Who will guard the guardians?

Those of us who follow football will have noticed that this crisp epigram of the Roman satirist Juvenal has of late been pressed into service repeatedly on the sports pages and the sports blogs. For it turns out that the guardians of the game of international football were taking bribes in return for allocating tournaments and television rights. As a journalistic scoop, this was on a par with discovering this.

Yes, ursine lavatorial habits are indeed al fresco. But then journalists are lazy – and I should know. We specialise is statements of the obvious. And refuse to think, except by analogy.

"Quis custodiet ipsos custodes? "


The Fifa scandal involved men in suits being paid large amounts of money. So, runs the journalistic logic, running football is just like running a bank. Countless articles delighted in another statement of the obvious: that banks were used to pay the bribes. The message was obvious: a Blatter is a Banker and a Banker is a Blatter. Thinking by analogy, instead of theory, is bound to lead to fallacious conclusions. And it is hard to conceive of how journalists could have missed the point of Quis custodiet ipsos custodes more completely than this. The real story is not that Blatter was a banker; it is that Blatter was a regulator. The test which Juvenal set - `Who guards the guardians?’ – occurs in his 6th satire. Its subject is the difficulty of finding a wife you can trust. He had good reason to ask. He writes of a senator’s wife who eloped to Egypt with a gladiator. And the wife of an Emperor who sneaks out of the palace at night to work in a brothel. How different from our own times.When the President of the Republic of France sneaks out of the Élyséé at night for secret trysts with an actress – on a scooter.

Members of Parliament and the United States Congress tweet photographs of their genitals to women they have yet to meet.

And a regulator who persecuted banks for “conflicts of interest” turns out to be “Client 9” of the Emperors Club VIP.

The world that Juvenal deplored 1,900 years ago is still with us: those who aspire to tell us how to live and work lack are just as hypocritical as their Roman forebears. So the point Juvenal made retains its force.

If your wife is guarded by eunuchs, it is a good idea to make sure they really are eunuchs. Yet, for some reason, we are not looking under their togas. They are looking under ours. And what regulators expect to find beneath our togas is … (Don’t worry: I won’t push this metaphor too far.)… evidence that we are doing what they prescribe.And of course we are. It is this which makes regulation self-defeating. We follow the letter, not the spirit. We tick the box, instead of asking the question. We comply with the rules, rather than obey the dictates of our conscience.

"Everyone has a divine ruler within himself. It is better for everyone to be ruled by divine reason, preferably within himself and his own – otherwise, it must be imposed from without."


Regulation does more than measure the lack of trust in our industry. It is actually reducing trust in our industry. The less control within, the more control without. The more control without, the less control within. Take Bulletin 2013-29 from the Office of the Comptroller of the Currency. The less control within, the more control without. The more control without, the less control within.Take Bulletin 2013-29 from the Office of the Comptroller of the Currency.

There are 11,585 words in this document.Here, in just one regulation, of one aspect of one industry, issued by one regulator, there are no less than 91 detailed instructions as to how a network manager should identify, assess, negotiate with, manage, monitor, review, terminate and prepare for regulatory examination of each and every relationship he or she has with each and every one of its sub-custodian banks. This is the great, unspoken absurdity of regulation. We are regulated because we cannot be trusted to regulate ourselves. Yet all regulation depends for its effectiveness on our ability to regulate ourselves. What Bulletin 2013-29 wants network managers to do is conduct due diligence on their sub-custodians. When they appoint them. When they use them. And even when they fire them.

And what is due diligence? It is an investigation of a business with which you contract. Its only purpose is to uncover information which might cause you not to sign or renew that contract. It is, in other words, a measure of the lack of trust between you.In a world ruled by regulators, we should not be surprised that trust is in short supply.

"Trust is like the air we breathe. When it’s present, no one really notices. When it’s absent, everyone notices."


There is a way out of this cul-de-sac. And I want to point to towards it. Once upon a time, custodians liked to call themselves “trust” companies. Some still do. Custodians were (and always will be) in a position of trust.The mistake was to become banks as well. Because what trust companies do is fundamentally different from what banks do. What trust companies do is look after the assets of investors. What banks do is create credit out of the assets of depositors.

All of the regulatory problems now confronting this industry stem from mixing these two activities together. What, after all is modern regulation seeking to do? On the one hand, it is seeking to make banks do less of what they do. In other words, create less credit. On the other hand, regulation is seeking to make trust companies do more of what they do.

The Dodd Frank Act, AIFMD, EMIR, UCITS V. They all, in their different ways, aim to make safe custody compulsory. This is an environment made, not for banks, but for trust companies.Because trust companies – true trust companies – will never face that constant source of temptation to banks: to use the assets of their customers to create credit.

In other words, structure matters. You will not find it hard to find bankers – let alone regulators –to tell you that the loss of trust in banks is not a matter of structure, but of culture, of character, of ethics, and (how much I dislike this word) `governance.’I have no doubt that they are right - in some parallel universe. But, in this universe, asking the people who run banks to transcend all the moral failings that stem from the fallen state of humanity is a triumph of hope over experience that makes the single European currency look like a great idea. We might as well try, as Wittgenstein warned us, to repair a spider’s web with our bare hands.

"We feel as if we had to repair a torn spider’s web with our fingers "

Ludwig Wittgenstein, Philosophical Investigations 106

If you doubt that, look at this table.

It is taken from a book in my possession entitled – try not to laugh – Ethics in Investment Banking. Of 20 day-to-day activities in everyday investment banking, 19 are either unethical or open to abuse. But if you get rid of all the activities peculiar to investment banking, the number of temptations you face falls dramatically: from 19 to just seven.

If you don’t do those things, you won’t have to deal with the ethical dilemmas they create. In other words, the problem is not character. It is not ethics. It is not culture. And it is certainly not governance. It is structure.If you change your structure, you will change your reputation. Let me close with my suggestions for changing your structure.

First, be what the regulators want you to be: an independent guardian of the interests of investors. Secondly, get rid of all your principal business: without it, you will lose more than half of your conflicts of interests with your clients.Thirdly, sell your asset management businesses: concentrate your resources on just one thing, and do it exceptionally well. Fourthly, put an end to cross-subsidisation: don’t use FX, or cash, or stock loan to cheapen the cost of custody: safekeeping is not the means; it is the end of what you do.

Fifthly, stop charging ad valorem fees: work to fixed fees for holding assets and fixed transaction fees for servicing them. Sixthly, ditch limited liability: revert to what most of the banks you worked for once were: partnerships: because partners put their own money at risk.

Seventhly, disclose everything to your clients: assets in custody, transaction volumes, fees, spreads, staff numbers, fixed costs, variable costs, share your intellectual property. Eighthly, fire every single person working in your compliance department, and close it down: try trust instead: trusting your people to get it right the first time, every time. If you think this is a pipedream, take a look at this marketing pitch I came across the other day. It is for a custodian bank.

See if you can guess which bank it is.

Dominic Hobson