By Oliver Blower, CEO of VoxSmart

 When the US Securities and Exchange Commission (SEC) last year handed nearly $2bn (£1.55bn) in fines to 11 Wall Street giants over WhatsApp-misuse, it didn’t come as much of a surprise. JP Morgan was the first to face such a penalty in December 2021, and there were constant rumblings of a tidal wave of fines coming for the wider global investment banking space in the months that followed. After all, WhatsApp has been deeply interwoven within the communication ecosystem of most global financial institutions for years. 

But while the titans of Wall Street have taken the brunt of regulatory fines thus far, many more market participants with similar regulatory recordkeeping and monitoring requirements could face similar penalties over the coming months. Indeed, the SEC recently requested several hedge funds including the likes of Point72 Asset Management and Citadel assess their employees’ phones for social media misconduct – seen by many as an expansion of the watchdog’s WhatsApp crackdown. Given the value of the fines that can be extracted from institutional investment houses, it seems asset managers and hedge funds may be next in the firing line for regulators.

This all comes at a time when markets are contracting, following a year that saw heightened volatility across most major asset classes. The Eye of Sauron is likely to be moving rapidly over a wide range of market participants right now, as with extreme volatility comes a higher risk of market abuse. Regulators will certainly be taking this into close consideration when deciding where next to cast the net.

The new commercial necessity

Anyone who has worked in an asset management firm will attest to the fact that historically, the industry has tended not to pump the same level of investment into the less sexy areas of the business than the money-making front-office functions. Investing in regulatory risk mitigation or elimination technology, for instance, rarely tops the agenda. In terms of the bottom line, though, the hefty fines imposed on banks pose a warning shot to asset managers – this judgemental error can have real consequences.

In today’s fast-paced, technology-driven investment environment, the reality is WhatsApp will continue to be used by fund managers. With so much flexibility in how market participants like traders now operate post-Covid, an increasing number of fund managers now prefer to use instant messaging applications such as WhatsApp to quickly and easily reach counterparties.

As firms vie for more accounts and quality relationships in an increasingly competitive landscape, being able to communicate with counterparties in the way that makes life easiest is now a commercial necessity. You need to encourage an environment where traders and fund managers use safe work devices to communicate, rather than driving them to turn to personal devices to preserve relationships through WhatsApp or other social messaging apps. After all, reasonable observers don’t see the use of these apps declining, only increasing.

Don’t ban it – scan it

The phrase ‘communications surveillance’ is viewed by many with suspicion. There has historically been an attitude that it is there as a means to an end – to weed out any bad actors and cover the backs of those in the hot seat. But that is an entirely negative way of looking at what this technology is in place for. In actual fact, it is a way of protecting good people working within the confines of the law, who simply want to be more flexible in the way they handle and maintain counterparty relationships. There is tremendous benefit to staff when financial institutions pursue a proactive form of compliance.

Recently, the SEC has stated that applications such as WhatsApp may need to be banned outright in favour of more official channels. This seems misguided for many reasons, not the least of which being the fact it is overlooking the Libor rigging scandal that occurred over business-facing instant messaging platform Bloomberg chat.

The answer is not, has never been, nor will ever be for financial institutions to impose an outright ban on messaging apps like WhatsApp. It is still a number-one form of communication between traders and asset managers, among many other market players. Attempting to change an entire generation’s communication behaviour is not a feasible way of tackling this issue – it is instead up to financial institutions to adapt their approach to risk management to cater for the modern ways of doing business.

Ultimately, the key to ensuring effective risk management cannot be to throw down a blanket ban on social messaging applications. The moment has passed for that – they are already deeply engrained in the way modern business is conducted. The solution must be to put a greater emphasis on effective supervision and risk management practices to tackle the issue head on. If the industry persists in sweeping WhatsApp under the rug, the regulators could pull the rug out from under them.