Macaskill on markets: NatWest and JPMorgan struggle with reputational risk management
Banks including NatWest and JPMorgan are struggling to put out reputational risk-management fires.
An ill-considered attempt to reduce reputational risk by a unit of NatWest has cost chief executive Alison Rose her job in London, while in New York, JPMorgan is fighting to prevent its historical association with sex offender Jeffrey Epstein from tarnishing longstanding chief executive Jamie Dimon.
The two episodes highlight both the short-term risk from attempting to micro-manage exposure to potentially embarrassing customers, and the long-term danger of turning a blind eye to client behaviour.
It may be difficult to find the right balance in managing these two risks, but banks are doing a spectacularly bad job at the moment and creating one of the worst public-relations challenges for the industry since the global financial crisis of 2008.
The risk-management exercise that cost Rose her job as the first female chief executive of a UK bank was a particularly egregious example of an unforced error.
Private bank Coutts has been owned by predecessor banks to NatWest for more than a century, but its zeal for policing the behaviour of its clients is much more recent, and seems to have been applied in a haphazard manner.
A decision by Coutts to withdraw banking services from Nigel Farage, a commodity broker turned right-wing politician turned TV host, led to the heads of the biggest UK banks being reprimanded by the government for supposed infringement of a customer’s right to hold both a bank account and a political opinion.
“I hope the whole financial sector learns from this incident,” said Andrew Griffith, economic secretary to the Treasury, after top bankers were forced to attend a meeting in London on Wednesday to hear the reprimand. “Its role is to serve customers well and fairly – not to tell them how or what to think.”
The bankers were spared an on-camera dressing down, but energetic briefings by political aides left little doubt that the government was keen to be seen to side with anyone who has a grievance with a bank.
Rose had resigned the night before in a demonstration of the inability of many bankers to cope with politically fuelled criticism that can develop momentum painfully quickly.
The NatWest board initially tried to back Rose after she admitted an “error of judgement” in talking to a reporter about details of Farage’s banishment from Coutts, before being forced into a humiliating retreat by political pressure from the top of the UK government.
The war on supposedly ‘woke’ banking and investing has been raging for longer on the other side of the Atlantic, as Republican politicians in the US condemn firms including BlackRock and Citigroup for promoting environmental, social and governance (ESG) principles or limiting lending to fossil fuel and gun companies.
But a seemingly relentless succession of lawsuits and negative headlines associating JPMorgan with the deceased Epstein is a reminder that a failure to monitor client risk can also have long-lasting consequences.
On Monday, another suit was filed in New York that was designed to link JPMorgan – and Dimon – with the crimes of Epstein.
The government of the US Virgin Islands, where Epstein committed much of his criminal activity, reworked the information available about the actions of his former bankers at JPMorgan – and their superiors – with some new details to generate publicity and add to the pressure on Dimon.
An email in which a JPMorgan banker said another client’s residence, “reminded me of JE’s (Epstein’s) house, except it was more tasteful, and fewer nymphettes”, was a reliable headline generator.
The filing also continued an attempt to tie Dimon to Epstein, despite the JPMorgan head’s denial of any personal contact.
“In 2004, Epstein – together with Jamie Dimon (then CEO-in-waiting) – was an integral part of JPMorgan’s game-changing acquisition of Highbridge,” the case said in a reference to the purchase of the hedge fund group by the bank.
There was also a reminder that bankers cannot feel safe from reputational embarrassment even long after their retirement.
The filing claimed that Sandy Warner, who retired as chairman and chief executive of JPMorgan after its 2000 merger with Chase Manhattan, had described Epstein as “one of the most connected people I know in New York”.
This was no doubt an unwelcome return to the spotlight for Warner – full name Douglas A Warner III – who is the epitome of an old-school establishment banker, down to his membership of multiple exclusive golf clubs and a role until 2020 on the governing body of Yale University.
Unlike NatWest, JPMorgan has prepared meticulously to defend its current chief executive.
The bank filed a case of its own on the same day as the latest salvo from the US Virgin Islands, in which it offered a rebuttal of the allegations.
“This is not a case about Jeffrey Epstein’s victims. This is a case in which a complicit governmental actor, the United States Virgin Islands (USVI), knowingly used its sovereign powers to enable Epstein’s sex crimes,” JPMorgan’s lawyers said. “USVI blames a third-party bank that did not have USVI’s authority to enforce any law … and seeks to pursue such claims at the expense of dragging Epstein’s victims through yet more litigation.”
JPMorgan has also mounted a vigorous attack on its former asset management and investment bank head Jes Staley, in an attempt to blame him for the consequences of the relationship with Epstein.
This includes a bid to force Staley to return all his JPMorgan compensation from 2006 to his departure in 2013, in another reminder that there is no rest for Wall Streeters accused of wickedness.
But despite JPMorgan’s energetic and disciplined defence of Dimon, there is no guarantee that it will prevail in the court of public opinion, even if it manages to beat the most recent charges.
The bank has already made a tactical retreat by agreeing a settlement with some of Epstein’s victims, for around $290 million. And it will know that any evidence that convincingly ties Dimon to Epstein could prove to be career-ending, even for the undisputed leading banker of his generation.
NatWest dominated the headlines in the UK in late July after the forced departure of Rose, but past and present board members of Barclays were probably monitoring the US news just as closely.
The decision to appoint Staley as chief executive of Barclays in 2015 looks increasingly like a failure of due diligence and judgement.
Barclays is clearly bracing for potential regulatory sanctions and legal cases related to Staley. Its most recent annual letter to shareholders from chairman Nigel Higgins described allegations made this year against Staley as “serious and new”. Barclays said it was suspending payments of outstanding deferred bonuses to Staley and “will also consider further action as appropriate”.
Barclays, like its UK-based peers, is also presumably considering further action to check how its tests on client suitability, including definitions of politically exposed persons, are applied.
The reputational risk-management challenges faced by banks appear to be multiplying and testing even the most agile bank leaders.
It must make senior managers at many banks yearn for the days when all they had to worry about was making money and collecting their cash bonuses.