The UK Financial Conduct Authority has raised concerns about bankers and brokers working from home on sensitive capital-raising deals.
With increased capital raising activity taking place, the UK’s Financial Conduct Authority (FCA) has warned bankers to stay on top of conduct risks, since so many employees are working from home, making it harder to monitor their conduct.
Economic activity has plunged due to public lockdowns to stop the spread of the Covid-19 virus, and many corporates have been forced to sell new shares to raise cash to stay in business. According to the London Stock Exchange, UK-listed companies raised £3.3bn ($4.1bn) via rights issues in April, with stock broker AJ Bell expecting many more fund raisings in the coming months. Other firms are tapping the bond markets for cash.
Many of these capital market activities are being conducted from the homes of bankers, raising concerns at the FCA that this could make it easier for market-sensitive information to be abused. In a bulletin dated May 27, the FCA warned that market uncertainty and changed working arrangements call for extra vigilance by firms around the possibility of leaks of sensitive information, and the spreading of market moving rumours.
Maintain surveillance
The FCA said there is a need to be able to identify breaches in confidentiality and is advising firms to maintain robust market surveillance to detect suspicious behaviour. It warned that misconduct could undermine investors’ confidence in new capital raisings and expose issuers to significant reputational risk.
As law firm Brown Rudnick pointed out in a circular, the FCA has “unambiguously” put market participants on notice that it will not accept coronavirus as an excuse for market conduct failings, even as it has relaxed some of its deadlines on reporting obligations.
One potentially worrying trend highlighted by Andrew Gordon, global leader, forensic and integrity services at EY, is an apparently marked downturn in calls to hotlines within financial firms from whistleblowers.
According to Stokoe Partnership Solicitors, reports to the FCA over breaches of standards of professional behaviour had risen by 35% over the past year, suggesting that whistleblowers are becoming more confident about disclosing wrongdoing to the regulator. What is unclear at this stage is whether the recent drop in calls to firms’ hotlines is matched by a similar fall in reports to the FCA on such concerns.
“Less visibility on unethical behaviour by others is one possible reason,” says Mr Gordon. “It’s uncharted territory and you can’t be sure yet.” However, he says compliance departments are anticipating a pick-up in whistleblower calls once people return to their offices.
He explains that in an office environment, people contemplating reporting questionable behaviour may first discuss it with colleagues, which is now more difficult due to home-working.
More misconduct likely
Echoing the FCA’s concerns, industry sources believe a significant number of new cases of misbehaviour will surface once the lockdown ends. In an office environment, it is likely to be easier to uncover poor compliance and suspicious ‘paper’ trails.
“There are heightened risks of wrongdoing because there is more opportunity. Control environments [at home] aren’t as vigorous as they would be if you were in the office,” says Mr Gordon. And it’s not just about technology and having teams in one place.
“It’s the element of surprise. When you’re in an office environment, the compliance teams are able to play a roving role. They walk the floor, stop at somebody’s desk for a chat, and that social interaction is really quite important and I think it is something we’ve underestimated previously,” he says, emphasising the importance of social interaction in helping to detect suspicious behaviour, such as from body language, but it also keeps people honest who might otherwise be tempted to stray.
In the absence of social interaction, technology has become more important for policing conduct. “It is vitally important to have systems in place. Regulators will be looking at resilience and continuity plans, and how they are communicated, and that conduct is being maintained at the highest level,” says Evgeny Likhoded, CEO at regulatory technology firm Clausematch.
He cites communication challenges arising among teams that are no longer sitting next to each other in an office and how this can mean decisions are not properly recorded.
“It’s now more necessary to have audit trails and visibility and to have in place different communication tools to provide management with real-time information,” says Mr Likhoded, adding this may necessitate rewriting processes and making teams aware of new ways of working.
Fast-tracking compliance
He reports that some firms have been fast-tracking compliance projects as there is a realisation that the FCA has not relaxed its conduct rules.
“You need to make data flows accessible so they can be monitored,” says Joshua Walsky, chief technology officer at Broadway Technology. He adds that transferring data in legacy systems to distributed systems can make it easier to observe and track activity within the organisation.
Work around data-intensive regulatory frameworks, such as the Markets in Financial Instruments Directive (MiFID) II, have helped push firms towards becoming more data centric, he says. “It has made markets more transparent than before.” Having access to plenty of data also helps identify problems that have not yet been thought of, he adds.
This article first appeared in The Banker's sister publication Global Risk Regulator.
