Jonathan Dixon, Head of Surveillance, eflow Global
If trading firms were asked to list their main priorities when thinking about regulatory compliance, topics such as keeping abreast of new legislation, enforcement action trends and strengthening risk management processes would likely feature near the top of the list. But collaboration with regulators? Well, that’s probably been seen as less of a priority unless you happen to have a close relationship with a particular regulatory body.
While regulators have always collaborated with firms in some way, different regions and bodies have weighted its importance differently, meaning the practice often hasn’t been at the heart of their strategy. Now, however, regulators around the world are instigating a noticeable shift towards proactive cooperation and building productive relationships with firms as they aim to reduce the threat of non-compliant behaviour.
The perception of regulators emerges from how they enforce compliance – the ever evolving line between offering the carrot or the stick. If penalties are too severe, or perhaps even sometimes unfair, an ‘us versus them’ mentality can emerge. While robust enforcement action is undoubtedly needed to act as a deterrent to firms that don’t take their regulatory obligations seriously, how this is implemented by regulators can be key to its long-term effectiveness.
In the U.S., the departure of ex-chair Gary Gensler from the SEC last year marked a particular change in regulatory strategy. He was renowned for taking a hardline stance and strong enforcement action. However, there has already been a major switch in tone regarding this outlook (first under acting chairman Mark Uyeda and now new chair Paul Atkins). Primarily, the SEC’s new strategy involves taking a more cooperative approach with firms that either self-report non-compliant activity or act quickly to implement the regulator’s recommendations. In these instances, the financial penalties imposed on firms can be greatly reduced, and some companies have even been publicly commended for their prompt action, which goes a long way to mitigating the reputational damage of a regulatory breach.
Of course, that’s not the only form of collaboration. There is also collaboration between other enforcement agencies, which is especially crucial to cross-border cases. And I would add regulatory tech providers as an essential third party too. With Regtech now seen as fundamental to many firms’ regulatory strategy, vendors have a leading role to play in the work – and success – of both regulators and trading firms.
Why shaming firms can have the opposite effect
In 2024, the last year of Gensler’s reign, there were 583 enforcement actions. While this number was down on the previous year, the $8.2 billion obtained in financial penalties represented the highest amount in SEC history. The crypto space in particular felt the brunt of strong enforcement action during his tenure.
One of the big changes under the new Trump administration, however, is the creation of a crypto task force “to respond to this overreach and to seek to repair ties with the crypto industry and other market players”. While there is a continued focus on traditional cases like insider trading, this collaborative approach is being extended to areas like AI, with the regulator “holding roundtables with industry participants to evaluate regulatory issues around the use of AI”.
The idea that too much enforcement action can damage a regulator’s relationship with firms is something being mirrored in the UK. The FCA pulled back from an initial plan to publicly name firms as soon as they were under investigation – not found guilty of wrongdoing, which there are of course repercussions for, but simply their alleged involvement in some form of market abuse.
My response to the plan was that you can’t name and shame someone just because you think they’ve done something wrong. That’s going to cause a whole load of further issues – and the case is going to be much more nuanced than right or wrong. So, it’s good news the FCA have changed their position on this, and it goes hand in hand with seeing much more of a focus on collaboration and guidance, rather than an aggressive, enforcement-based approach.
Reducing timelines for getting cases closed
With so much digital data to analyse, collaboration between regulators plays an important role in reducing investigation timelines and overcoming cross-border complications. In a speech delivered in September last year, Therese Chambers, the FCA’s joint executive director of enforcement and market oversight, discussed collaboration with other regulators, both at home and abroad.
It was by working with the PRA, for instance, that the FCA could successfully fine Citigroup £61.6m for failures in the firm’s systems and controls. Through this “excellent collaboration”, they were “able to settle the case within just 23 months”. Chambers also explained that they were able to censure asset manager H2O LLP for failures by working with the French regulator the AMF.
Regulators are increasingly working with tech vendors too to support the advancement of surveillance and monitoring tools. Initiatives like the FCA’s Tech Sprint demonstrate how these partnerships are helping to develop more sophisticated, efficient systems, strengthening both regulatory oversight and firms’ ability to meet their obligations.
Tech providers can significantly aid firms and regulators in their compliance activities, but they also need to understand the core challenges they face to help overcome them.
How to strike a balance?
Economic volatility is a new normal, so growth has been a central ambition for many governments. But as we know, growth and regulations don’t always go hand in hand. The more regulation you have, often the harder it is to achieve growth (certainly in the short term). Concurrently, little regulation can create a Wild West environment in which market abuse becomes commonplace and the risk to firms and investors increases significantly. And the irony is that to build better regulatory systems, you need freedom to innovate.
So, how do we find the balance between enforcement and cooperation, regulation and innovation? Well, you can definitely assess practices over the years and see what has worked better. But we’re also operating in a new world with great uncertainty: there is going to be a fluctuating requirement between needing one practice more than the other.
I would say collaboration itself is key to striking a balance. Understanding what risks firms are facing, where they are struggling to be compliant, how regulators can work together more effectively, what innovations tech providers are coming up with, and how they can help to meet firms’ pain points.
A collaborative approach doesn’t negate enforcement. What it does do is form a shared understanding which can improve regulatory outcomes while supporting innovation and growth. It encourages firms to be compliant and proactively report risk, rather than see regulators as a nuisance and compliance as a burden on their business.
If we’re to tackle the many threats appearing in today’s compliance landscape, the sharing of information, ideas and strategies is going to be fundamental to keeping one step ahead.