By Oliver Blower, CEO of VoxSmart
The last few years have seen market regulators dole out record numbers of fines to financial institutions over their failure to adequately monitor employee communications on instant messaging applications like WhatsApp. According to Securities and Exchange Commission (SEC) enforcement division chief Gurbir Grewal, the regulator has filed charges against 40 financial firms and imposed more than $1.5bn (£1.2bn) in fines for such failures since December 2021.
While there is no denying certain regulators have cracked down hard on firms for their messaging practices, this may only be a precursor to much more significant action over the coming years – particularly for firms headquartered in the UK. So far, regulators in Britain have paid little attention to the behaviour of traders conducting business through text and similar platforms that evade regulatory oversight. This is despite the use of instant messaging apps growing increasingly common among staff following the outbreak of Covid-19, when traders were forced to work and communicate via different channels. However, it seems this may be about to change, and firms operating in the UK must ensure they are well prepared for a tidal wave of investigations as soon as 2024.
FCA to follow SEC
Last month, it was reported there are growing signs that the Financial Conduct Authority may be considering its own probe into how traders use tools like WhatsApp. The FCA has been in conversation with its stateside peer around the SEC’s recent crackdown on the use of messaging apps, and many City lawyers believe this is a clear sign the watchdog has caught the scent of similar misconduct on its own patch.
When questioned whether the FCA would follow the SEC's recent WhatsApp action and monitor bankers' messages, executive director of markets at the FCA, Sarah Pritchard, gave reporters a fairly strong hint. She said staying abreast of what the SEC does ‘is something that we absolutely do, and that is something we have been doing with the US authorities in relation to the concerns that you've highlighted’.
Various banks headquartered in the UK have already taken pre-emptive measures against such action. For instance, HSBC last month blocked the SMS function on staff devices, adding to a previous WhatsApp ban. We can likely expect similar action from a host of British banks over the coming months as concerns over messaging fines mount. Nevertheless, financial firms operating in the UK are not the only ones that could be hit with fresh penalties moving forward.
A broader searchlight
There are also signs that regulators well versed in issuing such fines, including the SEC, are beginning to cast a wider net with regards to the types of financial institutions they are targeting. While the sell-side titans of Wall Street have so far taken the brunt of regulatory fines, many more market participants with similar regulatory recordkeeping and monitoring requirements could face similar penalties over the coming months.
The SEC this year requested several hedge funds including the likes of Point72 Asset Management and Citadel assess their employees’ phones for social media misconduct. Unsurprisingly, this was 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 worldwide, it seems asset managers and hedge funds may be next in the firing line for regulators. While these firms are not UK-based, similar firms headquartered in Britain appear just as at risk following the FCA’s recent warnings.
In addition, it is worth considering the wider market context firms find themselves in across Europe and further afield. A barrage of economic headwinds including higher interest rates, surging inflation and geopolitical uncertainty have caused markets to contract over the last couple of years, and the outlook looks set to remain uncertain for the foreseeable. Elevated price volatility across asset classes is likely to persist in this environment. This is doubly concerning for regulators, as research indicates extreme volatility tends to heighten the risk of market abuse.
Scan, don’t ban
With this in mind, the prudent move for financial firms of all types is to evaluate how best to mitigate the risk of staff misconduct when using instant messaging apps. As highlighted above, many firms take the rather brash approach of imposing bans on the use of popular platforms like WhatsApp.
While this may seem the most effective approach in principle, it falls short in practice. The way humans communicate is constantly evolving, and new platforms with shiny new tools and tricks come to market all the time. Over the last year, we have witnessed the emergence of apps that enable users to send messages that disappear on receipt, while others offer a wider variety of emojis. In this context, imposing a ban on the most popular messaging apps of today is at best a temporary solution.
Another issue with this approach is it inhibits staff flexibility and ultimately productivity. WhatsApp remains one of the most common forms of communication between traders and asset managers, among many other market players. Attempting to change an entire generation’s preferred medium of communication behaviour hardly seems a feasible way of tackling the issue. After all, the moment has passed for this approach – instant messaging apps are already deeply engrained in the way modern business is conducted.
The solution must instead be to put a greater emphasis on effective supervision and risk management practices to tackle the issue head on. British firms that do not take this approach may find themselves flooded with regulatory fines come the new year.
Found this useful?
Take a complimentary trial of the FOW Marketing Intelligence Platform – the comprehensive source of news and analysis across the buy- and sell- side.
Gain access to:
- A single source of in-depth news, insight and analysis across Asset Management, Securities Finance, Custody, Fund Services and Derivatives
- Our interactive database, optimized to enable you to summarise data and build graphs outlining market activity
- Exclusive whitepapers, supplements and industry analysis curated and published by Futures & Options World
- Breaking news, daily and weekly alerts on the markets most relevant to you