It’s not just the financial adviser
industry that ASIC is unwilling to take on – it’s just as wary of challenging
the big end of town. And it seems its watchpuppy peers around the world feel
the same way.

In today’s AFR report on the latest ASIC
discussion paper, there’s an intriguing quote or two about investment banks’
proprietary trading – the area of interest in the action ASIC has commenced
against Citigroup. The Citigroup case is
about alleged insider trading and alleged failure to manage conflicts according
to form, but there’s a whole question about proprietary trading going begging
here. Reports The Fin:

Mr Lucy (ASIC chairman) said that after
the Citigroup action was announced, ASIC was asked to explain its position to
international regulators, to assure them that it wasn’t planning to stamp out
proprietary trading.

“We’ve been in contact with our fellow
[international] regulators, and initially there was a lot of interest because
people were unsure of our attitude to proprietary trading….[and] whether the
regulator in Australia
would take an attitude of banning it, in essence,” he said. “We’ve been very quick to say that’s
not our expectation.”

Well, why not? Somehow that rush of
interest from other regulators suggests that all the watchpuppies know there’s
a dodgy system in place but no-one’s game to be the first to actually deal with
it. Like a bunch of nervous schoolboys on the edge of the pool, they’re all
waiting for someone else will jump in first to see if it’s cold.

The big players happily sell very expensive
advice to clients on one hand, while trading their own book against the clients
with the other. And that’s just one problem. With all the Chinese walls in the
world, information still percolates within organisations. Remember that even the
Great Wall of China failed – Genghis Khan just rode around it.

Proprietary trading at the top of the
finance industry is as structurally compromised as the financial planner on dodgy
commissions at the bottom – but ASIC and peers again lack the gonads to fix it.
The vested interests are simply too powerful to tackle.

Instead, the Fin reports Jeff Lucy as
saying investment banks might be able to conduct proprietary trading against
their clients’ interests as long as the banks fully disclosed any conflicts of
interest to clients and received their “informed consent”. Just like financial
planners’ clients, no doubt.

All Chinese walls eventually crumble. The
very synergies that large investment banks rely on give themselves an edge on
their own trading desks are structurally questionable. Go on, Jeff, have a go: give them a choice,
sell advice and work for clients, or trade for your own fun and profit, but
not both. Aside from upsetting powerful vested interests, why not?

Peter Fray

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