Malin Nilsson, managing director at Kroll, considers the year ahead, the risks that may arise in regulated financial services and the business sector more broadly
IT is always with some trepidation that one writes an article on what the year ahead might hold, as it feels like balancing wishful thinking with doomsday predictions.
The latter is especially the case against the backdrop of two years of a pandemic in the rear-view mirror with further uncertainty on that front lying ahead. With a world that has been living in heightened uncertainty since early 2020 due to Covid-19, the only thing we can predict with any certainty is that this uncertainty will continue.
The likelihood is that variants of Covid-19 will continue to emerge and, with it, regimes of mask wearing, travel restrictions and working from home will come and go as well.
One of the consequences of the pandemic – the increased prevalence of hybrid working arrangements – and the impact this has on firms, will be part of the focus of this article.
In an age where people now have the flexibility to work from both home and the office much more than ever before, the challenge for many firms is how to manage this shift in working behaviours.
This requires real management skills – particularly in terms of how to motivate and co-ordinate geographically distant teams.
Many employees are experiencing pandemic fatigue and how to continue working as a high-performance team is a real challenge for those in management positions.
If we rewind to March 2020, working from home was, for many, a novelty. This novelty has undoubtedly worn off. As the waves of the pandemic have come and gone, many firms have noted that during the pockets of opportunities we have had to reconnect face-to-face in the office, the benefits of human interaction have been clear and maintaining a team’s culture and connectivity is a much greater challenge when performed remotely.
While smaller offices and those where staff have a limited commute may prefer an office environment, bigger offices and those where employees face extended commutes very much welcome a hybrid working environment with a large proportion of their time spent working at home rather than the office. It is clear that firms will have to deal with both: the working from home and the working from the office; i.e. hybrid working. So, what might this mean for firms and regulators in the regulated world?
Hybrid working arrangements present risks that are well documented (for instance, conflicts of interest and data security). Since March 2020, when staff began to handle sensitive transactions, information and data from home, oversight systems had to adapt and data privacy, conduct and market abuse and financial crime regulations still had to be adhered to and monitored, no matter where staff were working from.
It is clear that technology is the way in which these risks need to be monitored. For instance, the use of electronic means of verifying customer identity as part of firms’ controls to combat money laundering has become the norm. Scanned documentation and digital ID submission is now more common than the traditional face-to-face approach.
Banks have also invested heavily in artificial intelligence and state-of-the-art technology to conduct customer due diligence and transaction monitoring to much greater effect than traditional manual processes.
The pressure that regulators put on regulated firms to monitor these types of risk is something they themselves need to live up to.
As the financial services industry enhances its technology solutions, regulators need to keep pace. It is interesting to note that as part of the Jersey Financial Services Commission’s strategic vision to be ‘a high performing regulator, building for the long-term success of Jersey’, the use of technology and influencing the ‘digitisation of financial services’ is a key anchor.
Technology, yes, but what about integrity and personal accountability?
Although technology can be used to control quantifiable risks at both regulated firms and the regulators themselves, managing staff who are working from home, ensuring that their conduct and behaviour is appropriate, is another. One cannot ignore the importance of culture, integrity and personal accountability in ‘doing the right thing when no one is looking’.
Personal accountability and integrity have always been part of a regulator’s requirements, whereby some positions occupied in firms (such as board positions or compliance officers) need prior vetting and/or ‘no objection’ from the regulator. Since the financial crisis of 2008, there has also been increased regulatory focus around the world to ensure that senior individuals who commit wrongdoing should be held to account.
We see this with the UK’s Senior Managers and Certification Regime as well as in Jersey where, in 2021, a consultation on the expansion of the civil penalties regime was conducted. Such powers are likely to become more widely used in the future. As a result, it is more important than ever that firms promote a culture of integrity to ensure that their weakest link is not an individual. Simply put, if people with integrity are hired, the risks of wrongdoing should be reduced.
And let us not forget about ESG
Integrity has long been a cornerstone of regulatory principles. Lately we have also seen that Environmental, Social and Governance issues have become more prominent and ESG dovetails well with integrity and individual accountability issues. As part of a Kroll survey on firms’ anti-bribery and corruption arrangements, inclusion of ESG into firms’ compliance programmes is becoming more widespread. A 2020 World Economic Forum report suggests that companies with diverse employees have up to 20% higher rates of innovation and 19% higher revenues and our survey results indicate that business ethics, diversity, equity and inclusion were the most common aspects implemented into ESG programmes.
The challenge for firms who want to reap the rewards of ESG is that its principles need to be embedded culturally, rather than attempted through tick-box compliance programmes.
Regulators have long focused on positive compliance cultures within firms. Effective governance arrangements, leading from the top and taking action where there is wrongdoing are key. And here we come full circle – these aspects are more difficult to manage in a remote working environment.
So what?
With hybrid working, use of technology, increasing focus of regulators on individual accountability and the rise of ESG implementation in the business community in a world where uncertainty prevails, what should firms take away from this article?
In my view, it is that firms must focus on hiring good people and nurturing their employees. Hiring is a highly competitive market and training staff is time consuming.
Retaining staff and enabling them to make a difference and allowing employees to operate with responsibility and trust will likely become a competitive advantage.
It may also help improve both commercial results and reduce overall risk within a business.
