Josh Ballard

Your firm has just been handed a $300,000,000 fine. Someone has to take the blame, so your COO has stepped down. The media are scrutinizing your every move. Your PR team is struggling to protect your CEO from public embarrassment. To make matters worse, your share price has fallen through the floor. Investors are questioning your integrity and viability. The damage done to your brand is irreversible, and you’re forced to szhutter the business.

This is the nightmare scenario that every financial firm wants to avoid. This is why financial compliance is more important than ever. When firms bend the regulatory rules too far, huge repercussions are never far behind. 

Substantial Financial Penalties

The threat and growing prevalence of regulatory fines are merely the beginning.

In 2019, the U.S. Securities Exchange Commission (SEC) issued penalties and disgorgements totaling U.S.$4.3 billion – an increase of approximately 10% from the previous year.

Those fines came from 862 enforcement cases. That’s the second-highest amount ever recorded by the SEC, with the average penalty costing $554,033. 

Compliance misconduct and fines aren’t purely monetary penalties. Although financial firms often budget for fines, this approach is extremely shortsighted. The impact to business continuity and brand reputation – both for the firm and its operators – can be much more painful. 

Senior Executive Accountability

If a compliance breach is severe, the regulator may call for removing managers, the chief compliance officer or the senior executives who are accountable. Alternatively, a firm may attempt to distance itself from the fine by dismissing the executives directly responsible, painting them as rogue employees. 

In some cases, the scandal is so egregious that those at the very top have to step down. The swell of public and lawmaker pressure following the Wells Fargo account fraud scandal resulted in the resignation of longtime CEO John Stumpf in 2016. His successor, Timothy Sloan, struggled for two and a half years to contain the scandal before resigning after calls from U.S. regulators and Congress for his departure.

Why is financial compliance important?

Financial compliance is important because when financial institutions operate within the rules set out by regulators they are protected from substantial fines, negative media coverage, and irreparable brand damage.

Living a Bad Movie – Facing Trial by Media

The last thing your firm needs during a pandemic and uncertain macro environment is your CEO in front of cameras facing a public trial by media. Nowadays, you may not even be afforded that luxury. The Netflix series “Dirty Money” has an entire episode titled “Cartel Bank” examining HSBC’s money-laundering lapses that resulted in a $1.9 billion fine. Although the penalty was issued in 2012, the episode didn’t hit screens until 2018. Once your financial compliance infringement is public, you never know how or when it will resurface.

Bearish Impact on Stock Price

Once a regulator publishes its findings and issues a fine, there is often a reaction in the stock market. If you’ve been found to be non-compliant, what other issues may be hiding under the surface? Is this just the tip of the iceberg? Investor confidence may slip, and before you know it, the stock price tumbles.

When Kweku Adoboli was found to have been making unauthorized trades at UBS, the bank was fined $47 million. The fine was the least of the bank’s worries. The scandal prompted the resignation of CEO Oswald Gruebel and wiped $4.5 billion from the UBS share price.

Irreparable Damage to the Brand

Sometimes, instances of non-compliance are so damning that irreparable damage is done to the brand. Public image has become so toxic that investors pull their money en masse or the regulator forces the firm to close.

At its peak in 2001, Pequot Capital was managing $15 billion of assets, making it one of the largest hedge funds in the world. In 2006, a raft of insider trading allegations caused investors to shun the firm. A few years later, the founder Arthur Samberg admitted defeat.

“It’s increasingly untenable for the firm and for me,” he said, “I have concluded that Pequot can no longer stay in business.”

How to Ensure Financial Compliance

A manual financial compliance process is no longer enough to guard against the threat of company-ending crises. The world’s largest banks, hedge funds, and private equity firms rely on Behavox Compliance and its industry-leading detection rate to uncover risks within their organizations quickly and accurately – before it’s too late.