Risk Management, PRMIA

What is interesting with regulation risk is that it is invitingly and intrinsically intertwined with behavior modification and that seems to be the approach the Financial Services Authority (FSA) is taking at present. Without doubt they are adamant to create an effective enforcement process as a method to achieve this behavioral change and Margaret Coles’ the head of enforcement at the FSA has recently delivered a speech that was also picked up by the Financial Times on this subject. She stated in particular, the FSA expects management to take responsibility for ensuring firms identify risks and increasingly individual managers are going to be held accountable for their inappropriate actions and their negligence. Now the FSA has never really been known as a regulatory animal who’s bark is louder than its bite and only last month they filed a case against Capita Financial, for £300,000 for failure to prevent actual and attempted frauds with the ominous quip “a failing that may be shared by most regulated firms”. What is interesting with this case is that it is quite a new angle for enforcement with regulators and they do not often place internal fraud at the top of the agenda list for punishment handouts however the regulatory landscape is changing.

If Capita Financial thought they were alone in edge regulatory risk they are also joined by Citicorp who have been tripped for alleged “institutional insider trading” and again the root cause appears to be an internal oversight. In Citicorp’s case the bank was supposedly not managing information flow between internal departments that operate in adjacent business functions and which benefit symbiotically from occasional good communication. Knowledge sharing is generally a good business practice and ensures the company takes advantage of potential opportunities but in some circumstances it crosses a boarder of law and in the eyes of the regulator, this case has conflicting goals with some potential downsides.

SMH News Article

Then back to Europe and Detusche who is again in the spotlight with a fine of £6.3 million for misconduct over a block trade and its former head of equities has received the largest personal penalty imposed by the FSA however, if that wasn’t enough for this bank, they are also under scrutiny for possible market abuse both in the Spain and France.

What appears to be the common thread, is that management are being held accountable for their lack of insight in their business controls or managing how these controls interact in the complex framework of products, value chains and policy. Certainly where there is sloppy execution the regulators appear to be tightening what they might classify as ‘a case’ and if trends continue they are more than likely to become virulent in pursuing such breeches.

Perhaps in the situations above, it is outmoded policies that exist and persist in these complex organizations. Such policies were once accepted yesterday but today take these institutions into questionable activity spaces. Whether these events are due to lack of regulatory knowledge, diligence of staff to detect and correct weak controls or in some instances simple risk taking “do and hope”; what seems apparent is that with regulation exposure an increasing hole of certainty for those who chose to skirt the law as well as those who fail to enforce it, efforts industry wide are going to have to improve for the hall of fame to slow on its tally.