The regulators on both sides of the pond have been active. Barclays, Knight Trading and now Standard Chartered have all found themselves squarely in the regulator’s sights.
The impact of all of these is serious to anyone running any sort of investment business.
One needs to overcome a lot of inertia to move an account or to move to another organisation – deposit guarantees not withstanding. And lets not kid ourselves – customers ultimately pay for these fines because these organisations keep a tight eye on the bottom line and find ways of recovering these costs. But fund boards do need to look at their service providers regularly to assess whether they remain appropriate and to spread risk if necessary.
Large businesses that can afford to do so will settle with the regulators quickly to try and limit reputational damage. e.g. Standard Chartered are already reported to be in settlement discussions in the US and today there have been reports that settlement has been reached to the tune of £217m. At least now we know how much a US banking licence costs as that is what has been preserved by reaching a settlement ahead of the hearings that were scheduled!
But a settlement of a regulatory action should not be the end of the matter for a fund board. It should consider whether the checks that will be carried out by a service provider remain appropriate and adequate and they should if necessary seek reassurances from them regarding exposure to any risks that arise as a consequence.
There are still a number of regulatory changes that have the potential to impact funds – the AIFMD rules have yet to be finalised and there have been changes to the CFTC exemptions which boards need to keep abreast of. It is important that they check back with the fund lawyers to understand what the impact of all these changes will be on the fund.
It is clear that the regulators have been focussing on ‘know your client’ type procedures and the extent to which these have been carried out in addition to the robustness of operational procedures.
Operational issues too are important, particularly in how brokers and investment banks are segregating and handling client assets and executing trades. IT change processes are often underestimated in terms of business impact as was demonstrated in the recent problems that the Royal Bank of Scotland had with its system upgrades.
In the meantime the best that a fund board can do in interpreting the emerging regulatory signals is ensuring that the disclosures to investors remain accurate and relevant and that their service providers are responding to the changing environment and have adequate disaster recovery processes that are updated and tested regularly.
©Jaitly LLP