Compliance

Regulators Must Open Up About Decisions To Improve Fairness – Singapore Firm

Tom Burroughes Group Editor 7 October 2024

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 The firm’s electronic payment banking licence was revoked; however, that decision was overturned in the European Court of Justice as well as by the Supreme Administrative Courts in Lithuania.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. 

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