The Financial Services Authority has warned UK investment banks to stop culling their back office staff involved in crucial valuation control functions.
FSA chief Hector Sants advised investment banking bosses last week to "consider carefully" whether they should axe the middle and back-office staff responsible for the valuation and marking to market of complex trades.
The letter, which was published on the FSA's website on 20 August, followed a 12-month review of bank's risk management practices that concluded market turmoil had “stretched” firms’ valuation and control processes, which were sometimes “materially flawed or inadequate”.
Sants stated in the letter: "In the current period of increased cost control, we have observed a tendency for firms to look to cut costs not just in front office functions, but in middle and back office functions too."
"We recommend that you consider carefully any headcount reduction exercises that will affect valuation control functions at this sensitive time."
The letter also hinted that the FSA would visit banks in the first half of next year to test their risk management capabilities.
Sants went on to state the recent mis-marking incidents are proof that in some firms the control oversight has failed. "The recent incidents shared a number of common characteristics in terms of the factors that contributed to the mis-marking being able to continue undetected, for extended periods of time."
Last week FSA fined Credit Suisse £5.6m after a scandal where rogue traders created intentional pricing errors. At the time, Credit Suisse said that its inadequate systems did not spot mis-marking and pricing errors by its traders for five months.
The warning comes at a time when jobs in the City are under threat during the economic decline. The Centre for Economics and Business Research forecasts 11,000 job losses this year. The Financial Times today revealed that UBS has shed more than 2,600 investment bankers in the past year, about 12 percent of the total. Trade union body Unite last month called on Barclays to provide written assurance on 900 back office staff jobs that are believed to be under threat.