What WhatsApp bank fines say about culture and regulation

How banks communicate is central to retaining long-standing clients and attracting new ones. If banks do the job badly enough, they can even end up being fined enormous amounts and losing senior managers. 

Last September, Goldman Sachs fired its head of transaction banking over breaking communication rules, while just a month before, nine Wall Street firms paid a total of $555mn to US regulators. 

The US Securities and Exchange Commission alongside the Commodity Futures Trading Commission are in the vanguard when it comes to levelling fines on banks for poor communication practices.

This is evidenced by data from SteelEye, a surveillance solutions provider, that records the number of fines issued to global financial institutions.

SteelEye has just published its annual fine tracker for 2023 that gives a flavour of which agencies are most trigger happy.

According to the tracker, penalties from the SEC and CFTC totalled $9.2bn in 2023, including 32 fines for insider trading alone. It also points out that the $4.3bn in penalties handed out by the CFTC was an all-time high. The figures include the joint fine against Wall Street banks over the use of WhatsApp employee communications and improper record-keeping practices.

US regulators imposed the greatest sum of fines by a considerable margin compared to others included in the survey, such as the UK’s Financial Conduct Authority and France’s Autorite des Marches Financiers.

Also appearing in the tracker are the Netherlands’ Authority for the Financial Markets; Germany’s BaFin and Federal Office of Justice; and the Monetary Authority of Singapore.

Regulatory differences

The nature of the fines says something about the attitude of certain banks towards communication methods and those that supervise them. 

Under Markets in Financial Instruments Directive rules for Europe, and Dodd-Frank legislation in the US, all electronic communications resulting in a transaction need to be recorded by banks. But there is a contrast in how regulators on both sides of the Atlantic apply the legislation and supervise banks. 

SteelEye CEO Matt Smith says: “What we find in Europe, the Asia-Pacific and increasingly in the Middle East is that regulators not only want instant communication records but they want the banks to monitor comms traffic in a pre-emptive way. They want proof of that. In the US, the regulators just want to see the record of the communication.”

That partially explains why the SEC and CFTC impose larger penalties on US banks as far as communication fines go. 

Smith adds: “Regulators had their foot on the accelerator in 2023, led by the enforcement crackdown from the SEC and CFTC. As highlighted in the report, over 30 per cent of US firms are not monitoring WhatsApp, which has been borne out in notable fines. 

“The remaining holes in compliance practices is why the regulators have cast a wider net in 2023 and imposed tougher penalties — something I believe we can expect to continue over the coming year.”

Oliver Blower, CEO of VoxSmart, a compliance services company, also believes there is a divergence between regulators and some banks in the US versus other countries. He argues the US approach to fines and how certain large banks insist their employees communicate with clients is wrongheaded. 

“Typically, the American regulators are looking for headlines and dollars. In the grand scheme of things, these are parking fines [imposed on banks] and they do not lead to a change in technology policies. 

“It is notable, in the example of Goldman Sachs, people lost their jobs. But it is not the staff at fault, it is Goldman at fault. Clients would have been interacting with bankers on WhatsApp and they have sales targets they need to meet set by management.”

In a written statement for The Banker, a Goldman Sachs spokesman said: “We do not comment on individual disciplinary matters. As a general matter, we take our communications policy seriously, and we expect all of our personnel to comply with it.” 

Blower adds that some banks are over confident to think they can drive client behaviour. The over confidence might result in them slowly becoming less competitive and losing market share. 

“We just onboarded [a large] bank in South America and they have enabled client-facing bankers to communicate with clients,” he says. “It is going to allow 20,000 employees to use WhatsApp. Not being able to call a banker on a mobile phone or WhatsApp is a joke.”

Ultimately, Blower wants there to be a cultural shift at banks that allows them to be more agile with technology.

AI potential

Yet, he is also cautious about the promise of AI to answer all of these problems. “Before embracing artificial intelligence, let people talk to clients on WhatsApp. It is also the job of regulators to ensure fair and efficient markets,” he says.

“The US regulators should take a harder line and enrol banks in a rehabilitation programme to ensure this does not happen again and make sure bankers can use more agile technology.”

Andy Schmidt, CGI vice-president and global industry lead for banking, thinks that technology like AI can help banks improve communication with clients, reduce fines and curtail bad practices.

“It starts with governance and strategy and ends in execution and testing,” he says. “Set up some accounts and try to behave like the customer. AI has near unlimited potential in terms of improvement at the margins.

“But you need to get the basics down in terms of handling customer information. Our big asset is trust. Every time a bank loses it, that is a problem. 

“Mistakes will be made, but you can reduce the frequency and impact of these incidents that take place.”