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LONDON (Reuters) – Potential breaches of market rules have spiked since traders began working from home in March, drawing scrutiny from regulators and piling pressure on banks to plug “black holes” in surveillance systems, industry officials say.
With banks unable to check in person on the behavior of traders working remotely, they have to rely on machines that flag any apparent bad behavior or suspicious transactions made under the unusual coronavirus crisis working conditions.
“In your kitchen or spare bedroom there is no colleague to monitor what you are up to and what we are seeing across a number of clients is a spike in escalations,” said Erkin Adylov, CEO of Behavox, whose software is by banks, hedge funds and asset managers in New York, London and Asia to monitor staff.
Behavox has seen an 18% rise in conduct being “escalated” or singled out for scrutiny among clients since March, ranging from swearing to more serious incidents like disclosing client names.
They have also included prohibited activities such as taking conversations private, using personal email and giving financial advice to family and friends, Adylov said.
“These kinds of breaches typically don’t happen, but right now there is a noticeable increase,” he said.
When the coronavirus crisis hit, regulators in Europe and the United States initially gave some leeway to home traders, such as easing a rule that all conversations be recorded.
But working from home must not mean a relaxation in surveillance and firms could hold retrospective reviews to focus on high risk areas, Britain’s Financial Conduct Authority said this week, adding it was aware of a surveillance alert surge.
Greenwich Associates said there has been a jump in “false positives” or potentially suspicious trades that must be reviewed, driven by record trading volumes during March.
The consultancy said one global banking client saw more than 35,000 false positives during just one trading day in March, up from 5,000 in a normal session, leading to delays in reviews by compliance teams.
“They normally review an alert on the same day, but in some cases it was two to three weeks later,” Danielle Tierney, senior analyst at Greenwich said.
Hong Kong’s Securities and Futures Commission said on Thursday that remote working policies due to the pandemic have caused an increase in operational risk and that a “regulatory conversation” was needed with financial firms.
Greenwich’s Tierney said firms that struggled to stay on top of surveillance will be under pressure from regulators to upgrade systems and will not be simply “forgiven” again for lapses next time round.
ALERT SPIKE
Tim Estes, executive chairman of Digital Reasoning, whose programs monitor staff at global banks, said banks were still digging through backlogs from an “incredible spike” in alerts, hiring teams in cheaper locations to do initial reviews.
“They know that within the enormous backlogs there are likely incidents of insider trading or market abuse,” he said.
Rachel Sexton, head of consultants EY’s financial services forensic and integrity practice in London, said some processes have been harder to implement in lockdown, such as the control of inside information
Britain’s FCA this week told bankers to have adequate systems at home to stop inside information leaks.
“What we will see in the next couple of months is regulators pro-actively issuing more work-from-home guidance,” said Robert Santella chief executive of IPC Systems, a supplier of kit for traders working from home in the U.S. and Europe.
