Worldwide: The Future In Focus

The wheels of justice turn slowly, but grind exceedingly fine, goes the old saying. At least one part of that is true. Cases dating back to the financial crisis are only now, a decade on, finally over; cases relating to benchmark manipulation are largely complete, but some still drag on. Criminal trials are on-going.  

The regulatory pipeline is long. As such, the best guide for the enforcement action we will be discussing in two or three years’ time are the cases already beginning or in progress today. As we note elsewhere in this report (see John Byrne’s article: Knowing the Rules), regulatory notices, announcements and speeches all offer powerful clues as to the big issues of tomorrow for enforcement, too. Already in the first half of 2018, we see some consistent trends with previous years in the areas of actions against firms for failings relating to firm management (corporate governance), AML, regulatory reporting and conduct of business such as mis-selling and suitability, disclosures to clients and overcharging.

At least some of what we are likely to see, therefore, should not come as a surprise. More than once, we have noted that a rise in action against individuals seems likely, not just in the UK and Hong Kong where new regimes have been introduced, but worldwide. Regulators are talking much more about holding individuals to account. It would be surprising if action did not follow.

Data demands

Developments in technology loom large. The demands around GDPR in Europe have received extensive coverage; the increasing focus on cybersecurity by global financial regulators is also well recognised.

There are a couple of related issues less commented on, however. One is the challenge new – and not so new – presented by communications channels. Last year saw the FCA fine an investment banker for sharing confidential information on WhatsApp68. That raises interesting questions as to if (and how) firms should be monitoring employees’ use of social media and external electronic communications platforms. Anecdotally, in some jurisdictions, communication platforms like WhatsApp and Telegraph are practically the business communication channel of choice precisely because they are completely private and fully encrypted.

The second issue is the increased opportunity that new technologies bring to old disciplines. Regulatory reporting is likely to see a renewed focus. This reflects both the increased ability of firms to capture and share much more of their data and the value it can then deliver to regulators through the use of sophisticated analytical tools.

Many regulators have invested heavily in systems and people to be able to use the data from these reports to understand market activity better and identify risks and abuses. Their ability to do so is severely compromised if the data is poor: Garbage in, garbage out.

Regulators are therefore going to be increasingly impatient with firms whose reporting is inaccurate, in the wrong form or untimely.

A long road back

A decade on from the global financial crisis, trust in the financial services industry is still proving slow and difficult to restore.69 The message that public enforcement action sends, that wrongdoers will be held to account, undoubtedly has an important role to play in restoring that trust. So, should we worry if the number of cases and fine amounts fall? As ever, the impact of enforcement activity will be as much down to how regulators act as to what they act against. The regulators’ drive to individual accountability really therefore, has to be seen in enforcement outcomes against senior individuals.

This focus on individual accountability is unlikely to be entirely welcomed by everyone in the industry, but it should be. At least part of the lack of trust in financial services seems to result from the perception that those responsible for the financial crisis were never properly held to account.

Abuses and misconduct that are left unaddressed are not simply forgotten, and failing to deal firmly and publicly with the perpetrators can do lasting damage to the industry. The enforcement machine may sometimes turn slowly but turn it must. The outcomes regulators produce are some of the most tangible ways in which regulators can demonstrate that they are serious about protecting investors and consumers. However long the regulatory pipeline, if it never brings closure, memories can be longer still. 

Footnotes

1 https://www.fca.org.uk/news/press-releases/fine-former-investment-banker-sharing-confidential-information-whatsapp"
2 http://cms.edelman.com/sites/default/files/2018-03/Edelman_Trust_Barometer_Financial_Services_2018.pdf

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