At the onset of the global pandemic, regulators exhibited all sorts of atypical activities. They relaxed regulations and offered temporary relief from injunctions. Market abuse investigations were put on hold and a flurry of the communique was issued that encouraged brokers to uphold a high ethical standard as the world, seemingly overnight, stopped. To get the world’s economies churning again, brokers were told to begin transacting their trades from their bedrooms, their kitchens, their basements and wherever they were, on residential internet lines and personal mobile phones; essentially creating a worst-case scenario nightmare for compliance officers. And regulators.
Notable activities by regulators
The Federal Deposit Insurance Corporation (FDIC) issued several interim rules related to the capital effects of the COVID-response and, specifically, the Payment Protection Program (PPP) lending facility. At least nine guidance updates have been published since March. These include interim rules, revised rules, clarifications, addenda, and updated transition policies. This is an exceptional amount of activity for this or any regulatory agency. Concurrently, over the same short time period, the Financial Industry Regulatory Authority (FINRA) released dozens of regulatory and technical notices, proposed rule changes, interpretive letters, and other policy amendments. In parallel, the regulators have amplified their voices via an omnichannel communication strategy including press releases, podcasts, and other forms of media to get the word out.
Make no mistake – this is not “normal” behavior by regulatory authorities. And it begs the question, “Is this the new normal?” Only time will tell if this flurry of regulation and communication updates will be sustained throughout the remainder of the pandemic’s hold – and beyond it. According to CUBE, “There has, however, been a slew of guidance from regulatory bodies concerning COVID-19 and their expectations as a result.” And CUBE projects that there will be an apex and that it’s coming soon, “Regulatory change stops for nothing and it is likely that regulatory change will peak towards the end of 2020.”
The importance of two-way communication between regulators and those who are regulated is an aspect of the new normal that isn’t getting much attention but should be. Cappitech has made the following observations and statements, “Over the last few months, due to COVID-19, SFTR and new report obligations in Singapore have gotten postponed. In addition, publish dates for RTS data under MiFID II have been pushed back. Also, various regulators have issued guidance that investment firms should update them about any reporting problems they are having. As such, companies need to have a process in place to handle their two-way communications with regulators.” With regulators in overdrive, the importance of enabling that dialogue between and amongst regulators, compliance officers, brokers and administrators cannot be understated.
Responses by firms
It didn’t take long. After not much more than a week of witnessing controlled to total chaos and everything in between, firms began bombarding their employees regarding ethical conduct. And they issued an insane number of emails to their constituents promising to keep workers and clients’ assets safe during these “troubled times” – a phrase used repeatedly throughout March. Regulators globally recognize that trading compliance has shifted as a result of the virus. And they collectively acknowledge that the “how” has changed but not the “what”; firms still need to comply with MAR and all other regulations.
Firms have been ramping up their efforts, aggressively lobbying regulators in the hopes of deflecting any sanctions as a result of operations under the “new normal” imposed by COVID-19. But the Securities and Exchange Commission (SEC) and Financial Conduct Authority (FCA) have made it crystal clear: just because they have not yet launched formal investigations of market abuse despite thousands of “tips” doesn’t mean that transgressions will be forgiven. It’s apparently just a matter of timing as they’ve stated that there will be no leniency. “Compliance doesn’t have a pause button. Compliance processes cannot stop, even when other operations within your organisation might,” are wise words from Alyne.
Known challenges haven’t gone away
Organizations must not relax when it comes to building a culture of compliance. The legal and ethical obligation to follow regulations and adhere to societal behavior norms is not going away, pandemic, or otherwise. Verint advises its clients to remind employees that, “supervision, surveillance, archiving and enforcement of policies will continue in order to retain customer and transaction records, ensure data privacy, and maintain transparency and accountability around trading activities – no matter the circumstances.”
Trade surveillance isn’t a new challenge, but it has become especially problematic. Ditto for transaction reporting, which is no longer straightforward given market volatility, and which was acutely the case in late March and early April. Large volumes of trades (a record 60 million-plus on a single day in May) are now being routinely recorded. As a result, there’s been a surge in alerts that firms are required to report and investigate. However, this “new normal” may be driving a more cavalier assessment of a “suspicious trade” and this nonchalance can have consequences once the pandemic subsides.
What if hyper-activity by regulators is the new normal?
Conjecture is often best reserved for theoretical discussions in higher education and over cocktails with friends as nobody can say what will happen next with any certainty. It’s unclear if the current “new normal” will be subject to change again. And, if so, when? If a futurist had boldly claimed that the world would grind to a halt in 2020 because of a submicroscopic spikey particle and that the live-streamed death of one man would be the final catalyst needed to usher in real change with respect to centuries of racism and inequality, even the tabloids would have passed on the story.
So, given that change is the only constant, how can firms prepare themselves in the event that the “new normal” of hyper-activity by regulators become the standard? It’s unlikely that every country and financial market regulatory authority will adopt similar standards to streamline compliance. That’s going to further complicate things. There’s only one solution: firms need the ability “to easily navigate a vast surveillance rules library and turn rules on/off as appropriate given the circumstances.” FIS elaborated further to drive the point home, “As market conditions change rapidly, so too does the surveillance requirements. Flexible and swift adjustments to detection thresholds become increasingly important in the face of market volatility.”
Succinctly stated, every firm needs to be able to activate new compliance policies and deactivate outdated ones with the flick of a switch. And that’s going to take sophisticated technology that exists only in a handful of RegTech companies.