The Podcast of the Lotus Eaters - PREVIEW： Brokenomics ｜ Finance Has Changed with Steven Woolfe

00:00:00.000 Hello and welcome to Brokernomics. Now, one of the most important functions in any city firm is the

00:00:06.140 business prevention officer. Those are the chaps who make sure that you don't go to jail. And I

00:00:10.160 found out just the other day that Stephen was a business prevention officer for many years during

00:00:15.340 the spiciest bits of the days in the city. Yeah. So I think you missed the Asian financial crisis, 0.98

00:00:21.340 the bearings. Yes. But you were in for, let me get this right, the dot-com crash. Yes. Enron,

00:00:29.840 9-11, the great financial crisis, the European collapse and the flash crash. So you got some

00:00:37.080 interesting, oh and LIBOR. Oh yeah, LIBOR as well. Yes. So when you say that now, absolutely.

00:00:43.720 Yes, you got in for some spices. So what is the role of a business prevention officer?

00:00:48.280 All right. So I came in, first of all, into a small stockbroking firm just across London Bridge,

00:00:56.120 which was really just slightly outside of the city. And I came in as a compliance officer and

00:01:02.020 general counsel. Oh yeah, you're supposed to call them compliance officers. So yeah, as a barrister,

00:01:06.280 my role came in as being just a general lawyer for doing anything from human resources and

00:01:12.600 employment law to looking after contracts. So we're doing it. But specifically, I was brought in as

00:01:17.780 this idea of a new compliance officer. In those days, the city was regulated very lightly by

00:01:24.080 organisations called Lautro and Fimbra, who had like little books that were literally this thick.

00:01:31.380 So you could almost memorise all the rules that all the firms had to be regulated by.

00:01:35.520 It was just basically good contact. Yes. And they were great.

00:01:37.840 So that had gone, because I came in just as the dot com thing was peaking.

00:01:43.260 Yeah. And by then, that was almost exactly the same time as the FSA came in.

00:01:47.840 So it went from them, Lautro and Fimbra, and we had the Bank of England.

00:01:51.820 Yes.

00:01:51.980 So the Bank of England had prudential rules. And my job as a compliance officer is to go,

00:01:56.820 here is the firm. We're regulated by these entities. In those days, it was pretty loose.

00:02:01.900 Look at the rules and say, can we do this trade? Can we do this transaction? Can we onboard this

00:02:08.460 particular client? And my first firm, which was, I'm not sure I should mention the name of it,

00:02:15.460 actually, but was actually brilliant. It was just like a classic Wolf of Wall Street. It was just

00:02:20.400 one very long table, brilliant long table, with about like 12 guys on one side, 12 guys on the

00:02:26.600 other. There was the head trader in the middle, phones all the way around. And basically, these

00:02:32.520 guys were picking up the phone from a whole list of numbers that they were provided for and ringing

00:02:38.000 up these business people who owned companies all across the country, trying to get them onboarded as

00:02:44.520 their clients to buy and sell shares, but also to buy and sell derivatives contracts. And in those

00:02:53.580 days, we had something called LEAPS, long dated equity options. So long dated equity options

00:03:00.000 basically provided a huge amount of commission for the guy that sold it. So if you were able to get

00:03:06.860 someone on the end of the phone to buy an option on, say, BP, but it was mainly American stocks who

00:03:14.900 were doing this, it was an option on whatever Amazon was at the time, probably wasn't even around

00:03:19.620 then. But Amazon, you buy at this price, if it reaches that price within nine months,

00:03:26.000 will sell out and you've got a profit.

00:03:27.260 So it's not fundamentally a bad product, because you pay pennies for the option to acquire a stock

00:03:32.820 in the future. And if the stock doesn't hit that level, then it just expires worthless and you've

00:03:38.660 lost your pennies. But if it goes over that level, then you can buy it at the pre-agreed price. And if it

00:03:43.340 goes way over that level, you can buy it at that pre-agreed price. And normally, these were cash

00:03:47.860 settled. So you just instantly get the difference between whatever the price was. So it's not

00:03:52.780 fundamentally a bad financial product.

00:03:55.420 No, it wasn't fundamentally a bad product.

00:03:56.080 But there was, I remember, a bit of a mis-selling crisis.

00:03:58.820 Yeah, there was a mis-selling crisis because of two factors. One is there was a massive commission

00:04:02.880 on it. So literally, I don't know, 20%, 25%, even 30% commission on whatever you've got. So if

00:04:08.740 someone was putting in 10 grand, we're picking out three. So already they needed to make three

00:04:13.740 grand above it.

00:04:14.660 That's a bit spicy.

00:04:15.400 Yeah, no, it was a huge one. I mean, these guys were, if someone came in with like a 25

00:04:22.320 or 50 grand deal, and people are like dancing on the tables or running around the whole table

00:04:26.520 going, yeah, so it was a bit like-

00:04:28.420 How much of that did the firm get? And how much did the individual trader get?

00:04:30.820 Oh, I think it was split. So it was quite big. I think it was like 60, 40 or something

00:04:35.300 like that. So the guys were getting quite a lot out. They paid very, very well out of this.

00:04:39.200 And the second element about it is time. It was time sensitive. So what happened is if the company

00:04:45.460 did pop and they made the client 30 or 40%, and it could happen. That happened quite a lot for the

00:04:52.560 guys. They made 30, 40%. Your client's going to be happy making that amount of money, but it could

00:04:58.420 have gone even further. So basically what they were doing is as soon as that came in, they sold out.

00:05:02.320 They rang them up. And if it was a week or two weeks or three weeks, and then just sold them

00:05:06.240 into something else, almost immediately. So the commission-

00:05:10.140 And they were motivated by the commission.

00:05:11.960 Oh, they were absolutely motivated by the commission.

00:05:13.500 I mean, that is not necessarily fundamentally a bad strategy, because with options, I mean,

00:05:18.780 there's the Greek letters that determine how they're priced. And I think row does the time

00:05:22.460 value. And that decays over time. So that's the thing. You can get these synthetic products

00:05:29.040 that you buy. But if you hold them and they just stay static, the time value decays.

00:05:34.640 Yeah, that was the problem. If they didn't make the money fairly quickly, there were some

00:05:38.740 very stressed people there, because the time decay really ate.

00:05:42.000 Yes.

00:05:42.560 On leaps, time decay.

00:05:43.940 What year was this?

00:05:45.400 Oh, so I must have been around 27. So it was 27, 28, 67, 77, 87. This is around 84, 85,

00:05:56.880 I think, I think, 84. Oh, okay.

00:05:59.080 Yeah, so it's quite, 67, 77, 87 would have made me 30. No, it wouldn't. No, it wouldn't.

00:06:05.640 67, I was born. I'm not having any maths. 77, 87, 97. So this is about 94, 94, 95.

00:06:12.660 94, 95. Okay, so that was a reasonably good pit. And it got super mental towards 1998 and

00:06:18.940 1999.

00:06:19.600 Yeah, it did.

00:06:20.820 In those days, things were basically trending up. Yeah. So actually, these might not have

00:06:26.780 been bad products.

00:06:27.600 No, they weren't. But every now and again, unfortunately, someone who was the analysts

00:06:31.620 would come in and would get one wrong. And when it went wrong, everyone on the table was

00:06:35.600 really, really pissed off, because it would drag everything down, and then everyone would

00:06:39.980 be panicking about time delay. And the thing for them is they all wanted to sell out quickly.

00:06:43.900 If they suddenly had to sit there and watch it for ages, they couldn't take the money from

00:06:47.160 the client to reinvest. So then they'd have to get on the phone again and find new business.

00:06:52.840 So they're motivated to be selling these things quickly.

00:06:54.920 Yeah, they hated doing that. And one of my jobs was brought in, to be fair, by the chief

00:07:00.160 executive. He saw that this was going to go out of fashion, and it would end. But also,

00:07:05.640 it was short term. And so he wanted to try and bring into a business model where you've

00:07:11.800 got more funds under management, less commission, which they didn't like. But the more funds under

00:07:17.140 the management you've got, if you've suddenly got 10 million...

00:07:19.120 For the firm, it's a much more sustainable business.

00:07:20.440 It's a much more sustainable business. So I was brought in as the transition to try and

00:07:24.540 work with him to bring that through. And then IMRO and SFA, then Securities and Futures Authority,

00:07:33.640 took over from where FIMRO and Loutro came.

00:07:36.200 So that was slightly before my time. But I remember the guys in the firm when I joined explaining

00:07:40.680 this to me. There was basically one that looked after investment firms and one that looked

00:07:43.740 after stockbrokers. And the one that looked after investment firms assumed that you were

00:07:49.560 incompetent, but not necessarily corrupt. And the one that looked after stockbrokers assumed

00:07:54.000 that you were corrupt, but not necessarily incompetent.

00:07:55.720 That's correct.

00:07:56.720 So which one were you, Amber?

00:07:58.080 We, unfortunately, had an arm of both. But IMRO was the primary function.

00:08:01.720 So IMRO came in. But the SFA was run by a chap called Philip Thorpe, who is an Australian

00:08:08.760 guy who ended up, I think, going leading. Oh, he was praised to high heaven. But his main

00:08:13.740 view was that I'm going to just take Everall. I'm just going to just imprison the lot if

00:08:18.820 I can. Everyone's corrupt.

00:08:20.020 Yes.

00:08:20.480 You know.

00:08:20.920 There was a bit of a tone shift about that period.

00:08:22.920 Oh, he was. And you'd have the phone calls. You'd be calling someone in the regulator

00:08:26.860 before. So you'd be speaking on the phone with someone who is working for Loutro or FIMRO.

00:08:31.820 And we'd have a really good conversation. I've got this issue. What do you think?

00:08:34.580 And they were old traders. These were people who were on the floor.

00:08:37.040 It was the industry regulating itself, wasn't it?

00:08:39.380 Yeah. And it was. And these people understood what you were doing. And we tried to work a

00:08:43.220 solution that was the right thing. But when he came in, he just slashed all of that. He

00:08:48.680 said, anyone who puts up the phone, they're obviously a criminal. That was his attitude

00:08:52.260 to it. And he spent his time trying to get people done. He saw it as a solution. If I can

00:09:00.660 get rid of all these bad people in the industry, of which everyone's bad. In reality, what he

00:09:05.240 was saying is the small players. I don't want them. I'm just working for the big guys.

00:09:09.240 And they can afford more expensive compliance. And that's where compliance took off. All

00:09:13.400 of a sudden, jobs for the boys came out there.

00:09:15.620 So the compliance officer always basically started off as somebody who helped keep you

00:09:19.720 out of jail.

00:09:20.440 Yeah.

00:09:21.220 And helped you with some sensible stuff. But as we talk about over the course of the

00:09:25.260 conversation, the importance of that role just went up steadily over the time.

00:09:30.540 Oh, usually so. Usually so. Yeah.

00:09:33.280 So actually, I'll ask you this fundamental question before we move on. As a compliance

00:09:37.380 officer, is your duty to the clients, the firm, or the regulator?

00:09:44.100 Ah, very good question. Very good question. And adding the fact I was a barrister as well,

00:09:50.760 so it was my duty to the bar council and the courts. So that's exactly what happened when

00:09:56.160 I was pulled in by these... I was asked to come visit Imro and just to have a general 1.00

00:10:02.880 chat about the firm. And so I turned up. And don't forget, I was fairly young. I'd only

00:10:07.360 been in the job, what, six, seven, eight months or something like that. And suddenly, I've

00:10:11.620 got like six people in a room, all questioning about the ethicacies of the business. And

00:10:16.920 well, is my boss a corrupt guy? And were you doing dodgy trading and all the rest of it?

00:10:22.200 And I'm sitting there like, you know, imagine a 28-year-old. No experience of banking in

00:10:28.620 the family. No experience of lawyers in the family. The only experience I've got is what

00:10:33.060 I've learned from, you know, either watching TV or being in the courts myself and from law

00:10:37.720 school. So literally in there, now being questioned as though I'm some sort of major criminal, you

00:10:43.480 know, protecting...

00:10:44.200 I mean, you had a good qualification set, but you were pretty green back then.

00:10:46.660 Yeah, no, I was. But the one thing I kept on thinking to myself is, I can't give them

00:10:51.080 too much, but I've got to give them something because the bar council says I've got to, you

00:10:54.580 know, rule for the law. But I've got to protect my client and I can't give them information

00:10:59.660 about them that's not in their, what they are supposed to ask. So they were trying to ask

00:11:06.900 questions that they knew they couldn't ask information from. So in the end, your responsibility

00:11:12.660 at that stage, thankfully, was to me, make sure I did everything ethically within that

00:11:17.720 as of being a barrister. So I wasn't going to lie, you know, about it, but also protect

00:11:23.080 the client because you're a barrister for the firm. So I was going to ensure that I only

00:11:29.200 told them what was required of me under the legislation as it was. And if I felt there was

00:11:36.400 in doubt, I'd say no, I can't answer that question. Now what they made it much more difficult

00:11:42.520 later on is they effectively changed the rules from being innocent till proven guilty to make

00:11:50.080 compliance officers now effectively be snitches within firms. So you have a very fine line.

00:11:56.300 That's why they're getting paid a lot of money now. Because at the top end, if you say something,

00:12:01.100 they will come back and say, we will sue you for providing us false information.

00:12:06.280 Because I think in the days when you joined, the responsibility was to the firm.

00:12:10.380 Yes.

00:12:11.180 And they've effectively shifted it every time. I guess we get onto that.

00:12:14.800 Yeah.

00:12:15.040 To now, notionally, your duty is still to the firm.

00:12:20.300 Notionally, yes.

00:12:21.160 But functionally, your duty is to the regulator. And they put a whole load of mechanisms

00:12:25.980 in place to make sure that's the case.

00:12:27.540 And so to the extent now that senior compliance officers and big firms, or even medium firms

00:12:32.260 now, require their own lawyers. I mean, this is the nonsense of it.

00:12:35.900 I didn't know that.

00:12:36.660 Yeah. So if you're going in now, you'd need your own lawyer. Because now you're being

00:12:40.920 potentially sued by your own firm as well as by the regulator. And knowing full well that

00:12:45.000 you can actually be banned from the industry and fined by the regulator if they deem that

00:12:49.320 your actions for protecting the firm were that that fell outside of what they regard as

00:12:54.980 acceptable. Bearing in mind that they are also judge, jury, executioner, sentencer, and

00:13:02.320 the appellate court. It's one of the most nonsensical issues. And why do people want to leave the

00:13:08.540 UK? It's because why, when you've got an industry that can actually charge you with the rules

00:13:14.380 it creates? And then effectively do you?

00:13:17.720 The first firm that I worked for, it was, I mean, it was an ethically, it was a completely

00:13:23.720 fine firm. What they did was financial advice. But they'd kind of give it to anyone on this

00:13:29.220 model where, you know, you could ring up and you could be a little old lady with £500 to 0.95

00:13:33.720 invest and they would answer you. They dealt with everybody who came in. Of course, they

00:13:37.220 wanted the bigger clients and the bigger clients got, you know, dedicated people and that kind of

00:13:40.980 stuff. It was open to all. And what the regulators did over that period that we're talking about

00:13:46.240 is they assumed that everyone was rotters. Yes. And what you need to do is you need to

00:13:54.580 not just give somebody advice, you need to write them a whole six-page letter explaining that

00:13:59.200 you've looked at their risk profile, you've done all these calculations, this is the reason for

00:14:03.360 doing it, here's the relevant legislation, all that kind of stuff. Now you need to write a six-page

00:14:07.160 letter. What that means is that it is completely economically unviable to deal with anyone without

00:14:13.840 a minimum of £100,000 to invest, and probably much higher than that. Yeah, I mean, I remember.

00:14:18.340 Which basically just means is that little old ladies, they don't get any advice these days, 1.00

00:14:22.160 whereas they used to in the old system. Of course. And that's because basically regulators

00:14:26.820 now are no longer people who've been in the industry for a long period of time. Lots of them

00:14:32.440 are either one or two categories of individuals. They've gone straight from university, studied some

00:14:35.860 course, HR, marketing, PR, maybe done a business degree. They're taken in. Some of them are lawyers,

00:14:42.640 perhaps lawyers who wouldn't have actually made it in a law firm or as a barrister, but they'll get in

00:14:47.060 at those lower ends because they know it's a good job. It's such a big organisation now that you just

00:14:52.520 climb the ladder through brown nosing and doing all the things that you do in a corporate world.

00:14:57.020 And then the other groups are the politicos who are appointed at the top end. And so they don't

00:15:03.360 really understand business. They don't understand the firms. They might have a big understanding,

00:15:06.920 oh, that is a share. That is a bond. That's what a stockbroking firm does. That's what corporate

00:15:11.420 finance does. And when you actually start to try and understand the whole framework,

00:15:15.920 they just haven't got the guts, blood and internal understanding of how the markets work. They just

00:15:22.660 turn around and go, everyone is bad, therefore stop. And this is what the government wants at the

00:15:27.240 moment. We will do it irrespective of what happens. To be fair, there were some dodgy firms.

00:15:32.220 Oh, look, there were. But in many ways, most of that has particularly gone because they can't,

00:15:40.240 but you're always going to find people who are dodgy and fraudulent in some form or other.

00:15:44.340 Actually, I don't think those firms would have survived the internet era particularly well anyway.

00:15:47.680 No, no, no. I agree with that. But the way that they've changed the regulations made it heavy.

00:15:51.840 And we talked earlier before we came in on the show about how the city of London is

00:15:55.680 fracturing and dying a death. How a lot of businesses are moving to Dubai and Saudi Arabia.

00:16:00.420 How companies are being bought by the American markets. Or there's the encouragement of large

00:16:05.580 firms if they're not being taken over by American companies to go and relist on the US. This is part

00:16:11.380 of it. It's a 20, 30 year destruction of our city of London through over-impressive regulations.

00:16:19.600 So what happened after that? So they've dragged you into a meeting and they're giving you the third degree?

00:16:22.820 Yeah, they gave me the third degree and I didn't really give them enough. But what I did is I went back

00:16:28.940 to my firm. And I remember having the conversation with my CEO. I said, this is what's happened.

00:16:34.640 It wasn't what they told me I was going in for. They've actually basically come in for you

00:16:39.240 a Nick who is the other boss. They're saying that you're a completely dodgy firm. And to be fair on

00:16:47.780 my boss, he went away and he was a really lovely guy and I fully respect him. He went away and about

00:16:53.840 a week later he called me into the office and he said, Stephen, look, I think that they're going to

00:17:00.880 come back heavily on us. I'm going to instruct this law firm to try and help. But as much as I've tried

00:17:08.100 to change the company, it probably is a good idea if you look elsewhere. Not because I'm firing,

00:17:16.820 I want you to stay. And if you want to stay, you can stay. But you're a good guy and I've got a feeling

00:17:22.160 they're going to try and drag us down. And they did. They went after him as a decent bloke. They

00:17:27.540 ended up fining the company a lot of money, so much that they did carry on. And, you know,

00:17:37.000 he was really, really good to me. Did he actually make his clients money overall?

00:17:42.400 On a whole, he did. Yeah, that's the point. That was the sad thing. He was trying to do the right

00:17:46.300 thing. They were making money and he was trying to change the firm to a new model. So he's

00:17:52.120 fighting his own staff and even including one of his own partners to recognize that funds under

00:17:58.120 management is where the future is. And as we know now, that's the model that most people were doing

00:18:03.620 and he was going to get there. And he would have been ahead of the game if he'd have managed to

00:18:07.480 achieve that. But the very fact that the regulator thought there was something dodgy about it because

00:18:13.120 they were using leaps and they were calling people on the phone. I think that applied pressure,

00:18:18.740 the additional pressure that business people don't need. You'd need legal pressure,

00:18:21.980 regulatory pressure, as well as business pressures, trying to deal with your firm.

00:18:25.820 And I think it's just hard. And I saw that, first of all, of how the state, when it gets it into

00:18:33.080 their head that we're right, even though we know nothing about what's going on, we'll do whatever

00:18:37.320 we can to destroy another entity. The first place I worked, my boss there was a wealthy guy and ran a

00:18:44.060 successful firm. I mean, his involvement in this leap stuff is after it got so blown out of proportion

00:18:49.260 and the message was put out loud and clear that leaps are dodgy. And they're not actually.

00:18:53.320 They are a legitimate product. I mean, they're a bit esoteric and it's probably not the right

00:18:57.860 thing to do to call people up to get them to invest in because it is a bit complicated.

00:19:01.560 Yeah.

00:19:01.860 But they're not actually a fundamentally bad product. Anyway, so the message went out to

00:19:05.140 everybody that leaps are dodgy and you should run a mile from them.

00:19:07.860 So nobody wanted to hold them. It was called this leaps misselling crisis.

00:19:12.920 Yeah.

00:19:13.120 Everybody wanted out of them. And what my boss did is he basically just bought up all of

00:19:16.300 them and then held them. And he made a massive profit on it. So they aren't fundamentally a

00:19:22.700 bad thing.

00:19:23.480 It's just, you know, the regulators have got this idea that the way to protect people is

00:19:29.660 to stop people from buying what they want to buy.

00:19:31.780 If you would like to see the full version of this premium video, please head over to

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The Podcast of the Lotus Eaters - July 08, 2025

PREVIEW： Brokenomics ｜ Finance Has Changed with Steven Woolfe

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