“As technology changes, it’s even more important that registrants ensure that their communications are appropriately recorded and are not conducted outside of official channels in order to avoid market oversight.”
— Gary Gensler, U.S. Securities and Exchange Commission, Chairperson
Federal law requires financial firms to keep detailed records of electronic messages so regulators can ensure the firms aren’t breaking anti-fraud or antitrust laws. The Government expects firms to have and enforce compliance policies and monitor business communications to stop improper conduct from happening. The rapid emergence of mobile messaging apps and the necessity to shift to remote work due to the pandemic challenged this system. However, these challenges do not excuse any business from the need to ensure their communications remain compliant. This week, we explore how regulators are cracking down on this practice, view several cases of financial institutions coming under regulatory fire for the use of unauthorized communication channels, and consider how the banking industry can get proactive to mitigate this compliance risk.
Wall Street Texting Habit Sticks Banks with $1 Billion in Fines
The five biggest U.S investment banks are expected to be fined by regulators about $1 billion for failing to monitor employees using unauthorized messaging apps, with Morgan Stanley disclosing that it expects to pay a $200 million fine. The total penalty amount is much higher than in similar cases in the past. The increased amount uses the recent JPMorgan case as the industry yardstick. In Morgan Stanley’s case, the fine is “related to a specific regulatory matter concerning the use of unapproved personal devices and the firm’s record-keeping requirements,” the firm announced.
JPMorgan Hit with $200 Million in Fines for Letting Employees Use WhatsApp to Evade Regulators’ Reach
As referenced above, JPMorgan was fined $200 million by the Security and Exchange Commission and the Commodity Futures Trading Commission last December. The fines were handed down to settle charges that JPMorgan’s Wall Street division allowed employees to use WhatsApp and other platforms to get around federal record-keeping laws. The company admitted to “widespread” record-keeping failures and allowing unapproved communications since at least 2015. The move was a sign of the ongoing battle between regulators, banks, and employees over the use of personal devices made more challenging due to the increase of remote work due to the pandemic.
A Better Approach to Avoiding Misconduct
Financial firms still experience fraud and other forms of misconduct despite regulatory reform following the 2008 financial crisis. They have paid out more than $400 billion in fines over the past 12 years as a result. The traditional approach to financial regulation of imposing formal rules and investing in a strong compliance function does not protect firms against excessive risk-taking and misconduct. Consider an alternative approach to compliance. Learn about an approach that is based on the principles of behavioral psychology that involve understanding the contextual drivers of human behaviors. Introducing small changes, or “nudges,” will help eliminate misconduct at the source.
Why the Banking Industry Needs to Proactively Identify Unapproved Communications Channels
In light of last week’s news, it is worth exploring what the banking industry needs to do to stop conducting business on unapproved communications channels. This is a prevalent problem that will continue growing with ongoing remote work and new ways to communicate digitally emerging frequently. As a result, when businesses are caught, the associated costs are high. It is clear from recent cases that banks can expect regulators to watch this closely and must prepare. The best way to ensure compliance with communications policies is to train employees on where they can communicate and the consequences of working outside those bounds.
