Failing to comply with regulations does not just affect the reputation of a business, which can lead to loss of profit and market share; it personally affects those in charge of the business. In a world where super-size fines no longer shock or deter bad practices, regulators have moved on to using a wider range of measures to ensure compliant behaviour from both firms and individuals.
“We are in an era of greater individual accountability. It is now widely accepted that new regulations will probably lead to even more enforcement actions against individuals in future,” said Julian Korek, global head of regulatory and compliance consulting at Duff & Phelps, the corporate financial advisory group, in a recent interview with the Financial Times.
2013 was the first year the UK financial conduct authority sanctioned more individuals than firms.
The Global Survey on Reputation risk by Deloitte, found that responsibility for reputation risk resides within the highest levels of the organization with 36% of respondents identifying the Chief Executive Office (CEO) of any company as the individual with primary responsibility for managing reputational risk and 21% identifying the Chief Risk Officer (CRO).
Post financial crisis, regulators have recognised the need to primarily change the behaviour of financial firms. Senior stakeholders will be fundamental to ensuring that all policies and procedures are designed with business considerations in mind, and will encourage the required cultural changes. In the UK, the Financial Conduct Authority (FCA) is holding individuals in senior positions personally accountable for any compliance breach as well as the culture within their firm.
It has become routine for senior executives to be named, shamed and often dismissed as part of a large enforcement case, the purpose being that even if they are not facing personal fines, their reputation, career and future prospects have been permanently damaged.
With proceedings being brought against 1,761 individuals last year, enforcement actions against individuals outnumbered those against companies by a ratio of four to one last year.
In 2016, enforcement actions against individuals outnumbered those against companies by a ration of four to one
In January 2015, two former senior executives of Martin Brokers were personally fined a total of £315,000 and banned from performing significant influence functions at any FCA authorised firm. The FCA found that the directors failed to recognise the risk of the culture developing at Martins and to take any reasonable steps towards preventing it.
According to Georgina Philippou, acting director of enforcement and market oversight at the FCA, the two directors were responsible for setting the right culture within the firm as well as ensuring that the risk management and controls were adequate. Having failed to do so and ensure compliance, they were both held responsible for misconduct.
Moreover in July 2017, the FCA fined David Watters £75,000 for failing in his duties as a compliance officer when providing advice on pension transfers while working at two companies.
These examples serve as a clear warning for anyone holding a significant influential position in any firm. The warning is as follows: if a firm’s misconduct can be attributed to cultural failings, senior management can be held personally responsible and will answer for it, even if they were not directly involved.
While firms all too often see enforcement action as simply another “cost of doing business”, when an individual is targeted, it is more likely they will work in unison to defend themselves from what could be a devastating career-ending penalty. In fact, according to the OpenText survey, reputational risk is twice as significant as a driver for compliance (44%) versus avoiding fines and penalties (20%).
One of the key measures financial institutions are adopting in order to ensure traders are not abusing the system, is technology. PwC’s market abuse surveillance survey found that the majority of banks are expecting to invest 156 million on top of their current spend to improve surveillance over the next 18 months.
The survey reported that more than half of the banks believe that integrated surveillance systems would enhance surveillance functions, indicating an intention to develop more integrated capabilities from the data they collect.
As a result, we have seen an increase in interest towards Speech and Text Analytics technology as it provides the necessary means to search proactively through recordings for ‘high risk’ keywords and phrases to isolate issues and prevent them from escalating, as well as quickly find and retrieve calls requested by compliance officers, consequently reducing business and personal risk.
Speech analytics technology has continued to progress tremendously over the past few years, with its ability to accurately analyse calls proving to be a real asset for Compliance departments. Moreover, in light of MiFID II, entry level analytic solutions have also gained in popularity, with packages now available on a competitively priced licence basis, which can be easily and effectively budgeted for.
Entry analytics technology removes much of the complexity of enterprise level solutions with effective key word search functionality capable of pinpointing specific trade related calls for compliance checks and fact verification.
There are at least 16 distinct areas that present risk for non-compliance and which can be summarised as follows:
- Monetary fines
- End of a business or business line
- Increased capital, liquidity or solvency requirements
- Impact on share price
- Competitive disadvantages
- Opportunity costs of non-compliance
- Increased personal liability
- Forced changes to senior management
- Need for more highly-priced risk and compliance skills
- Claw-backs invoked on bonuses
- Expensive and time-consuming remedial actions including redress
- Enforced changes to business
- Expensive and time-consuming use of third party or skilled persons
- Inability to recruit and retain high quality skilled resources
- Greater regulatory scrutiny
- More regulation, cost and complexity for all
Don’t let compliance regulations catch you off guard. Ensure you are able not only to comply and provide the information requested in full, but also prevent potential breach of compliance by proactively spotting risky behaviours and correct them before they become real threats to the firm and its employees.