Business
The hidden price of communications non-compliance
Global Banking and Finance Review
Company
Tom Padgett, General Manager, Enterprise Headshot
Attributed to Tom Padgett, President, Enterprise Business at Smarsh
The compliance standards set for top city firms are continuing to rise, with regulatory scrutiny of workplace communications reaching an all-time high. The spotlight placed on financial services firms by regulatory bodies has revealed the complacency of employees, and more importantly, risk managers, when it comes to how sensitive information is communicated. Outcomes of industry probes, such as the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) fining $1.8bn to top city firms in 2022 due to misuse of personal WhatsApp and text messages to discuss sensitive information, exemplify this.
But despite being one of the largest collective resolutions in U.S. regulatory history, it failed to curb this apparent epidemic of non-compliance. Earlier this year, a fresh group of Wall Street firms settled to pay more than $81 million in civil penalties to charges of record-keeping failures, adding to the now more than $2.8 billion in fines inflicted for similar offenses in the U.S. With the UK’s FCA having launched its own probes earlier this year, it is likely that we will see these hefty fines continue to pile up across these two major markets.
While these financial penalties are substantial, they are merely the opening round of punches in what can become a prolonged battle for businesses. The true cost of non-compliance is multifaceted and extends far beyond the immediate financial impact.
Cost of lost trust
The repercussions of non-compliance in communications on a company’s reputation are profound and far-reaching. If a firm has failed to adhere to regulatory standards, particularly surrounding sensitive customer data or possible future deals, the damage to its reputation can be immediate and, in some cases, irreversible.
Trust, once broken, is not easily restored. Clients, who expect the highest levels of confidentiality and integrity, may start to look elsewhere, wary of the risks associated with a non-compliant firm. Investors, too, are quick to react, often pulling back funds or thinking twice about future investments, concerned about the stability and governance of the company.
The public’s perception is equally affected. In today’s digital age, news travels fast, and a company’s missteps are broadcast widely and rapidly. A tarnished reputation can ultimately lead to a loss of consumer confidence and, consequently, a possible decline in market share and having larger financial implications than any initial fine could have been. The impact on a company’s value can be significant, as the market responds to the perceived increase in risk associated with the company’s brand.
Disruption to internal operations
The operational impact of regulatory investigations and the subsequent need for increased compliance measures can be just as debilitating as the financial penalties themselves. The diversion of resources to manage the fallout from an investigation can disrupt business operations, leading to inefficiencies and a loss of focus on core business activities. Employees may find themselves mired in compliance activities, detracting from their regular duties and potentially affecting service delivery.
The strain on employee morale should not be underestimated either. The uncertainty and pressure that comes with a regulatory investigation can lead to a tense work environment, reduced productivity and even staff turnover. Furthermore, the long-term implications of operational disruption can manifest in sustained inefficiencies, as the company struggles to return to its pre-investigation state of affairs.
The burden of heightened oversight
Once a company has been marked by non-compliance, it often faces a future of increased scrutiny from regulators. This heightened oversight can be both exhaustive and exhausting, requiring significant internal resources to manage. Companies may find themselves in a perpetual state of audit-readiness, with the need to produce detailed reports and documentation on demand.
The cost of compliance is likely to rise as firms bolster their compliance departments and invest in training to ensure that all employees are aware of, and adhere to, the new standards. The spectre of more stringent regulations and the potential for additional fines can stifle growth and innovation, as companies become more conservative in their business practices to avoid further infractions.
The need for effective communications compliance
In response to these challenges, there is a clear need for firms to implement effective communications compliance strategies. Such strategies must include robust monitoring systems that can detect not only direct breaches, but also patterns or gaps that may suggest off-channel communications. While the cost of implementing these systems may appear significant, the investment is essential to protect companies from future penalties and to maintain their reputation in the industry.
Effective compliance systems serve as both a deterrent to non-compliance and a defence mechanism against inadvertent breaches. They provide a framework within which employees can operate safely and with confidence, knowing that their communications are being monitored and managed in accordance with regulatory requirements.
The hidden price of communications non-compliance is a complex threat that can undermine the very foundations of a business. Financial penalties, while painful, are only the beginning. The long-term consequences – reputational damage, operational disruption and increased scrutiny – can be far more damaging and enduring. To safeguard against these risks, firms must recognise the critical importance of effective communications compliance and invest accordingly in robust systems. Although an upfront expense, it is a price worth paying.
Compliance refers to the adherence to laws, regulations, and guidelines that govern financial institutions and their operations.
Regulatory scrutiny involves the examination and oversight of financial institutions by regulatory bodies to ensure adherence to laws and regulations.
Operational disruption occurs when business activities are interrupted, often due to investigations or compliance measures, affecting efficiency and productivity.
Risk management is the process of identifying, assessing, and mitigating risks that could negatively impact an organization’s operations or reputation.
Communications compliance involves ensuring that all workplace communications adhere to regulatory standards and guidelines to protect sensitive information.
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