The Conduct Chronicles – “On the Public Record”
Emma Parry writes on her experience of misconduct within the financial services, and how firms must do more than monitor communications to prevent it.
Written by a human
Let’s be honest, telephone call recording, and email monitoring, have been commonplace in financial services for many, many years, and certainly long before the advent of more sophisticated surveillance solutions. Moreover, most employment contracts stipulate that the firm will monitor and record employee communications – be it phone, email, messaging platforms and chat rooms. The question is, do people behave better if they think, or indeed know, that they are being monitored?
Not unlike others who have worked in financial services for a number of years, I have encountered misconduct. In a few cases, that misconduct has resulted in legal proceedings, with email and telephone transcripts tabled as evidence in court and now on the public record.
Here are just a couple of examples, gleaned from my experience in financial services, that suggest that monitoring alone does not act as a deterrent.
Expert Witness: Contracts for Difference
In 2021, I was instructed as an expert witness on a case in the UK High Court relating to Contracts for Difference (CFDs). Central to the case was the process by which the retail client was opted-up to elective professional. It was that process upon which I was asked to opine.
The case arose as the client made a significant trading loss, but via the opt-up, lost all their retail protections. The online broker was seeking settlement of the money owed. However, the client argued that the process by which they were opted-up was in breach of the regulations and hence invalid.
If you’re not familiar with CFDs they are a high-risk product with the majority of consumers losing money when trading in them. CFDs are often highly leveraged, which means they use debt to try and amplify returns. However, that amplification can also result in consumers losing significantly more than they invested. Add to this that the underlying assets are often volatile – eg. FX, crypto – and its little wonder that regulators around the world have implemented stringent restrictions on the offering of CFDs to retail consumers.
In this particular court case, the papers included evidence of a ‘tick the box’ process used to capture the client’s knowledge and experience, alongside numerous emails which highlighted the broker offering inducements to the retail client to opt-up. This included statements specifying how opting-up would enable their account to be set up ‘in the most margin efficient manner’.
In reading through the emails, I was shocked to discover that one of them included wording that the FCA Handbook specifically states cannot be used. In the Handbook (‘restrictions on the retail marketing, distribution and sale’ of CFDs), the FCA outlines the inducements that cannot be offered, noting that ‘monetary incentives include, but are not limited to … the offering of rebates on fees (including volume-based rebates).’ Yet here it was, evidence tabled in court, an email from the online broker stating that by opting up the client could ‘earn a volume-based rebate’.
Ultimately, the statutory demand served by the broker was set-aside based on the classification and opt up issues tabled in court.
Mark Johnson: Front-running (Wire Fraud)
In early 2016, I was working with a colleague at HSBC on best execution, a legal mandate that requires brokers to seek the most favorable options to execute their clients’ orders within the prevailing market environment. Best execution doesn’t just entail getting the best prices, but rather encompasses a broad range of execution factors, including speed, size and nature of trades, likelihood of execution, and specified venue.
My colleague was working on the policy, and I was working on the practical implementation of the policy, including the governance framework.
My colleague’s name was Mark Johnson. And in July 2016, he was arrested at JFK airport on allegations of front-running (US wire fraud).
The case, dating back to 2011, pivoted around allegations of manipulation of the price of Sterling prior to converting USD $3.5 billion to GBP on behalf of HSBC’s client, Cairn Energy. Evidence presented included that HSBC promised to drip feed the transaction to prevent a spike in the FX rate. However, Cairn complained that it paid a higher price for GBP after HSBC traders “ramped” up the rate.
Johnson’s defence argued that:
- Pre-hedging is explicitly permitted in the FX global code of conduct, and
- HSBC needed to buy GBP ahead of the trade to fill the client order.
In addition, the evidence included telephone recordings between Johnson and traders based in London and New York that are now on the public record.
Notwithstanding the technical debates about FX trading and what is allowable under the global code of conduct, the telephone transcripts became pivotal to the proceedings, and they undoubtedly served to sway the jurors given the language and sentiment they captured. Specifically, the transcripts included Johnson:
- Exclaiming “Oh, f***ing Christmas” when he learned that Cairn had decided to go ahead with the trade
- Discussing how high the price of GBP could rise before the client would “squeal”
- Stating, following completion of the Sterling order, “I think we got away with it”.
In October 2017, a US jury found Johnson guilty of wire fraud. In April 2018, he was handed a two-year sentence and a $300,000 fine.
Misconduct vs Minority Report
The number of court cases where emails, eComms surveillance records and call transcripts are tabled as evidence, suggest that the mere fact of being monitored doesn’t necessarily deter misconduct. And we have to wonder why this is.
Firstly, monitoring is undoubtedly capturing spontaneous, yet inappropriate or incriminating exclamations, fuelled by the adrenaline rush of a successful deal or transaction (be it intentional market abuse or not). In the heat of the moment, employees forget they are being monitored. In the case of Johnson, this evidence almost certainly led to the criminal conviction.
Secondly, as in the CFD case, the controls around what is permissible in communications with consumers should have been more closely enforced and monitored by the compliance team. The fact that inducements were being offered to a retail client, against the restrictions clearly set out by the FCA, suggests that the restrictions were not adequately covered in policies, procedures nor training to the relevant personnel.
My experiences, and as set out in these two examples, highlight that monitoring alone won’t deter misconduct, which is why firms implement, and rely upon, a wide-ranging suite of controls.
Firms, and indeed regulators, are also increasingly focused on understanding the interplay of culture and conduct, with the aim of moving from a preventative model to one that is more predictive. Thankfully, the Minority Report scenario – where crimes are stopped before they take place based on insights from psychics – is still fantasy. However, by studying real-world cases, we can gain significant insights into the myriad of ways in which misconduct can manifest, alongside learning ways in which our controls need to continue to improve and evolve.
