Whom this blog is intended for: C-suite and board level; risk and compliance teams; heads of digitalisation and strategy; MLROs and SMFs.
Length of time to read: 10 minutes
The world of work is changing. Well before COVID-19, firms’ adoption of remote working, outsourcing and new technologies were already on the rise. However, since the pandemic, these trends have accelerated further, and firms have had to adopt digital, flexible and robust practices to enable mass remote working. These trends will shape the future of financial services and pose a number of regulatory challenges for firms.
This blog analyses two key regulatory challenges – surveillance and monitoring of trading activities and good customer outcomes – and sets out how firms can reshape their business models and future work plans to meet them.
Surveillance and monitoring of trading activities
Challenges for firms
Several challenges for firms in monitoring for misconduct and market abuse have become more acute in a prolonged remote work setting:
- Increased difficulty in monitoring the use of personal or unmonitored devices creates an additional risk of insider information being inappropriately disclosed either internally or externally to a firm. Examples include:
- traders no longer having to ”leave the floor” to share insider information;
- avoiding inadvertent information disclosure to partners or flatmates who work in the same industry or could benefit from insider information; and
- preventing the use of personal or unregistered devices, e.g. mobiles.
- Reduced physical surveillance presence and an increased risk of less self-policing from office staff may make unethical or illicit behaviours easier. Examples include:
- the absence of physical monitoring and proximity from supervisors or colleagues would allow a trader more easily to commit market abuse; and
- the risk of personal dealing increases while employees are working from home.
- Maintaining good culture in a dispersed working environment.
- Awareness as to what types of information would affect valuations during the pandemic, and should therefore be monitored for inappropriate sharing and disclosure e.g. whether a company has utilised the furlough scheme; information about the pace of cash flow burn, etc.
Notably, in October the FCA stated that “office and working from home arrangements should be equivalent” , which means that firms will need to adopt new methods and technologies to mitigate these risks and ensure compliance under this new scenario.
FCA expectations and examples of good practice
The FCA says firms should “record all relevant communications (including voice calls) when working outside the office” and expects firms to have “updated their policies, refreshed their training, and put in place rigorous oversight reflecting the new environment – particularly regarding the risk of use of privately owned devices”. Staff should be in no doubt that these standards apply “wherever” they are.
The FCA cited a notable example of good practice from firms which managed “increased output” with “flexibility” by “transferring staff across from one compliance discipline to another to help handle sudden short-term increases in alert volume” which “demonstrated the value of cross training” and “a nimble approach from managers”.
What firms should be doing
A strong monitoring function will be built around the twin pillars of trade surveillance and communications monitoring. Consequently, firms should consider:
- Monitoring what is not being monitored. As a preventative measure, firms may look to monitor traders’ level of business in comparison to the volume of their monitored calls. This is especially critical when business levels have increased but the volumes of monitored calls have fallen sharply, indicating that conversations occurred on non-recorded channels.
- Firms should adapt their policies and procedures to mitigate and detect risk, by for example requiring all orders to be captured and confirmed via email. Firms should also consider taking a proactive approach, such as scheduling regular calls from compliance to check in with traders.
- Renewing their focus on good culture and prevention. Good culture is a firm’s strongest defence mechanism against market manipulation and insider dealing. Culture is driven by incentives, and staff rewarded solely on sales and profits are more likely to take on excessive risks to achieve them. These risks are often the key drivers of poor conduct and so addressing the issue of remuneration is at the core of creating a good culture. Firms should ensure their remuneration policy recognises good conduct, client outcomes and not solely profits generated - and equally penalises poor conduct regardless of the outcome. Firms need a culture in place which discourages traders from engaging in reckless behaviour, either to recover losses when trades have gone badly or from taking on excessive risk due to irrational exuberance.
- Using analytics to detect employees who show indicators of poor conduct behaviours. Some firms have looked to further their use of analytics by employing new technologies, for example network analytics and the monitoring of behavioural indicators to identify personnel who consistently exhibit characteristics related to poor conduct. Consolidating these data points can be used to take corrective action to prevent misconduct rather than waiting for it to happen and resorting to detection.
Good customer outcomes
Challenges for firms
COVID-19 has given new importance to good customer outcomes and the fair treatment of vulnerable customers . The acceleration of automation increases the likelihood of customers receiving services with less of a human touch. On a broader level, remote working has created cultural and behavioural challenges resulting in reduced quality of day-to-day oversight. For example, many firms have noticed that documentation and note-taking have fallen below levels seen in a typical working environment. More specifically, banks are noticing a drop in the quality of customer service calls, and staff are showing a tendency to favour actions that do not require senior intervention, even if that action would favour the customer. This is often due to the additional burden of having to contact the more senior staff member which would have normally been easier in an office or call centre setting.
FCA expectations and examples of good practice
Although we are still at an early stage, the FCA has generally been satisfied with firms’ ability to scale their operations at pace, especially in collections, to respond to customer queries even when dealing with the consequences of the pandemic themselves . The FCA proposed guidance highlighting key themes in the fair treatment of vulnerable customers: i) recognising vulnerability and understanding customers’ needs; ii) the value of sympathy; iii) the importance of empowered and knowledgeable staff; and iv) meeting vulnerable customers’ communication needs . Many banks helped vulnerable customers deal with difficulties from COVID-19, and several examples of good practice include: actively phoning vulnerable customers; providing dedicated phone lines for NHS staff and the elderly; allowing a “trusted third party” account access; allowing the online cashing of cheques; and providing “virtual tea and teach sessions” to build confidence banking online.
What firms should be doing
- Reinforcing good culture and behaviour to address the quality of oversight and any performance issues. Firms should reiterate to staff the importance of: a) completing documentation (i.e. meetings notes and customer calls), b) including team leaders in the relevant conversations, and c) securing approval from senior management, e.g. for agreeing what forbearance would be appropriate for a customer.
- Striking the right balance when reducing their physical footprint. Firms will be analysing branch utilisation and the geographic concentration of their customers to determine which branches to close or workforces to reduce, but must also consider the needs of vulnerable customers when doing so. For example:
- firms should prioritise the fair treatment of vulnerable customers despite a reduction in face to face channels and increasing levels of automation. There are a number of ways in which firms can achieve this, including:
- creating alternatives to ATM cash withdrawals via post offices and using mobile banking apps for security verification;
- evidencing that vulnerable customers are considered in their automation and AI strategies, and the customer process is designed to enable a holistic customer experience;
- monitoring and evaluating vulnerable customers’ feedback of new digital service channels, by proactively inviting customer feedback (instead of simply reacting to feedback volunteered) to evolve their strategy;
- building awareness of new customer support options by publishing clear and up-to-date policies that are easy to understand, and sharing successful experiences of new digital customers since the pandemic;
- categorising customers newly vulnerable due to COVID-19 or who may have multiple drivers of vulnerability (e.g.. disability, illness, redundancy, bereavement), and consulting with experts and charities to increase their understanding of different vulnerable customers’ needs;
- meeting vulnerable customers’ communication needs by for example referring them to a specialist support team well trained in providing tailored assistance regarding vulnerability matters (e.g. bereavement), and able to provide upfront, helpful and accurate advice.
Although financial services firms have now become well accustomed to remote working conditions since the start of the pandemic, their capabilities will be further tested in early 2021 with lockdowns and social distancing continuing in many countries. Firms should look to anticipate emerging risks and adapt their regulatory conduct capabilities and future of work strategies for the medium term.
 According to the FCA, 24.1 million people display at least one characteristic of vulnerability which is nearly 50% of UK adults: ‘New guidance to help firms do more for vulnerable customers’, updated 25 Sep 2020.
 Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, said “The pandemic is a challenging new scenario for firms” and he was “impressed by and grateful for the decisive and effective action that firms and their staff daily take to help”: