GFE Overseers Services

SMCR Support – Monitor Prevention – Sub-culture Compliance

With few exceptions, Regulators have proved to be unassailable over the last five years as they have set about addressing the many issues that came to light from a systematic scrutiny of Banks and their staff following the Global Financial Crisis. Investigations and whistle-blower allegations have meant that much of the focus to date has centred around anomalies in trading operations and AML / KYC deficiencies, but the list of potential issues continues to grow.

Moreover, in the UK, the Financial Conduct Authority (“FCA”) has introduced the Senior Managers & Certification Regime (“SMCR”). The SMCR aims to ensure that those running a regulated firm in the UK are held to account. Under it, every senior manager (generally limited to the top two tiers of management) has a statutory duty of responsibility. If a firm breaches an FCA requirement, the Senior Manager responsible for that area could be held accountable by the Regulator if he or she did not take reasonable steps to prevent or stop the breach from occurring.

Missives and instructions from the Regulators have been constant and unrelenting. Regulators across the globe are utilising Deferred Prosecution Agreements (DPAs) and Monitors at an increasing rate. For many Banks, the ability to exchange views and work alongside the Regulator seems to be confined to a somewhat ill-fitting one-sided relationship with Monitors which is costly and consumes a disproportionate amount of the Bank’s resources. Moreover, with a multitude of new rules and regulations, the sum of those burdens can impair any Bank’s ability to function properly.

Good internal compliance and risk and control functions must adapt to changing circumstances without Regulators and legislators continually imposing additional rules and regulations. Accordingly, compliance should rely less on the elaborate articulation of rules and more on the judgment and decision making of experienced market professionals. Regulators are shifting their attention away from law and the enactment of policies and procedures to a system more focused on the implementation and adoption of ethics and risk management culture. Regulators are asking bankers to convince them why their practices are safe, their governance sound and their culture aligned with the strategy of the company. We believe that this is why Experts, in tandem with an organisation’s compliance and internal and external legal functions, can provide a one-stop solution.

With the SMCR and the current regulatory environment in mind, GFE’s Overseers Service provides a bespoke adaptable resource, responsive to the regulatory environment. The Overseer model offers a robust control infrastructure, leveraging subject matter expertise with first hand regulatory guidance from its in-house ex-Regulators and ex-Federal prosecutors with the primary aim of addressing the problems and anomalies that may exist as a result of the ingrained sub-cultures within trading desks and other areas within a Bank’s operations.

Until now, Banks have only utilised Experts in a supporting role to external law firms who have been engaged to undertake internal Bank investigations and / or subsequent litigation. However, subject matter Experts can be a powerful tool in delivering accurate and timely answers to the very issues that lie at the heart of many of a Bank’s problems. Experts are ex-bankers who have dealt with both senior management at one or more Banks as well as one or more regulators. Knowing how to best frame issues and devise solutions is key to satisfying regulators and to minimise the risks of additional regulatory oversight.

GFE sees the resource of an (ex) Regulator in an entirely different light. The Overseer model affords a Bank a “friendly’ Regulator who seeks to be proactive as opposed to reactive in its endeavours to counter Monitor activity and / or ward off the potential threat of the imposition of a Monitor. The Overseer taps into subject matter Experts as necessary based on its understanding of the Bank, regulatory initiatives and the general market place. To date no Bank has utilised such a resource. Law firms are renowned for attracting (ex) Regulators but essentially in their capacity as a lawyer, engaging with the Bank once a problem has occurred. The model we operate seeks to do the reverse: identifying and rectifying any issues before they become a problem (or avoiding the issues altogether).

More specifically, many individuals subject to the SMCR, or similar accountability regimes, are focused on what amounts to “reasonable steps” in the eyes of the regulator, and what evidential requirements would be needed to show that those steps were taken. We believe that the act of engaging Experts, with direction from the Overseer, demonstrates that the Bank’s board is taking its oversight responsibility seriously. First, Experts can provide a mechanism to ensure information properly flows to the board and is not filtered by compliance, legal or senior management. Second, Experts can independently assess whether various work streams have been implemented and whether that implementation has accomplished the desired goals. Third, Experts can work to ensure that the values of an organisation articulated from the top (that is, the board) are both heard and echoed from the bottom (front office and support personnel) or customised to fit and break down problematic desk sub-cultures. Reinforcement by Experts specifically policing profit and trading styles of traders and desks can be accomplished should the Bank wish to focus efforts on areas prone to trading anomalies.