The unprecedented fine from the SEC, exacted on 16 Wall Street banking giants in 2022, caused ripples on both sides of the pond last year.
The collective $1.8bn in punishments doled out to a group consisting of names such as Barclays, Citigroup, Goldman Sachs, and Morgan Stanley, was executed as staff were found to have discussed deals and trades on private messaging applications such as WhatsApp, that weren’t being suitably monitored.
The worry for City firms now is not only that the FCA will turn its attention to banks on these shores, but that it will also look into how other financial institutions, such as asset managers, are record-keeping and managing surveillance requirements.
To discuss this case, City A.M. sat down with OIiver Blower, CEO at VoxSmart, a Southwark-based fintech that specialises in the processing and analysis of communications data, to discuss the tense relationship between bankers and messaging platforms like WhatsApp and Telegram.
First of all, were these fines avoidable?
Inappropriate use of WhatsApp has been at the centre of several banking scandals this year. In addition to being the reason for this latest round of fines, it was also widely reported as the reason that a few senior executives at the likes of Credit Suisse and other major banks lost their jobs.
In reality though, the story didn’t start this year – it can be traced all the way back to 2016 when WhatsApp first came to prominence as the communication platform of choice in global energy markets. Ever since, it has only grown in popularity and has become more and more interlinked with the communication ecosystem of most major global financial markets.
“Generally, funding is directed into the front office, and technologies such as communications surveillance have been viewed through a negative lens.”Oliver Blower
The pandemic and subsequent shift to hybrid working certainly helped to amplify the extent to which market participants relied on WhatsApp to operate smoothly, but the real issue is that firms have not historically invested the appropriate levels of funding into technological solutions, which are instead regarded as back or middle office issues.
The size of these fines are huge – do you expect UK regulators to follow suit?
I do. This is not an issue that is exclusive to US investment banks – this is something that is rife across the global financial services sector. However, from our perspective, it shouldn’t necessarily be viewed negatively. There are a lot of benefits to using applications such as WhatsApp, or at least integrating them within a range of communications methods in day-to-day working life.
It gives a lot more flexibility to communicate with clients and counterparties, and in an increasingly competitive landscape, being able to communicate with clients in a way that makes life easiest for them is now a commercial necessity. The focus should instead be on enacting strong risk management and using technology to liberate staff to operate in the way that they feel is most effective from a commercial perspective.
What would your advice be to UK regulators when it comes to recordkeeping requirements?
For eight years now, since we founded VoxSmart, we have been sat in the same rooms as both global regulators and market participants, so have been able to form our views with the benefit of plenty of different perspectives.
In our opinion, the UK and European regulators would benefit from being more prescriptive and taking a lead from the US approach. The US is very clear through regulations such as the recordkeeping requirements outlined in the Dodd-Frank protection act – firms need to be able to accurately reconstruct swap trades within 72 hours, at any time of calling.
“There has historically been a bit of a grey area around both recordkeeping and surveillance requirements for firms in the UK.”Oliver Blower
We would encourage regulators to establish a clear distinction between a requirement to have the ability to pull this data on request, or the requirement to be proactively monitoring. I think a lot of firms on both the sell and buy-side would appreciate greater clarity on their obligations.
Is this an issue that is siloed to the banks, or should asset managers also be concerned?
It is something that affects both, but I think it is fair to say that the sell-side have a clearer view of what they need to do. Part of this is that vendors such as ourselves, have historically spent a disproportionate amount of time with the sell-side, to educate them on what is technologically available. This is partly due to the fact that they have felt the regulatory burden more.
“The buy-side has also historically not had the same seat at the table as the sell-side when it comes to regulatory conversations.”Oliver Blower
Their operating models are also extremely different. And as such, the way that they address the question of WhatsApp’s role in their business will differ. Whilst banks are geared towards a high volume of trading activity, asset managers generally operate at a relatively slower pace. The volume of data that they deal with is vastly different. The sell-side will always be more liable to market abuse, due mainly to banks’ extremely high deal flows. So for them, the focus is much more on communications surveillance for these applications.
And what about the buy-side?
Buy-side firms are often more pragmatic in the way that they implement changes, and don’t have the same quantity of data to sift through. However, the communications data they do have can provide tremendous value if utilised correctly. They have buckets of data on how and when their staff communicate with counterparties that can be analysed in the context of the wider results of trades or the strength of relationships. On top of this, asset managers have a relatively clean technology stack (especially when compared to the sell-side), so have more control over implementing technology smoothly.
You mentioned that due to their high deal flows, sell-side banks are more liable to market abuse. Is this a particular concern during periods of volatility, as we have seen this year?
Certainly. On top of that, macroeconomic events put a greater regulatory strain on firms, especially banks, who are processing millions of trades per day. The benefit of having technology that can clean up and automate analysis of communications data has been demonstrated throughout this year. As an example, I recently heard from a tier one bank customer of ours, that they were able to use automated trade reconstruction technology to proactively confirm to regulators that they had zero-ruble exposure. And if there is one thing that helps to build relationships with regulators, it is taking a proactive approach, especially in extended periods of market volatility, where their radars are going to be scanning double time.