It has been tough to keep track of all the regulatory fines handed out to major banks over the last few years. Many have pertained to employee communications and record-keeping failures, with fines related to bankers’ WhatsApp misuse frequently making the headlines. WhatsApp has, after all, become ubiquitous with the banking industry over the last decade, emerging as the messaging app of choice among many traders worldwide.
Given this eye-watering sum, it might seem as though the dust is finally settling with regards to watchdogs’ probe into the issue. After the thorough shakedown of the large Wall Street firms, who is left for them to target in this part of the market? But banks are just one of many types of financial institutions that communicate through instant messaging platforms. This raises the question: are non-banking financial institutions (NBFIs) staying on top of their record-keeping and communications monitoring requirements, or are they as ill-prepared as their banking counterparts were found to be?
There are growing signs that the SEC is working hard to answer this question over the coming months. After all, when regulators identify a systemic misdemeanor in one area of the sector, it is prudent to conduct a much broader sweep of the wider industry. While several large broker-dealer firms have already been dealt significant fines by regulators as a result of this approach, it appears watchdogs will cast an ever-wider net over the coming months.
Recent reports suggest regulators have begun turning their attention towards a whole host of NBFIs, including smaller broker-dealers, asset managers, and hedge funds. Several smaller firms have already been targeted by regulators, and German asset manager DWS even said in July it has set aside roughly €12m to cover potential US regulatory fines linked to investigations into employees’ use of unapproved devices and record-keeping requirements.
This will set alarm bells ringing for many middle and back-office teams at smaller brokerages and investment management houses, who can ill afford to pay the hefty multi-million-dollar fines issued to large banks. While tier one banks typically possess vast balance sheets capable of absorbing penalties with minimal impact on their financials, smaller NBFIs usually have different business models and less room for absorbing additional costs. As a result, a sizeable regulatory fine could have a much more significant impact on margins, potentially forcing firms to pass the cost on to investors – a worst-case scenario for investment advisers and fund managers.
In addition, the true financial cost of a regulatory penalty is much greater than the figure cited in the headlines. Aside from the costs associated with reputational damage, there are considerable outlays related to the timely provision of requested data. Essentially, when a firm comes under investigation by a regulator, it is legally obligated to provide the watchdog with all the data it needs to carry out its inspection. As many firms still possess dated data repositories and inefficient systems, this can be an extremely resource-intensive and costly process. Again, the costs of meeting the operational requirement could lead many to pass these costs on to their investors.
Given the above, US financial institutions of all sizes must ensure they enhance their capabilities when it comes to employee communications monitoring. They certainly cannot afford to view investment into bolstering back-office systems as a ‘nice to have.’ After all, the cost of implementing a system that ensures reliable adherence to communications monitoring regulations will pale into insignificance against the figure at the bottom of an SEC fine.