Caveat venditor part 4 – lies, damned lies and patter
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If you’ve read this far you’ve likely guessed or googled what ‘caveat venditor’ means. Nevertheless, here’s my take:
Caveat venditor is a Latin maxim meaning 'let the seller beware'. It fosters consumer welfare by making the seller accountable for the quality of goods produced or services offered. It’s the opposite to the maxim of caveat emptor, which means ‘let the buyer beware’. Caveat emptor is still in use in wholesale financial markets because the professionals can reasonably expect their counterparts to know as much as they do. In this context it reduces friction and increases speed and efficiency. So far, so obvious.
Even at wholesale level though, if one professional looks like they are making a gross mistake in an OTC transaction, a good counterparty will sometimes give them one (and only one) opportunity to check and correct themselves. The good guys will say “are you sure?”, which is recognised code for “you’ve miscalculated - I wouldn’t do that (trade) if I were you.” This action is not entirely borne of benevolence; it helps both parties to maintain and even strengthen their trading relationship. There’s also an element of pay-it-forward and even a whiff of sentiment i.e. “there, but for the grace of god, go I”.
Most consumers would not have enough market-smarts to answer the “are you sure?” question and would not spot that it is euphemistic. The utility of asking "are you sure?" would be limited and might even introduce mistrust. Where caveat venditor applies the onus, and thus the “are you sure you want to do this?” question, is placed on the seller. Rightly so.
We have already covered profiteering during execution, misappropriating in-the-money gains and the hidden profits in window forwards. The fourth and final thing we’ll talk about is loose language and how that leads to sales patter masquerading as advice. I have a couple of loose-language bugbears including “Banking-as-a-Service” when you’re not actually a bank (grrr). But the original and (in my opinion) worst example is the use of the verb “to advise” (double-grrr).
If you inform me it’s 3.00pm then you are not “advising me of the time”, you are telling me the time which is a fact. A lot of people use the verb ‘to advise’ when it’s often a peculiarly British and pompous way of telling or informing.
A bit different to this, but not wholly separate, is the soft-advising of clients and ex post claim of ‘consultative sale’ and ‘value-add’. It’s often ingratiating and obfuscatory twaddle. The word ‘advise’ will not be used, but the approach is couched to make the client think they’ve done better than they would have otherwise and leave them to infer that they got advice. They probably got a neutral outcome at best. A couple of examples:
- Guidance towards setting long windows and taking early drawdowns of a window forward (see previous article). This can’t be dressed-up as value add – it’s the appropriation of money that the client paid to buy flexibility. The outcome to the client could be neutral if they were going to take this action anyway, but otherwise it's worse.
- The discussion with clients about how to execute when there is market-sensitive data due out. Salespeople have been known to guide or soft-advise clients to book 50% of their requirement before the data is published and wait until afterwards to book the remainder. This sounds eminently sensible as an approach. But if the market goes up after the news event, then the dealer assumes credit for retaining some participation in the upside. If the market instead goes down, the dealer takes credit for having suggested the client ‘protect’ some of their requirement. Either way, the client gets a neutral outcome but is encouraged to feel gratitude. It might even be used to make clients less price sensitive, which will be a negative. The client will hear what they want to hear and will think they are getting advice; they may even be encouraged to infer that they did.
The provision of ‘advice’ will likely be covered in T&Cs. Words to the effect of, “we don’t offer advice so whatever we might have said, or whatever you might have inferred, we didn’t advise you”. If the client thinks they received a poor outcome, any claim that they were advised would be rebuffed. UK courts have also not favoured the client in this situation; claims of mis-selling and negligent misstatement have failed with judges reverting to T&Cs, i.e. there was no advice irrespective of what the client inferred from sales guff.
What can be done? The banks don’t have much data they can look at, but as product manufacturer they can / should be undertaking a qualitative review of practices. This is in addition to the quantitative analysis already described. For example, banks could review how firms are undertaking conduct surveillance and supervision. The good guys wouldn't mind at all. Regulators could also require an industry consultation followed by updated guidance to banks or an (always helpful) ‘Dear CEO’ letter.
Times have changed; twenty years ago the payments industry was young and under much less scrutiny. Companies could establish and thrive, in some cases because no-one was watching. Banks were little better (famously, often worse). The regulators only had resource and bandwidth to focus on large institutions. Supervision was cursory; surveillance, supervision and monitoring was generally notable by its absence.
Payments firms and the FX banks that support them should be placed squarely be on the hook. The FX Banks must stop being laissez-faire; it’s not 1995 and it’s clear that caveat emptor is no more.
So that’s it. Caveat venditor. Caveat argentaria. Et caveat moderator.