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Simon Price, UK managing director of Recommind, looks at the impact of high-profile legal cases on the financial services sector and what organisations can do to defend themselves from the soaring cost of litigation.

In a post-recession world, policy makers are taking a much tougher stance with organisations that fail to prevent fundamental failings in financial controls. As governing bodies concentrate on creating more controlled markets, a series of extraordinary events – including Libor, the mis-selling of Payment Protection Insurance (PPI) and breaches of compliance sanctions – have strengthened the regulators resolve to create a viable industry that protects clients’ interests.

However, the new regulatory drive to hold financial institutions to account is causing legal costs to spiral. The mainstream litigation found within most financial institutions has been compounded by a series of cross-border investigations into allegations of malpractice. As a result, analysts at JP Morgan Cazenove have predicted that despite UK banks already setting aside £30 billion to cover legal costs and settlements over the last three years, new litigation will require another £15 billion to be spent over the next three. Reflecting this trend, Barclays more than doubled its litigation provisions for the last fiscal year and both the Royal Bank of Scotland and Lloyds Bank have set aside more than £3 billion to cover rising legal costs in 2014 alone.

Scaling investigations

Simon Price
Simon Price

Part of the challenge that financial organisations face in satisfying the regulator’s demands is the huge scale of investigations required. Often, the information that investigators are looking for won’t be contained within a single document but hidden within a sequence of events prior to certain transactions. For example, investigations into the manipulation of Libor required banks to examine the communications of traders over a period of approximately 23 years. One large bank estimated that its internal probe into Libor retrieved 100 million documents, of which 18 million were reviewed using 1,000 search terms. In addition, the investigation extended beyond millions of archived documents to faxes, emails, instant messages and audio conversations.

Being able to piece together different bit of information to gain a better understanding of what happened has become a huge eDiscovery exercise that is complicated by the size of investigations mandated. Whilst in the past, reviewing individual documents would have been outsourced to legal teams, financial institutions are starting to recognise that it is imperative to develop smarter ways of working that can help resolve high-profile legal cases within squeezed budgets.

Understanding information
Given that legal cases are won or lost on the back of the information available, it’s important that banking organisations have the ability to understand the massive volumes of data available and understand human interactions that point to potential illicit activities.

It’s no longer feasible for a single human to go through thousands of documents and find a pattern. The volume of data involved means that financial institutions need to move away from the linear process of manually assessing each individual document to understand what has happened and build a robust defense. Instead, organisations need to rely on new tools that are capable of identifying the hidden connections between people, documents, messages, timelines, conceptual topics and more. Such tools provide an entirely new way of analysing large amounts of data to discover the patterns and relationships in unstructured information flows.

Visualising connections
Increasingly, banks are relying on tools that visualise the connections between multiple sources and types of information in a single interface. By using visual interfaces to identify the hidden patterns or information hidden within large data sets, key stakeholders within legal cases can start to experiment with hypotheses, grasp the big picture at a glance and drill into the details that may otherwise have gone unnoticed. For example, it’s possible to uncover which people have been having conversations, what these discussions are about and whether it its relevant to the defense of a certain case.

Adopting this approach also means that organisations no longer have to review every piece of information. By combining powerful machine learning capabilities with graph analysis and advanced visualisation, financial organisations are able to gain much earlier insight into the data that they hold. They are also able to accurately pinpoint where information is contained and identify the most relevant documents that need to be reviewed. This prioritises the review process and allows firms to create a strong seed set using the most relevant and responsive documents, so they can then simply sample the remaining data to double-check that no crucial evidence has been missed.

Early case assessment
Ultimately, litigation costs are a challenge for financial institutions to execute on strategic plans as they put significant pressure on the capital base. As a result, organisations need to manage the cost of litigation more effectively by adopting a calculated approach to the procurement of systems and services that help them prepare for legal cases.

Increasingly, there is a trend for in-house counsel or forensics teams to purchase systems themselves so they can collect the relevant data and do a focused review of evidence internally. Only after this stage, do financial institutions collaborate with law firms to develop an initial case strategy and formulate a preliminary discovery and litigation plan that is essential to winning a case. This approach not only allows for the focused review of evidence in the early stage, it also enables in-house counsel to invest in building repeatable processes that make it quicker, cheaper and easier to manage growing litigation costs in the long-term by gaining control of processes and becoming more proactive with information.

Simon Price is the Managing Director of Recommind’s UK operations, based out of the London office. Mr. Price has over 15 years of experience in sales and management within the software industry, managing relationships with many of the world’s largest professional service and corporate organisations. Mr. Price is responsible for overseeing the expansion of Recommind’s London operations and the support of its growing UK and European client base. Prior to joining Recommind, Mr. Price served as a Sales Manager at Aderant Inc., a leading provider in finance and practice management solutions and previously as Sales & Marketing Manager with Chambers & Partners publishers.