The Generational Shift That Will Change Business Behaviors

Starling Team
WEF founder Klaus Schwab recently described COVID-19 as “a litmus test for stakeholder capitalism.”  

Young people, in particular, are expecting more from companies during this time of crisis.  A survey by JUST Capital and The Harris Poll found that 58% of young people believe companies need to better support the health, safety and security of their workforce in light of COVID-19.  This is 10% higher than the response from those that are 35 and older.

Even prior to the pandemic, there were signs that this new generation was paying closer attention to environmental, social and governance issues.  (“ESG”)  For instance, one study shows that nearly half of millennials have been vocal, either in supporting or criticizing their employer, regarding its actions in connection with a social issue of significance.  Young people are also considering these factors when purchasing goods and voting on political matters. Gen Z is likely to follow in their footsteps. 

Firms embroiled in culture or misconduct-related scandals may be particularly vulnerable in this context.  The current generation of schoolchildren and young adults will be the next generation of voters, workers and consumers.  That shift will also come with higher expectations for businesses.  What remains to be seen is if businesses will rise to the challenge or wait until they are forced to react after scandal erupts and value is lost.

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A Whistleblower Just Took Home $50 Million — the Biggest Award the SEC Has Ever Paid

Starling Team

The US Securities and Exchange Commission has paid out nearly $50 million — its largest-ever whistleblower award. 

The whistleblower tipped off the agency to a currency manipulation scheme at a bank, which resulted in successful enforcement action, according to the SEC.  Reports from the Wall Street Journal show that the whistleblower is a trader from Bank of New York Mellon who had assisted with a related SEC investigation for over a decade.  While a source named the whistleblower to the Journal, the SEC said confidentiality agreements restrict it from revealing the whistleblower’s identity.

The bank was accused of making artificially enlarged profits by giving pension funds less-than-desirable exchange rates and pocketing the difference.  The institution didn’t deny these accusations and in 2015, it paid more than $700 million in fines.  “Whistleblowers have proven to be a critical tool in the enforcement arsenal to combat fraud and protect investors.”  Jane Norberg, chief of the SEC’s Office of the Whistleblower, said in a related statement.

This brings the SEC’s total award payout to over $500 million since the program was created. Among other market overseers and conduct regulators, the SEC has looked to staff within organizations to spot when pious “Tone from the Top” appears to be mere window-dressing, at odds with day-to-day operating realities.

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In another recent item involving the SEC, we commented on the news that its Strategic Hub for Innovation and Financial Technology (FinHub) will hold virtual meetups to continue industry interactions through the COVID-19 pandemic.  To find out more about these events, go to this page.

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SEC FinHub Announces Virtual Meetups, First Up is Regtech

Starling Team
The Securities and Exchange Commission (SEC) announced that its Strategic Hub for Innovation and Financial Technology (FinHub) will begin to hold virtual meet-ups, given the challenges with in-person meetings during the COVID-19 pandemic.  However, the SEC HUB wants to continue to support industry interactions, to inform regarding regulatory priorities and approaches, and to help allow people in the industry to engage on particular projects and issues.

To do this FinHub will host a series of themed virtual P2P meet-ups in the coming months.  We note with interest that the first theme is regulatory technology (Regtech).  Those working on Regtech solutions or implementations are encouraged be a part of this initiative.  The Regtech virtual P2Ps will take place on the week of July 6, 2020.  

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It’s great to see the SEC Innovation steam putting attention to the potential represented by the Regtech community.  If you’d like to book a virtual P2P meeting, you can use this form.
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73% of Respondents Believe the Focus on Culture and Conduct Risk Will Increase Personal Accountability of Senior Managers

Starling Team

Thomson Reuters Regulatory Intelligence recently published its 11th annual Cost of Compliance report.  Over 750 senior compliance practitioners took part in a related survey, representing banks, insurers, broker-dealers, and asset managers. 

Among those respondents, 73% indicated that the regulatory focus on culture or conduct risk will result in increased personal liability exposure for senior managers.  About one in five respondents expect such personal liability to grow significantly in the course of the next year.

With the survey having been completed before COVID-19 had a global impact, the Thomson Reuters report seeks to offer views on what risk and compliance practices will look like in the face of current and future uncertainties. Culture and conduct risk concerns are expected to remain significant in that context — perhaps even more so than previously.  See the full report to learn more.

For informed discussions of these themes, organized by Starling and Thomson Reuters in New York (2018) and London (2019), please see here and here.  A related video clip is viewable at this link.

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What Is the Future for Regulatory Enforcement in Australia?

Starling Team

In the wake of the Hayne Royal Commission hearings and report, Australia’s bank regulators adopted a more aggressive enforcement stance. However, COVID-relief efforts have since mandated that those regulators relax their supervisory agenda and exercise a certain degree of forbearance until we get past the crisis.

The pace of regulatory investigations has slowed, as regulators acknowledged the challenges in this environment that impact businesses’ ability to respond to inquires promptly. But such leniency will soon come to an end, and the key question firms are asking is whether regulators will revert to the fairly combative stance they adopted over the course of 2019.

Early signs suggest that the answer is “Yes.” According to one report, Rod Sims, Australian Competition & Consumer Commission chairman, said that the “five-month litigation drought” would end in the near future and that enforcement would ramp up again in the coming months. ASIC’s chairman James Shipton also stated that ASIC continues to have appetite for high-profile litigation, per its previously announced “why not litigate” posture, and said that “past illegal conduct, including behaviour identified by the Hayne royal commission, must continue to be a priority.”

Firms should thus prioritize developing an ability to evidence successful culture and conduct risk management now, before they face potential investigation. Following on its requirement that firms undertake independent “culture audits,” the Australian Prudential Regulation Authority was critical of the reports it subsequently received.

Earlier this year, APRA Deputy Chair Helen Rowell suggested that an over-reliance on the use of consultants who offered. “Institutions may well wish to use external advisors to facilitate, provide structure or challenge their internal dialogue, however it remains the responsibility of each institution to own and drive its understanding of how accountability works within its organisational structure,” Rowell said.

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