Banking Crisis - Treasury Contents

Memorandum from Dr Damian Tambini,[53] POLIS/The London School of Economics

  I am grateful for the opportunity to respond to the Inquiry. My response focuses on only one of the points raised by the Committee:

1.11  The role of the media in financial stability and whether financial journalists should operate under any form of reporting restrictions during banking crises


  As the author of a recent report on financial journalism by POLIS: a media and society Think Tank based at the London School of Economics I have conducted over 30 interviews with some of the UK's leading financial journalists and editors in recent months. This research asked financial journalists about how they approach their professional responsibilities as journalists and what challenges they face in carrying them out. I have also interviewed journalists, regulators, PR professionals and other interested parties in and outside the UK. The research "What are Financial Journalists For?" was published in November 2008 and is available at:

  Interviewees were drawn from the established news media but also elsewhere in the media including the new media.

  On the basis of this research I argue that the news media may contribute to financial stability if information was more selectively released, but that this may not be a good thing. I also argue that self-regulation rather than new legal obligations on journalists is likely to be an effective solution in this case.

  Based on a review of the literature and these expert interviews, I think it is reasonable to conclude that:

A.   The Role of the Media in financial stability

  Markets depend on information. The established news media—among other intermediaries—foster the flow of information about the market, and about particular companies, to investors, citizens and consumers, thus enabling them to make informed decisions. By applying well established journalistic strategies of verification, media organizations help ensure that information is as accurate as possible given time, regulatory and resource constraints. By ensuring a competitive approach to news and information provision, and by reference to established professional ethics, the established media help ensure that information is provided as rapidly as possible, and that that information is of a high quality. From the point of view of stability, this may not always be a good thing: stability may be better served if information is selectively leaked to a limited number of market participants. The impact of information on prices may create the potential for shocks and panics therefore, but whilst a staged, leaky approach to information provision might serve "stability" better, it would be unjust.

  Journalism is undergoing radical change currently however which impacts the ethical and regulatory structures that secure the reliability of news and information, and the ability of news organizations to invest the necessary resources in verification. Alongside what I refer to as the "established news media" new intermediaries provide financial and business news and information whilst operating outside of the legal and ethical framework of journalism. Despite these radical changes, the Polis research supports the following views:

    1. Media reporting can and does move markets. The regulatory framework for news media recognizes that media reports can have an impact on market sentiment in general and on prices of particular securities, and this is supported by ample research evidence.

    2. There is (therefore) ample scope for market abuse by the media. Recent scandals such as the "City Slickers" case in the UK and the Foster Winans case in the US show that it is possible for certain journalists to gain advantage by market manipulation, including through rumor fueled short selling. Research tends to support the view that in the UK and the US such practices are rare, and the established media tend to act as a brake rather than a lubricant on rumor driven runs (at least when these are based on false rumors).

    3. Media may reinforce volatility. It is acknowledged in studies of the behavior of news journalists that they may be subject to herd mentality; tending to agree among themselves on what "the story" is in response to an announcement and in the case of running stories seeking news that fits with a particular notion of "the story". These tendencies may reinforce herd and momentum market behaviors but there is little solid research evidence on this. By volume, it is likely that the impact of media reporting on the majority of investment decisions is marginal. Most high volume institutional investors do not rely on established news media for their information.

    4. News Media can act as a conduit for unfounded rumors. Whilst all media outlets do have established procedures for verifying news stories, they also provide tips and rumors in certain columns and broadcast forms (such as analyst quotes). Media are changing: the division between fact and comment may be becoming less obvious to readers—but currently at least, audiences (as with the HBOS rumors of March 08) turn to the established news brands in order to verify stories.

    5. The legal framework on market abuse applies to journalists as it does to anyone, but there are jurisdiction problems and enforcement is patchy. Journalists do enjoy certain immunities from the regulatory framework, and there is evidence that regulators are reluctant to engage with them. In the UK journalists that offer investment recommendations are exempt from the conflict of interest disclosure requirements that apply to others, and they—due to informal arrangements- are less likely to be required to reveal their sources than others.

    6. The effectiveness of the ethical and self regulatory framework operated by the PCC, and by individual media outlets is uncertain. The numbers of complaints against the PCC code articles on financial journalism is extremely low. And there is nothing in the existing code, or professional practices, that deals with the issue of the macro impact of financial reporting on general market sentiment.

  In conclusion, it is evident that the news media perform a crucial role in bringing information to the market: there is no conclusive evidence that the media as a whole or in specific instances reinforce volatility, but there is a possibility that certain newsgathering behaviors might encourage a herd mentality in the market. The news media, and professional reflection and self-regulation of journalists are focused on verification of information and not on the consequences of publication, or processes of selection or agenda setting.

B.   Should journalists operate under any form of reporting restrictions during banking crises?

  1.  The principle of press freedom is very important—though of course journalists operate under many restrictions. The European standard according to the ECHR is that such restrictions have to be necessary in a democratic society and in accordance with law. Restrictions would have to meet that test.

  2.  Existing restrictions are in place relating to market abuse (as well as general restrictions on libel, intellectual property and so forth).

  3.  Journalists tend to be well aware of restrictions and operate within them.

  4.  Rules that apply "to journalists" "during crises" raise the obvious question of who decides who is doing journalism, when is a banking crisis underway and so forth. Definitional problems are becoming more pronounced because the activity of journalism is no longer defined by a technology of delivery, and the technology of delivery is no longer a guarantee of a particular self-regulatory framework.

  5.  The more convincing arguments against reporting restrictions are not those based on principle (eg "the principle of freedom of the press") but those based on the impracticality of reporting restrictions and their likely perverse consequences. Even if there were restrictions, information and rumor would circulate but more of the audience would turn to unregulated platforms that do not profess to be doing "journalism" and which do not exhibit any form of self restraint. There are advantages of getting information into the market as quickly as possibly and serious disadvantages if barriers are introduced. From the point of view of financial stability, artificial blocks and bottlenecks in the provision of information may exacerbate financial shocks and, further introduce obvious inequalities and mistrust in access to trusted information. These are likely to have political as well as economic consequences.

  In conclusion, new legal restrictions on reporting are likely to do more harm than good. But the Committee could encourage smarter regulation and encourage a new approach to self-regulation. At a time of intense—perhaps unprecedented—financial pressure on all established media (broadcasting and the press) it is unlikely that news providers will prioritize ethical and professional reflection, so they should be incentivized and encouraged to do so. This is always most effectively done if there is the possibility of legislation lurking in the background. Much can be done to encourage responsible financial and business journalism through ensuring access to information, protection of sources and so forth, but the quid pro quo for this should be a genuine attempt to develop a code of responsible conduct that reflects on the macroeconomic impact of reporting styles.

  More research is necessary to better understand how business journalists are responding to current changes and challenges, but it is already clear that business and financial journalists should be encouraged to develop their ethical and professional practices through self-regulation, and it is likely that new legal restrictions would hinder journalists in their important work and not result in improved financial stability.

    "Free speech and a free press not only make abuses of government powers less likely, they also enhance the likelihood that people's basic social needs will be met", ... "Improvements in information and the rules governing its dissemination can reduce the scope for these abuses in both markets and in political processes. Many of the decisions taken in the political arena have economic consequences. Also, better and timelier information results in better, more efficient resource allocations".

    Joe Stiglitz In: The Right to Tell. World Bank, 2002.

January 2009

53   Dr Tambini is a member of the Communications Consumer Panel. This submission represents a purely personal view and does not represent a Consumer Panel or Ofcom view. Back

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