• Dharam Shah, Senior Manager |
  • Halvor Wood, Senior Manager |
3 min read

Market abuse is an active concern for Financial Institutions. From the high-profile historical events of LIBOR and Foreign Exchange trading scandals through to the compliance weaknesses exposed by the ongoing COVID-19 situation. Trader surveillance continues to be high on the agenda.

We caught up with Halvor Wood, Senior Manager in our Forensic Data Analytics practice, and Dharam Shah , Senior Manager in our Banking Risk practice, to get their insights on what Financial Institutions can do to help reduce the risk of misconduct.  

What are the complexities around trader behaviour in our current environment?

Halvor: The role of traders is to make money for their firms, which brings considerable stress and potential temptation in uncertain market conditions. It feels like 2021 will certainly provide that, with considerable financial strain on business in some sectors, home schooling, and possibly a post-vaccine economic pop. In practice, trading in extremely stressful conditions can help blur the line between good behaviour and abuse.

In this current environment what are the compliance challenges that Financial Institutions face?

Halvor: The COVID-19 pandemic has exposed a number of compliance weaknesses as Financial Institutions faced a perfect storm of challenges – from difficulties obtaining monitored and secure system access; alert backlogs at firms with insufficient surveillance resources to manage market volumes and volatility; to problems adjusting monitoring capabilities.

Institutions adapted and enhanced their risk coverage after the beginning of lockdown almost a year ago, and we are still seeing requests to increase controls around the remote working situation.

What are the risk implications for controls?

Dharam: The risk of sensitive information or misleading information being shared remains considerable, and the opportunity exists for traders and asset managers to hold conversations, while sitting at their laptops at home, that would never have been possible when sitting in open plan offices.

There are a significant number of market participants who share a home, or those who have long standing relationships where the potential and temptation to “do a favour” is a distinct possibility.

Additionally, the absence of compliance “soft” controls is visible, which in itself can and does lead to complacency or active disregard of policy if traders feel that no one nearby is implicitly monitoring their behaviour.

Given this changing landscape, what are your top tips for companies to reduce the risk of misconduct?

Halvor: There is no sure way to safeguard against all potential risks. But putting a robust and progressive framework in place will either identify those committing misconduct, and illustrate to regulators that actions have been taken in an attempt to mitigate potential risk.

For this reason, it is essential that compliance, surveillance and risk officers continue to ask the right questions of staff and maintain a close working relationship. There are only a very small proportion of people who are tempted and willing to commit misconduct, but that does not remove the need to put controls in place that are proportionate to risk and manageable from a business perspective.

Dharam: With remote working arrangements likely to continue for the foreseeable future, the significance of supervisory controls as well as the ‘tone from the top’ will be important in driving and promoting a good culture across the respective banks. The emphasis on reinforcing ethics and values as well as ongoing training to make staff aware of what is acceptable practice will remain key to achieving good conduct outcomes. 

Surveillance is integral to the identification and investigation of unlawful or unethical practices, such as market abuse, insider trading, bribery and corruption and other forms of misconduct. Are you downsizing or reorganising your compliance team and trying to deliver move coverage with fewer resources? Are you confident that your current systems and processes enable you to spot market abuse and respond rapidly? Contact us to discuss how the changing risk profile is impacting your surveillance.