Compliance
Regulators Must Open Up About Decisions To Improve Fairness – Singapore Firm
Regulators that mete out punishments and other measures aren't infallible; a recent saga in Lithuania shines a light on why watchdogs' actions need to improve.
(Story clarifies that ABC Projektai and Bruc + Bond are unrelated firms.)
Readers are familiar with many examples of banks and other
financial firms being punished for compliance failings. It’s less
common to read of a regulator wrongly acting against a firm
and later having to be reined in. And that sort of episode
raises questions about whether watchdogs should be more open
about why they act and the punishments they choose
to impose.
An example of the issue came up in early July this year when ABC
Projektai (formerly Bruc Bond UAB) suffered an inappropriate
application of regulatory interpretation in Lithuania by the
Lithuanian Central Bank. The firm’s electronic payment banking
licence was revoked; however,
that decision was overturned in the European Court of Justice
as well as by the Supreme Administrative Courts in
Lithuania.
The initial penalty of permanent revocation was found by the
court to be excessively harsh and disproportionate given the
circumstances. The court also confirmed that there was no
evidence of intentional wrongdoing by ABC Projektai. The firm
said the revocation was unprecedented.
At Singapore-based firm to ABC Projektai, called Bruc + Bond,
said, there are several important lessons from the Lithuania
saga. Bruc + Bond is a global cross-border payment provider for
corporate banking. (Bruc + Bond is entirely unrelated to the
Lithuanian business, ABC Projektai.)
“I would argue that demonstrable independent oversight is
essential within any regulatory action process both on the
regulated entity’s side as well as the regulator’s,” Krishna
Subramanyan, CEO of Bruc Bond, told this publication. (We met
Subramanyan near his offices in Singapore.) “Therefore, an
independent review mechanism that allows regulators to seek
external input to verify findings would prevent potential bias,
ensuring fair and just decision-making prior to the decision
itself. This sequence is important.”
“Alongside this, I believe that a window of opportunity for
dialogue, like the US settlement system, could foster a more
cooperative relationship between regulators and financial
institutions. They can both then appear to be on the same side of
the law rather than on the opposite extremes.”
“Meaning, that even if a fine is imposed, there is an opportunity
to resolve the issue in a way that mitigates collateral damage
with a focus on ensuring robustness of compliance outcomes,”
Subramanyan continued. “This can allow both parties to negotiate
and reach an agreed settlement of the matter, which may even
include admission of certain improvement areas without escalation
into a court battle.”
Much is at stake, given the reputational and financial costs of
compliance lapses, a process that also drives demand for ways to
make know-your-client (KYC) and anti-money laundering processes,
for example, easier to handle. In June this year, Fenergo, the
Ireland-headquartered firm operating in this sector, said data
showed that
penalties for breaching rules totalled $6.6 billion in
2023, rising from $4.2 billion in 2022.
Given the consequences of wrongdoing, mistaken punishments are a
problem calling out to be corrected.
“Transparency is crucial in regulatory decisions, particularly
when imposing fines. The purpose of supervision is to instil
confidence in the marketplace that there is an unbiased
assessment of entities that can be interpreted
correctly – without transparency, the trust in this
system is eroded,” Subramanyan said.
“Unless there is a good reason as to why regulators may not
provide full details, for example, a national security threat, in
such cases, withholding information is justified. It may be to
prevent compromising broader issues with the intention to ward
off undesirable external actors from taking further advantage of
findings if published,” he continued.
Asked about the Lithuanian episode, Subramanyan replied: “The
main lesson here is the importance of fighting against
unjustified regulatory actions to ensure that decisions are held
to a high level of transparency and fairness. It's about first
checking that regulated companies maintain robust controls based
on sound legal and independent legal opinions.
“On that basis, then showing no hesitation to invite open legal
scrutiny when regulatory decisions are not made fairly and on
solid legal foundations,” he said.
This news service asked Subramanyan what jurisdictions are
getting things right and building trust, and what centres need to
improve how they operate.
“When it comes to building trust, I would look to Hong Kong and
Singapore. These are large finance centres and operate in a way
that is culturally sensitive, where public naming and shaming is
not typically the first course of regulatory action.
“This means that regulatory preference tends to include the four
key ingredients of fairness: (i) identification through
confidential reviews of required corrective action; (ii)
engagement of approved and independent expertise to confirm the
same; (iii) provision of an agreed time frame for corrective
action; and (iv) review of outcomes before closure or public
action.
“This approach minimises much of the potential damage which can
greatly impact an institution's reputation. As a result,
financial institutions are able to instil greater trust in
regulators knowing that action is carefully considered before
being carried out,” Subramanyan said.
“Reputation and trust tend to be more culturally significant in
Asia. Because of this, it is likely that Asian regulators will
continue to maintain a discreet and private approach to
regulatory action in order to preserve trust in the system,” he
said.
This news service asked whether there is a risk that the US
approach to imposing fines suggests a certain cynicism, making
fines an occupational risk of doing business.
“In the US, a majority of large financial institutions have been
fined at some point in time. For example, a large US bank was
fined north of $900 million in the past four years and, despite
this, there seems to be no reputational damage. This suggests
that the valuation of damage may become a mere percentage of net
income instead of that uncompromisable social brand of trust that
it should ideally be,” Subramanyan said.