Partner Article

Scrutiny on banking behaviour: the race for leniency

It’s no secret that the banking sector experienced a turbulent 2014. A number of incidents uncovered further instances of malpractice including forex manipulation, Libor scandals and the mis-selling of Payment Protection Insurance, (PPI). As a result, the regulators resolve to reshape the financial services industry and protect clients interests is dramatically hardening.

With growing pressure to create a more controlled industry, reform of wholesale financial markets is well underway. The Financial Services Act has already come into effect and will soon count false or misleading statements in relation to benchmark setting as a criminal offence. In addition, the FCA is overseeing investigations into Libor, reaffirming its role in ensuring good conduct by placing more focus on the individuals that can be held to account for breaches of compliance.

A proactive approach: the race for leniency

However, the increased scrutiny on banking behaviour comes at a cost. As financial institutions experience the wrath of regulators, legal costs are spiraling with banks having to set aside even bigger contingencies to resolve investigations. For example, in recent financial statements we’ve seen HSBC set aside $1.7 billion to cover one-off charges and JP Morgan raise its provisions to $6bn for legal costs.

Whilst city watchdogs on both sides of the Atlantic have demonstrated their appetite for creating a more controlled market, we are beginning to see instances in which they’ve shown willingness to reward banks that co-operate with investigations. The Royal Bank of Scotland escaped a €115m fine in late October for alerting the European commission’s competition watchdog to two attempts to fix the prices of key interest rates. Even more recently, the FCA granted a 30% reduction on forex fines for the five banks that settled at an early stage as part of efforts to quickly reach a resolution.

Increasingly, banks should look at these decisions as an indication that if they review their approach to remediation then there is potential to negotiate with regulators and seek an element of control over spiraling legal costs. Of course this depends on the bank’s ability to meet demands for the necessary information to support investigations.

The challenge

Often when investigations begin, governing bodies know more than those running the entity that is being investigated. As such, the priority for banks needs to be quickly finding the facts that the regulator is looking for. In most cases, this requires getting a deeper dive into both the manipulations that have occurred and those individuals at the heart of them.

Yet, the biggest challenge for banks is that this information will rarely be held within a single document. In order to fully co-operate with the regulator, financial institutions are required to review millions of archived documents, faxes, emails, instant messages and audio conversations.

Furthermore, the information that regulators are looking for is much more likely to be hidden within a sequence of events prior to certain transactions. For example, innocuous phases from chat logs, emails, or phone conversations that disguise something more sinister. To navigate an evolving regulatory landscape, the financial services industry needs to look beyond its reliance on compliance officers to handle investigations. It’s no longer feasible for individuals to manually review many thousands of documents efficiently and cost effectively or spot patterns in communications. Instead, organisations need to have systems and processes in place that can visually identify the themes in information flows and prioritise the data review process.

Banking organisations need to be able to quickly recognise the patterns within emails, spreadsheets, social media posts or online transactions that contain crucial information or indicate potential breaches, so that regulators can start to piece together the jigsaw. This supports banks in demonstrating good governance by providing regulators with a better understanding of what has happened and where responsibility lies. As the pressure mounts on banks to hold individuals to account, this capability will become even more crucial.

The regulator’s drive to create a more orderly market is not going to dissipate but banks can take a more proactive approach to dealing with investigations. By adopting tools and processes - such as advanced clustering, pattern matching and true predictive analytics technologies - financial institutions can reduce the impact that investigations have on balance sheets, help keep litigation costs down and introduce best practice as part of due diligence processes, all without significantly increasing headcount.

This was posted in Bdaily's Members' News section by Simon Price .