Banks' proprietary trading desks are facing tough recommendations to change their culture and could become part of the approved persons regime, according to the Banking Commission's latest report.
Weighing in at over 500 pages, the Parliamentary Commission on Banking Standards' final report, published today, has been highly critical of the "testosterone-fuelled" culture of bank trading desks.
Key recommendations in the report set to affect proprietary trading desks include an expansion of the approved person regime and proposals to shake up their management structure.
The Commission suggests that the current approved person regime is insufficient for regulators to carry out enforcement. Estimates suggest that less than 10% of bankers are currently covered by the regime, which primarily encompasses those at the very top of the organisation, a few key functions and those who directly deal with clients.
This means that unless a criminal act has occurred, such as insider trading, many bank employees are effectively immune from regulatory sanctions. The report suggests that the approved persons regime should be extended so that all key responsibilities within a bank will be assigned to a specific, senior individual, even where decisions are made collectively.
Setting out the new approach, the Commission said: "the scope of the new licensing regime will ensure that all those who can do serious harm are subject to the full range of civil enforcement powers. These include fines, restrictions on responsibilities and a ban from the industry".
In cases of particularly reckless behavior, jail terms could be imposed.
The Commission's report also claimed the current management structure at trading desks is insufficient and reinforces the "macho" culture of traders that it believes leads to excessive risk taking.
Many top traders have been promoted to management positions due to being able to make significant earnings for the bank, but this does not necessarily make them suitable to manage, the report suggested.
Joris Luyendijk, an anthropologist and journalist who contributed evidence to the report, said: "the skills you need to be a good trader are almost opposite to the skills you need to be a good manager […] managing or trading are just completely different things."
The report recommends different pay structures be introduced so that those who trade and transact are remunerated differently to those who manage them. The remuneration for those who manage traders should not directly reflect the performance of the desk they run.
Other recommendations to change the culture of bank trading desks include hiring more women, bringing back-office culture into the front office and adopting pay structures that reflect long-term performance and risk management.