Remuneration reduction: the solution for illicit comms?

As more financial institutions act to dock the remuneration of employees who use off-channel communications, we look at whether pay reduction is a long-term fix.

24 February 2023 5 mins read
by Jennie Clarke

At the beginning of the year, multinational investment firm Morgan Stanley announced that it was tackling the use of illicit communications by issuing non-compliant employees with financial penalties. One month later, it appears that Morgan Stanley’s approach is catching on, with other global banks unveiling similar internal enforcement measures.

Last week, Barclays PLC announced in its Annual Report 2022 that it will be docking the annual bonuses of employees who were accountable for historical regulatory enforcement for the use of illicit communications, as well as the bonuses of overseeing Executive Directors.

In the same week, Bloomberg reported that Deutsche Bank AG aims to cut the bonuses of its staff that used unauthorized messaging platforms for business communications.

Both Deutsche and Barclays made up two of the 16 firms that were fined by the U.S. Securities and Exchange Commission (SEC) in 2022 for “widespread record keeping failures” extending to a failure to maintain and preserve electronic communications. The 16 Wall Street firms paid a cumulative $1.1billion for their past use of “pervasive off-channel communications”.

While both of the above firms have since implemented new technology to monitor, maintain, and preserve compliant communications, they continue to take positive steps in their remediation efforts and attempts to deter non-compliant activity in future.

Barclays’s approach to remediation

Barclays’s Annual Report 2022 makes explicit reference to the remedial action it is taking, namely by reducing the remuneration of certain employees who were involved with the historical use of off-channel communications.

In a section entitled “Colleague remuneration” (p.200) Barclays notes that, in assessing employee remuneration, it has been “mindful of the unsatisfactory impact of litigation and conduct issues […] on both our financial performance and our reputation”. As a means of repairing consumer trust and deterring future non-compliance, Barclays is “ensuring the cost of litigation and conduct issues has a clear impact on pay”.

As such, it has implemented a “significant downward adjustment” in the remuneration of employees and Executive Directors, amounting to “c.£500m to reflect risk and control issues including the […] monetary penalties imposed by the SEC and Commodity Futures Trading Commission (CFTC) for the use of unauthorized business communications channels”, as referenced above.

The c.£5000m downward adjustment has been applied – and will be felt – across the whole of Barclays workforce. However, the Annual Report notes that it is “more focused in the areas of the Group closest to where the incidents occurred”.

Individuals who helped identify or escalate issues of non-compliance have been “recognized and rewarded”, while individuals considered “responsible or otherwise accountable” for wrongdoing will see a dent in their remuneration packages as a result of their participation in illicit communications.

The downward adjustment in compensation is not solely limited to the employees involved in non-compliance activity, but expands to Executive Directors, who too saw significant reductions in their annual bonuses by reason of the regulatory penalties issued to the firm for their use of unauthorized business communications channels.

Internal penalties may be popular, but are they the solution?

As regulators across the globe increase scrutiny around the use of messaging channels for business communications, it is right – and expected – that firms are taking proactive steps to remediate historical wrongdoing and ultimately deter employees from future non-compliant activity. However, while this proactivity is welcomed, questions remain around whether internal punitive measures are a long-term solution or a short-term fix. Especially where firms continue to restrict the use of certain messaging channels.

Consider for a moment the pace of change for communication. It does not seem long ago that SMS messages were limited to 160 characters, or that you could wait hours for a response. Fast forward to today; people communicate instantaneously on their phones – both for personal communication and for business. Responses take seconds or minutes. People are communicating all the time, fast.

So, when a compliance team makes the decision to implement a channel ban – for example telling employees they can’t use instant messages, SMS, or WhatsApp – those employees will often feel as though they are hindered in conducting everyday business. When a compliance policy or process acts as a hinderance to business, it’s likely that people will find a way to circumnavigate it. As a result, there’s increased illicit comms, an increase in regulatory fines by reason of those illicit comms, and firms then taking punitive action from within.

Solutions, not restrictions

It could be argued, then, that instead of taking steps to prevent employees from using off-channel communications – or penalizing them when they do – firms should be examining how they can evolve their risk strategies to meet the pace of technological and regulatory change.

Punitive remuneration action will be a deterrent, but it isn’t necessarily a watertight solution for future compliance.

Instead of pulling employees back into antiquated ways of communicating, or using fear tactics to hopefully dissuade non-compliant action, firms should seek to enable employees to communicate in a compliant way – across every channel they (and your customers) are accustomed to using.

By enabling messaging channels, the benefits are threefold:

1. All messaging channels are compliant, and no communication is illicit

2. All communications are monitored, captured, and retained for regulatory purposes

3. Employees will feel empowered by the compliance team, which will likely improve buy-in for compliance strategies moving forward

Global Relay enables compliant communication for future-ready business, allowing compliance teams to feel empowered to allow business communication across all messaging channels, on both corporate and personal devices.