PREVIEW： Brokenomics ｜ Finance Has Changed with Steven Woolfe
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Summary
One of the most important roles in any city firm is the Business Prevention Officer. They make sure that you don t go to jail. And I found out just the other day that Stephen was a Business Protection Officer for many years during the spiciest bits of the days in the city.
Transcript
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Hello and welcome to Brokernomics. Now, one of the most important functions in any city firm is the
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business prevention officer. Those are the chaps who make sure that you don't go to jail. And I
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found out just the other day that Stephen was a business prevention officer for many years during
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the spiciest bits of the days in the city. Yeah. So I think you missed the Asian financial crisis,
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the bearings. Yes. But you were in for, let me get this right, the dot-com crash. Yes. Enron,
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9-11, the great financial crisis, the European collapse and the flash crash. So you got some
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interesting, oh and LIBOR. Oh yeah, LIBOR as well. Yes. So when you say that now, absolutely.
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Yes, you got in for some spices. So what is the role of a business prevention officer?
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All right. So I came in, first of all, into a small stockbroking firm just across London Bridge,
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which was really just slightly outside of the city. And I came in as a compliance officer and
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general counsel. Oh yeah, you're supposed to call them compliance officers. So yeah, as a barrister,
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my role came in as being just a general lawyer for doing anything from human resources and
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employment law to looking after contracts. So we're doing it. But specifically, I was brought in as
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this idea of a new compliance officer. In those days, the city was regulated very lightly by
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organisations called Lautro and Fimbra, who had like little books that were literally this thick.
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So you could almost memorise all the rules that all the firms had to be regulated by.
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It was just basically good contact. Yes. And they were great.
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So that had gone, because I came in just as the dot com thing was peaking.
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Yeah. And by then, that was almost exactly the same time as the FSA came in.
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So it went from them, Lautro and Fimbra, and we had the Bank of England.
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So the Bank of England had prudential rules. And my job as a compliance officer is to go,
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here is the firm. We're regulated by these entities. In those days, it was pretty loose.
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Look at the rules and say, can we do this trade? Can we do this transaction? Can we onboard this
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particular client? And my first firm, which was, I'm not sure I should mention the name of it,
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actually, but was actually brilliant. It was just like a classic Wolf of Wall Street. It was just
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one very long table, brilliant long table, with about like 12 guys on one side, 12 guys on the
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other. There was the head trader in the middle, phones all the way around. And basically, these
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guys were picking up the phone from a whole list of numbers that they were provided for and ringing
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up these business people who owned companies all across the country, trying to get them onboarded as
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their clients to buy and sell shares, but also to buy and sell derivatives contracts. And in those
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days, we had something called LEAPS, long dated equity options. So long dated equity options
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basically provided a huge amount of commission for the guy that sold it. So if you were able to get
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someone on the end of the phone to buy an option on, say, BP, but it was mainly American stocks who
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were doing this, it was an option on whatever Amazon was at the time, probably wasn't even around
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then. But Amazon, you buy at this price, if it reaches that price within nine months,
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So it's not fundamentally a bad product, because you pay pennies for the option to acquire a stock
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in the future. And if the stock doesn't hit that level, then it just expires worthless and you've
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lost your pennies. But if it goes over that level, then you can buy it at the pre-agreed price. And if it
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goes way over that level, you can buy it at that pre-agreed price. And normally, these were cash
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settled. So you just instantly get the difference between whatever the price was. So it's not
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But there was, I remember, a bit of a mis-selling crisis.
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Yeah, there was a mis-selling crisis because of two factors. One is there was a massive commission
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on it. So literally, I don't know, 20%, 25%, even 30% commission on whatever you've got. So if
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someone was putting in 10 grand, we're picking out three. So already they needed to make three
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Yeah, no, it was a huge one. I mean, these guys were, if someone came in with like a 25
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or 50 grand deal, and people are like dancing on the tables or running around the whole table
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How much of that did the firm get? And how much did the individual trader get?
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Oh, I think it was split. So it was quite big. I think it was like 60, 40 or something
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like that. So the guys were getting quite a lot out. They paid very, very well out of this.
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And the second element about it is time. It was time sensitive. So what happened is if the company
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did pop and they made the client 30 or 40%, and it could happen. That happened quite a lot for the
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guys. They made 30, 40%. Your client's going to be happy making that amount of money, but it could
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have gone even further. So basically what they were doing is as soon as that came in, they sold out.
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They rang them up. And if it was a week or two weeks or three weeks, and then just sold them
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into something else, almost immediately. So the commission-
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Oh, they were absolutely motivated by the commission.
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I mean, that is not necessarily fundamentally a bad strategy, because with options, I mean,
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there's the Greek letters that determine how they're priced. And I think row does the time
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value. And that decays over time. So that's the thing. You can get these synthetic products
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that you buy. But if you hold them and they just stay static, the time value decays.
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Yeah, that was the problem. If they didn't make the money fairly quickly, there were some
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very stressed people there, because the time decay really ate.
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Oh, so I must have been around 27. So it was 27, 28, 67, 77, 87. This is around 84, 85,
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Yeah, so it's quite, 67, 77, 87 would have made me 30. No, it wouldn't. No, it wouldn't.
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67, I was born. I'm not having any maths. 77, 87, 97. So this is about 94, 94, 95.
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94, 95. Okay, so that was a reasonably good pit. And it got super mental towards 1998 and
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In those days, things were basically trending up. Yeah. So actually, these might not have
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No, they weren't. But every now and again, unfortunately, someone who was the analysts
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would come in and would get one wrong. And when it went wrong, everyone on the table was
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really, really pissed off, because it would drag everything down, and then everyone would
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be panicking about time delay. And the thing for them is they all wanted to sell out quickly.
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If they suddenly had to sit there and watch it for ages, they couldn't take the money from
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the client to reinvest. So then they'd have to get on the phone again and find new business.
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So they're motivated to be selling these things quickly.
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Yeah, they hated doing that. And one of my jobs was brought in, to be fair, by the chief
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executive. He saw that this was going to go out of fashion, and it would end. But also,
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it was short term. And so he wanted to try and bring into a business model where you've
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got more funds under management, less commission, which they didn't like. But the more funds under
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the management you've got, if you've suddenly got 10 million...
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For the firm, it's a much more sustainable business.
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It's a much more sustainable business. So I was brought in as the transition to try and
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work with him to bring that through. And then IMRO and SFA, then Securities and Futures Authority,
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So that was slightly before my time. But I remember the guys in the firm when I joined explaining
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this to me. There was basically one that looked after investment firms and one that looked
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after stockbrokers. And the one that looked after investment firms assumed that you were
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incompetent, but not necessarily corrupt. And the one that looked after stockbrokers assumed
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that you were corrupt, but not necessarily incompetent.
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We, unfortunately, had an arm of both. But IMRO was the primary function.
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So IMRO came in. But the SFA was run by a chap called Philip Thorpe, who is an Australian
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guy who ended up, I think, going leading. Oh, he was praised to high heaven. But his main
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view was that I'm going to just take Everall. I'm just going to just imprison the lot if
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There was a bit of a tone shift about that period.
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Oh, he was. And you'd have the phone calls. You'd be calling someone in the regulator
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before. So you'd be speaking on the phone with someone who is working for Loutro or FIMRO.
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And we'd have a really good conversation. I've got this issue. What do you think?
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And they were old traders. These were people who were on the floor.
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It was the industry regulating itself, wasn't it?
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Yeah. And it was. And these people understood what you were doing. And we tried to work a
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solution that was the right thing. But when he came in, he just slashed all of that. He
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said, anyone who puts up the phone, they're obviously a criminal. That was his attitude
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to it. And he spent his time trying to get people done. He saw it as a solution. If I can
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get rid of all these bad people in the industry, of which everyone's bad. In reality, what he
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was saying is the small players. I don't want them. I'm just working for the big guys.
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And they can afford more expensive compliance. And that's where compliance took off. All
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So the compliance officer always basically started off as somebody who helped keep you
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And helped you with some sensible stuff. But as we talk about over the course of the
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conversation, the importance of that role just went up steadily over the time.
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So actually, I'll ask you this fundamental question before we move on. As a compliance
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officer, is your duty to the clients, the firm, or the regulator?
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Ah, very good question. Very good question. And adding the fact I was a barrister as well,
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so it was my duty to the bar council and the courts. So that's exactly what happened when
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I was pulled in by these... I was asked to come visit Imro and just to have a general
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chat about the firm. And so I turned up. And don't forget, I was fairly young. I'd only
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been in the job, what, six, seven, eight months or something like that. And suddenly, I've
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got like six people in a room, all questioning about the ethicacies of the business. And
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well, is my boss a corrupt guy? And were you doing dodgy trading and all the rest of it?
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And I'm sitting there like, you know, imagine a 28-year-old. No experience of banking in
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the family. No experience of lawyers in the family. The only experience I've got is what
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I've learned from, you know, either watching TV or being in the courts myself and from law
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school. So literally in there, now being questioned as though I'm some sort of major criminal, you
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I mean, you had a good qualification set, but you were pretty green back then.
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Yeah, no, I was. But the one thing I kept on thinking to myself is, I can't give them
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too much, but I've got to give them something because the bar council says I've got to, you
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know, rule for the law. But I've got to protect my client and I can't give them information
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about them that's not in their, what they are supposed to ask. So they were trying to ask
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questions that they knew they couldn't ask information from. So in the end, your responsibility
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at that stage, thankfully, was to me, make sure I did everything ethically within that
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as of being a barrister. So I wasn't going to lie, you know, about it, but also protect
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the client because you're a barrister for the firm. So I was going to ensure that I only
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told them what was required of me under the legislation as it was. And if I felt there was
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in doubt, I'd say no, I can't answer that question. Now what they made it much more difficult
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later on is they effectively changed the rules from being innocent till proven guilty to make
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compliance officers now effectively be snitches within firms. So you have a very fine line.
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That's why they're getting paid a lot of money now. Because at the top end, if you say something,
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they will come back and say, we will sue you for providing us false information.
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Because I think in the days when you joined, the responsibility was to the firm.
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And they've effectively shifted it every time. I guess we get onto that.
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To now, notionally, your duty is still to the firm.
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But functionally, your duty is to the regulator. And they put a whole load of mechanisms
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And so to the extent now that senior compliance officers and big firms, or even medium firms
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now, require their own lawyers. I mean, this is the nonsense of it.
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Yeah. So if you're going in now, you'd need your own lawyer. Because now you're being
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potentially sued by your own firm as well as by the regulator. And knowing full well that
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you can actually be banned from the industry and fined by the regulator if they deem that
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your actions for protecting the firm were that that fell outside of what they regard as
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acceptable. Bearing in mind that they are also judge, jury, executioner, sentencer, and
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the appellate court. It's one of the most nonsensical issues. And why do people want to leave the
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UK? It's because why, when you've got an industry that can actually charge you with the rules
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The first firm that I worked for, it was, I mean, it was an ethically, it was a completely
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fine firm. What they did was financial advice. But they'd kind of give it to anyone on this
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model where, you know, you could ring up and you could be a little old lady with £500 to
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invest and they would answer you. They dealt with everybody who came in. Of course, they
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wanted the bigger clients and the bigger clients got, you know, dedicated people and that kind of
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stuff. It was open to all. And what the regulators did over that period that we're talking about
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is they assumed that everyone was rotters. Yes. And what you need to do is you need to
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not just give somebody advice, you need to write them a whole six-page letter explaining that
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you've looked at their risk profile, you've done all these calculations, this is the reason for
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doing it, here's the relevant legislation, all that kind of stuff. Now you need to write a six-page
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letter. What that means is that it is completely economically unviable to deal with anyone without
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a minimum of £100,000 to invest, and probably much higher than that. Yeah, I mean, I remember.
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Which basically just means is that little old ladies, they don't get any advice these days,
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whereas they used to in the old system. Of course. And that's because basically regulators
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now are no longer people who've been in the industry for a long period of time. Lots of them
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are either one or two categories of individuals. They've gone straight from university, studied some
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course, HR, marketing, PR, maybe done a business degree. They're taken in. Some of them are lawyers,
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perhaps lawyers who wouldn't have actually made it in a law firm or as a barrister, but they'll get in
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at those lower ends because they know it's a good job. It's such a big organisation now that you just
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climb the ladder through brown nosing and doing all the things that you do in a corporate world.
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And then the other groups are the politicos who are appointed at the top end. And so they don't
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really understand business. They don't understand the firms. They might have a big understanding,
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oh, that is a share. That is a bond. That's what a stockbroking firm does. That's what corporate
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finance does. And when you actually start to try and understand the whole framework,
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they just haven't got the guts, blood and internal understanding of how the markets work. They just
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turn around and go, everyone is bad, therefore stop. And this is what the government wants at the
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moment. We will do it irrespective of what happens. To be fair, there were some dodgy firms.
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Oh, look, there were. But in many ways, most of that has particularly gone because they can't,
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but you're always going to find people who are dodgy and fraudulent in some form or other.
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Actually, I don't think those firms would have survived the internet era particularly well anyway.
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No, no, no. I agree with that. But the way that they've changed the regulations made it heavy.
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And we talked earlier before we came in on the show about how the city of London is
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fracturing and dying a death. How a lot of businesses are moving to Dubai and Saudi Arabia.
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How companies are being bought by the American markets. Or there's the encouragement of large
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firms if they're not being taken over by American companies to go and relist on the US. This is part
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of it. It's a 20, 30 year destruction of our city of London through over-impressive regulations.
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So what happened after that? So they've dragged you into a meeting and they're giving you the third degree?
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Yeah, they gave me the third degree and I didn't really give them enough. But what I did is I went back
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to my firm. And I remember having the conversation with my CEO. I said, this is what's happened.
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It wasn't what they told me I was going in for. They've actually basically come in for you
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a Nick who is the other boss. They're saying that you're a completely dodgy firm. And to be fair on
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my boss, he went away and he was a really lovely guy and I fully respect him. He went away and about
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a week later he called me into the office and he said, Stephen, look, I think that they're going to
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come back heavily on us. I'm going to instruct this law firm to try and help. But as much as I've tried
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to change the company, it probably is a good idea if you look elsewhere. Not because I'm firing,
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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
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they're going to try and drag us down. And they did. They went after him as a decent bloke. They
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ended up fining the company a lot of money, so much that they did carry on. And, you know,
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he was really, really good to me. Did he actually make his clients money overall?
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On a whole, he did. Yeah, that's the point. That was the sad thing. He was trying to do the right
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thing. They were making money and he was trying to change the firm to a new model. So he's
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fighting his own staff and even including one of his own partners to recognize that funds under
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management is where the future is. And as we know now, that's the model that most people were doing
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and he was going to get there. And he would have been ahead of the game if he'd have managed to
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achieve that. But the very fact that the regulator thought there was something dodgy about it because
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they were using leaps and they were calling people on the phone. I think that applied pressure,
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the additional pressure that business people don't need. You'd need legal pressure,
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regulatory pressure, as well as business pressures, trying to deal with your firm.
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And I think it's just hard. And I saw that, first of all, of how the state, when it gets it into
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their head that we're right, even though we know nothing about what's going on, we'll do whatever
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we can to destroy another entity. The first place I worked, my boss there was a wealthy guy and ran a
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successful firm. I mean, his involvement in this leap stuff is after it got so blown out of proportion
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and the message was put out loud and clear that leaps are dodgy. And they're not actually.
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They are a legitimate product. I mean, they're a bit esoteric and it's probably not the right
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thing to do to call people up to get them to invest in because it is a bit complicated.
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But they're not actually a fundamentally bad product. Anyway, so the message went out to
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everybody that leaps are dodgy and you should run a mile from them.
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So nobody wanted to hold them. It was called this leaps misselling crisis.
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Everybody wanted out of them. And what my boss did is he basically just bought up all of
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them and then held them. And he made a massive profit on it. So they aren't fundamentally a
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It's just, you know, the regulators have got this idea that the way to protect people is
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to stop people from buying what they want to buy.
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