How WFH Will Accelerate Financial Misconduct

Cast your minds back to the end of 2019. The headquarters of financial firms were bustling, full of people blissfully unaware that the following year would represent the greatest change and challenge in their working lives. Coronavirus was taking hold in China and, in just a few short months, a whole financial industry – one that’s designed to thrive in a centralized work location – was about to be flipped on its head with global economic shutdowns and widespread working from home. At the same time, the SEC had just announced a record year for fines. In total, the regulator filed $4.9 billion in fines, up 10 percent from 2018.

So, what is the connection between the rising threat of huge monetary fines and the effect of COVID-19 on the way financial services operate? Well, banks, hedge funds and private equity firms were already guilty of pushing regulators too far in their pursuit of profits, and working from home has only exacerbated risk in financial services. Although the total fines for 2020 compliance breaches are still to be revealed, they are likely to be huge both in number and size.

I say this with confidence, as we are already seeing a direct correlation between working from home and increased risk. Looking into my crystal ball (data taken directly from the world’s largest financial institutions), I envision numerous incidents of misconduct and noncompliance that may lead to future company-ending crises.

Information Falling into the Wrong Hands

Insider trading has always been a threat for financial firms, but working from home has compounded the issue for a number of reasons. In normal circumstances, when a team is working on a deal involving sensitive information, they will sit together and have all negotiations face-to-face. Now, with teams collaborating over electronic communication channels, there’s an increased risk of information leaking. People may eavesdrop on Zoom calls and the wrong person may be copied on an email. Traders are also using their personal devices that would have previously been banned from the trading floor. All of these changes contribute to the increased likelihood of information falling into the wrong hands.

The Loss of Compliance Culture Sparking Personal Trading

Closely related to insider trading is the risk of personal account trading. Again, this threat is expounded by a distributed workforce. We are in daily conversation with compliance officers at leading financial institutions, and one thing we hear time and time again is that it is so difficult to replicate the culture of compliance when employees are working from home. The line of sight has been lost, and although technology can step in to provide some level of protection, it cannot sense the atmosphere on the trading floor or notice when someone is acting suspiciously.

By removing employees from a physical workplace, personal trading is only going to increase. The psychological barrier has been lifted, and individuals more inclined to partake in this kind of activity are more likely to take the risk. The FCA has already warned firms that they will be closely monitoring for instances of personal account dealing and that “the companies these individuals work for should be equally concerned about the loss of integrity to our markets that such behavior represents.”

Employees Revealing Their True Colors

If someone makes a racist remark at the office and you hear it, you would hopefully raise the issue with your HR team. Now that everyone is working from home and using private forms of electronic communication, it’s harder to keep a check on this kind of behavior. In fact, we’ve found that since global lockdowns started in March, there has been an increase in alerts relating to racism, sexism and other forms of misconduct. With people working from home, they are more inclined to reveal their true colors and, unfortunately, that can include sending discriminatory messages to other like-minded individuals.

This form of misconduct has previously represented a grey area for compliance professionals. There are no regulations relating to racism and sexism in the workplace and, therefore, they may pass these issues on to their HR team or turn a blind eye completely. However, we are starting to see a trend – perhaps galvanized by the Black Lives Matter and #MeToo movements – of enterprises and financial institutions taking these issues seriously. Just a few short weeks ago, Google paid a $310 million settlement for sexual discrimination. Unfortunately, we live in a world where companies often only react when their bottom line is affected. The indefinite work-from-home environment is likely to see an increase in fines and settlements related to misconduct.

The Digital Domain is a Complete Wild West

The main factor influencing these types of misconduct is digital communication. We have moved from a centralized way of working with mature policies, monitoring and compliance functions to a decentralized risk map where employees are communicating in the shadows. Regulators around the world have urged firms to act by utilizing the latest technologies to monitor communications for instances of misconduct, but many fail to do so.

Investors’ patience is wearing thin. Bad risk management creates huge legal and financial risks that are reflected in a firm’s share price. Take Deutsche Bank as an example: This is a bulge-bracket investment bank with a market cap of €15 billion, a fraction of what it should be trading at. Investors have lost confidence in Deutsche Bank’s ability to manage risk.

Problems are only going to increase with the indefinite distributed working environment. Risk is going to become unmanageable unless firms react and implement new procedures and policies and enforce them by leveraging the latest compliance monitoring technology. The role of compliance officers has never been as crucial as it is today; they have the power to avoid huge regulatory fines in the future – but only if they act now.