The SEC and CFTC Fine Banks ~$2 Billion for Record Keeping Failures. Yeah, Whatever.
I've titled this newsletter, "Stop Harming Customers: A Manifesto for Compliance." I was going to start on the manifesto part today by talking about potential ideas for improving compliance. That was my intent, but they keep pulling me in, and by that I mean, the regulators keep handing out billion dollar plus fines. I can't ignore that can I?
At the end of September 2022, the SEC and CFTC fined a bunch of banks a bunch of money. Blah blah blah. In this case for failing to keep records, especially text messages, which employees and <gasp> senior managers sent using personal devices and apps such as WhatsApp and Signal. This was in violation of the company's own policies and securities regulations from the 1930s. Yes, the SEC says that 1930s in their press release. That was when many phones looked like this:
And, the SEC points out, this will help to avoid repeats of the 2013 Forex scandal. If you don't remember that one--and who can remember all of them--it was when bankers colluded in chatrooms with names such as "The Bandit's Club." I think it should go without saying that this fine isn't going to stop people who are colluding to commit criminal acts from corresponding quietly in covert communication channels. Correct?
OK, but maybe the fine is correcting a harm. And what harm would that be? This isn't about bad behavior, but rather failure to save documents that may evidence bad behavior. So the harm is to the investigators, i.e., the regulators themselves? Maybe. OK. And Matt Levine at Bloomberg suggests that the law isn't so useful here for these reasons. But regardless, the rules are the rules and banks knew that they were supposed to keep all communication--their internal policies even said so.
All good right? Right? You have been reading my articles, yes? You know this isn't going to be OK.
We've Got a Lot of What It Takes to Get Along
The reason that non-colluding employees were using unapproved apps from personal devices were several, such as customers who preferred those apps, but also because the bank took all the Blackberries away, and the iPhones, and the laptops, and any paying of telecom bills whatsoever. Some financial firms still hand out devices to use for work, but all the big banks stopped doing this. Some a long time ago, others more recently.
This saved money. Lots of money. Kitting an employee out with an iPhone and service is maybe $120 a month. A laptop another $50 or so, or at least that's a common internal cost factor. There's certainly a lot of room for discounts, keeping devices running longer, but on the other side there's a lot of dropped phones and punched laptops (I'm guessing). On the opposite end is giving everyone Blackberry Mobile Suite for $3 to $10 per month.
Let's be conservative and guess $100 a month in savings for BYOD: Bring Your Own Device. Maybe more, maybe less, but it's in the ball park and it's easy to multiply. Next, the record keeping fines are for the period from January 2018 to September 2021 or 45 months. This equals a savings of $4,500 per BYOD employee in that time frame. You see where this is going, right? Should I just put in the damn table and stop yammering?
(For the love of Pete, LinkedIn and SquareSpace: put tables in your editor app.)
Here's how to read this, the last column represent the percentage of employees who would need to have switched from company issued equipment to personal devices for the 45 months covered by the fine. Clearly Jeffries was the loser by this metric and Goldman not so great, but everyone else? At Bank of America, one in four employees would have had to have switched over for the fine to be a wash in terms of cost versus savings.
Yes, I'm sure that not every employee had a company issued phone, especially at the banks with retail consumer businesses--tellers were not getting a company issued phone--and the fines were only for the broker dealer businesses in any event. Alternatively, this is the savings only for 45 months. Time, I'm told, continues forward and BYOD policies started before 2018, meaning savings before and into the future.
The firms have certainly been chastised, and employees will be forced to take training to not send messages through unapproved apps, but nobody is going back to handing out phones to traders. I'm left wondering: was the penalty really a penalty if it was just a delay on the savings to be had by making employees pay for their own communications? And did I miss an opportunity for a joke about employees and 1930s phones?
Mr. Burns answering the phone the way Alexander Graham Bell originally proposed.