk silo perspective, Algorithmics’ research paper, titled ‘Basel III: What’s New? – Business and Technological Challenges’, identifies what they claim is a fundamental flaw of failing to reflect the true relationship between liquidity and capital.

One of the report’s authors, Dr Mario Onorato, Head of Balance Sheet & Capital Management at Algorithmics, and Honorary Senior Lecturer, Cass Business School in London, says, “Continuing to view capital as a primary mitigant of liquidity risk fails to recognise the complete nature of liquidity risk. Should a liquidity situation arise and the bank uses reserves set aside to absorb losses and meet obligations, the value of the company and of the capital are also likely to decline, because the bank will begin to be perceived as ‘riskier’. Liquidity risk and capital are therefore inextricably linked and cannot be addressed as separate silos.”

Basel III goes only part way to addressing the weaknesses of the established silo-based approach to risk management. The compartmentalized, prescriptive nature of the liquidity coverage ratio and net stable funding ratio within Basel III is unhelpful because it does not reflect the capital-liquidity interplay. This summer’s European Bank stress tests did not touch on liquidity, the very thing that crippled the markets during the recent crisis. The avoidance of a repeat occurrence is a key Basel III objective.

Regardless of regulatory gaps, Dr Onorato suggests stakeholders’ demands for better governance will result in banks amending their risk processes and systems in order to view risk holistically for all their legal entities, from both a bottom up and top down perspective.

“A truly effective risk management system will take a holistic approach to risk measurement and reporting; viewing and managing the interconnections between all risk factors, such that their potential impact on the balance sheet and stakeholders’ interests can be properly accounted for.” says Dr Onorato

To download a copy of this Algorithmics' Basel III research paper visit: http://www.algorithmics.com/EN/media/pdfs/Algo-WP0910-LR-Basel3-Exd.pdf

UK Treasury to investigate high-frequency trading practices, news report reveals

The UK Treasury is to launch a probe into practices surrounding high-frequency trading, according to reports in London's Financial Times.

According to the newspaper, the investigation has been set up to assess what impact a computer-generated error made via these trades would have on the economy as a whole.

High-frequency trades are currently the subject of regulatory scrutiny in the US following the ‘flash crash’, which occurred on the Dow Jones Industrial Index earlier in the year.

The index fell by approximately 1,000 points in less than 20 minutes and a report into the reasons behind the crash is expected to be released by the Securities and Exchange Commission over the coming weeks.

In an email from within the Treasury, which the Financial Times gained access to, the department said: “This ‘flash crash’ exposed the vulnerability of high-frequency algorithmic trading, which was a contributory factor to the decline in confidence that is still being felt across markets.”

It added: “The possibility remains of a computer-generated trading failure occurring in the UK and having a significant economic impact.”

The Treasury’s report is expected to focus on the use of algorithms which enable traders to rapidly buy and sell a wide range of shares and derivatives.

Lucas Pedace of the government Office for Science is due to lead the report.

Safaricom upgrading its mobile banking services

Safaricom whose M-PESA mobile banking service has taken Kenya and Africa by storm is upgrading its services to capture a wider telecoms pie in a bid to remain the dominant player in the market amidst a fierce tariff battle.

Outgoing Safaricom Chief Executive Michael Joseph says the M-PESA service will remain an additional value for its customers.

Industry analysts saw last week's move by Telkom Kenya to lower its price on data bundles as a move to bring down Safaricom's dominance in the market. However, Safaricom which claims to have the fastest 3G network says the quality of its services will sustain its subscription as it had superior speeds.

Joseph said the company was working to improve on its successful money transfer services while seeking to win the tariff wars by all means.

Among the new developments lined up by Safaricom include expansion of its maximum sending amount that currently stands at 35,000 shillings to 50,000 to increase the transaction range and reducing the minimum transaction amount from the current 200 to 100 shillings a move to capture the lower end market.

Meanwhile Joseph expressed his delight after the review of the communication regulations removed a clause in the equality and competition rules that defined the dominant operator as one whose revenues exceeded 25% of the total income of all licensees in a particular segment of the market and prone to regulation.

Joseph was speaking during the signing of partnership between Safaricom and Sarova hotels through which Sarova customers will be able to pay their bills through M-PESA.