Toby works as a fund manager for a mid-size firm of asset managers which has been the subject of a recent regulatory visit. A number of procedural weaknesses in the firm’s processes were identified. The principal one in which Toby was involved related to the fact that fund managers were permitted to initiate, book and execute their own trades.

In response to this criticism, Toby and his fellow managers said that they were not responsible for introducing the system; they were merely following the firm’s procedures. Accordingly, if the firm wanted them to do something else, it should tell them what to do. However, it all seemed a bit of a storm in a teacup as it had not given rise to any problems. Nevertheless, the firm undertook to the regulator that it would modify its procedures.

Shortly after having provided this reassurance to the regulator, one of Toby’s colleagues initiated a trade to buy Norwegian Government warrants, but accidentally placed an order for ten times the required value. With the unaltered system still in operation, this was not picked up immediately, coming to light only when it was queried by the settlements team because it was outside the normal run of transactions.

Implementing change
This failure was reported to the regulator, which insisted upon an urgent skilled person’s review of the firm’s systems, with an early date for remedial action to prevent similar and potentially more destructive events. The firm was given a deadline for the implementation of these changes and told to report these to the regulator.

In response to this requirement, the firm set up a working group with representatives of all those areas affected by the regulator’s requirements. Toby was somewhat irked to be nominated to represent his area. Over the following weeks a number of meetings were held and new end-to-end processes were designed. Some parts of these were put in place, although it was felt that the introduction of the complete package should be phased in to ensure that the individual stages were working effectively.

Meanwhile, a report was written for submission to the regulator, having been signed off by the head of compliance and the chief executive. This was circulated to the working group only after having been sent to the regulator. Toby read it and was alarmed by statements that a number of new procedures had been introduced, which was not the case, as they were a part of the phased introduction which had not yet occurred. He raised this in the working group, from which he received a variety of responses, ranging from “we must do something – can we get the letter back”, to “we didn’t sign the letter so it’s not our problem”, together with a variety of more considered comments. The upshot of the meeting was that Toby should convey the group’s concerns to the head of compliance.
He had no intention of telling the CEO that he had been induced to sign a letter to the regulator making untrue statementsToby met the head of compliance and told him of the working group’s concern that the letter sent to the regulator was factually incorrect, since it stated as fact that processes had been put in place which, although they had been designed, had not yet been implemented. The head of compliance responded that, personally, he was quite relaxed about this, saying that it was really only an issue of timing, and that during the next few weeks the statement would become fact. Accordingly, he had no intention of telling the CEO that he had been induced to sign a letter to the regulator making untrue statements.

Having been told effectively to mind his own business, Toby’s initial reaction was to let the matter drop. But he communicated the view of the head of compliance to the working group, from which the consensus was that further action was now outside its remit, because the group existed to ensure smooth introduction of the new processes.

Toby was unsettled by what he knew had taken place, and while he was not happy about it, he felt that because of the seniority of those involved, it was really out of his hands. After all, the CEO must have known what he was doing and besides, introduction of the new processes was occupying his every waking minute.

A short while later, Vikram, a fellow working group member, came to see Toby and told him of his discomfort at being aware of the position of the firm, should the regulator discover that it had been misled and that staff knew about this. Surely they all had a responsibility to be honest, but he was in a quandary as to what, if anything, he could do without being implicated.

Vikram’s concerns echoed those of Toby himself, who had tried to identify some plausible actions. He set these out for Vikram.

The CISI verdictReaders were offered four choices:

A. Let matters take their course. Undermining senior executives, especially the CEO, would be career suicide. Anyway, the new processes will soon be up and running and the problem will disappear (0%).

B. Arrange to speak to the CEO and tell him what has happened (42%).

C. Arrange to speak to the firm’s senior independent non-executive director (NED) (19%).

D. Use the firm’s Speak Up telephone line (40%).

No one chose to take no action, which is positive although, as always, I do wonder whether if faced with such a situation in ‘real life’, some of us might not actually feel that keeping one’s head down is the most sensible action to take.

By a small margin, speaking to the CEO was the most popular course of action. This is a situation which is in the CEO’s line of responsibility and he needs to know from Toby, as a figure directly involved, what has happened.

Speaking to the firm’s senior NED would be appropriate if the CEO does nothing, but he should be given the opportunity to take action first of all.

Using the firm’s Speak Up line was only marginally less popular than speaking to the CEO and it does represent a defensible course of action.

However, we feel that as this is a matter which needs to be dealt with as a priority and involves the CEO, making him aware of it as soon as possible is the most appropriate course of action, notwithstanding that one might be fearful of the consequences.

This dilemma appeared in the July print edition of The Review. The results of the survey and the opinion of the CISI also appear in the September 2016 print edition of The Review.