Much has been written about the regulatory failures that led to the financial crisis of 2008. Similarly, the crisis itself provided opportunities for unethical behaviour, and the years that ensued demonstrated a number of such cases, one being the LIBOR rigging scandal. The COVID-19 pandemic has had, and will continue to have, wide reaching impacts on the economy, including the regulated financial services sector and how it works. As a result, it is important for firms to pay as much attention to their operational and regulatory control frameworks as before.
As most financial services firms have tested their business continuity plans (BCPs) in a way that was most likely never envisaged, firms and their employees are now settling into the new normal of working from home. This includes virtual board meetings, conference calls and increasing online collaboration both internally and with clients. The notion that BCPs would be invoked in current circumstances with nearly all staff working from home for the longer term was likely never imagined. These practical working arrangements do pose some challenges for regulated firms and their compliance teams, a firm’s control framework and how these can and should continue to function normally.
On March 24, 2020, the Jersey Financial Services Commission (JFSC) made a statement regarding business continuity responses as a result of COVID-19. One statement in particular requires firms to review compliance and controls procedures to ensure that records, “four eyes” reviews and “other existing control specifications are not diluted by remote working.” In other words, there appears to be little to no leeway in relaxing compliance with regulatory obligations during this period.
In a crisis situation, many firms will likely focus on the most immediate issues, which include liquidity and cash management. These issues are at the forefront of regulators’ minds worldwide, as financial stability of the system will be a key focus of global regulations and policy makers in coming months. What is also of upmost importance, however, is to ensure that controls as a whole remain operational and intact to prevent regulatory failures that may have impacts after the crisis has passed. Criminals and money launderers, for instance, may take advantage of the potential weaknesses that working from home could impose, such as onboarding or transaction controls.
The crisis raises concerns regarding a host of fundamental aspects. For instance, how does a regulated firm maintain its span of control? How does its governance documentation hold up when board meetings are held virtually? Firms may need to amend, or seek exceptions to, its charters for quorums and attendance. Other issues to consider are liquidity management and the collectability of debts in the context of ANLA calculations. Compliance and finance teams will be working closely together to ensure that the firm not only remains financially stable but that regulatory liquidity requirements are met. For compliance teams, it will also be a challenge to conduct robust remote compliance monitoring. Firms working in a trading environment will need to ensure that market integrity is maintained in a household with multiple family members or friends working in close proximity. Regulators are not known to tolerate any potential insider trading or market manipulation. In answer to many of these challenges, the JFSC provided further guidance to firms on April 3, 2020 on how to maintain regulatory standards in the areas of customer identification, board resilience and span of control, compliance monitoring and how to ensure there is sufficient professional indemnity insurance cover in place.
For Jersey firms, while the key short-term risks lie in maintaining liquidity and client service standards, governance and AML controls will be a focus of the JFSC, especially if the effects of COVID-19 continue. The challenge will be for IT, compliance staff as well as client facing employees to work together on maintaining controls to withstand regulatory scrutiny in the future.
This article was first published by Jersey Evening Post on April 8, 2020.