To most people, a £450,000 fine would be a serious lot of money. To high-flying City bankers like Ian Hannam it could be paid out of one annual bonus and still leave sufficient money to buy a house. The real damage is to reputation – both Hannam’s and his employer, JP Morgan. The charge was ‘wall-crossing’.
In a similar case earlier this year efinancialnews.com described a larger fine (£7.2m levied against David Einhorn and Greenlight Capital) demonstrating that the Financial Services Authority (FSA) is taking wall crossing seriously. Efinancialnews explains that “Wall crossing most commonly occurs where a company and its brokers bring a variety of third parties, usually large institutional shareholders, over the wall to provide inside information about a proposed transaction and garner those third parties' views.” Problems can occur if that information is subsequently mis-used.
In Hannam’s case, the FSA decided he was guilty of ‘improper disclosure’. “Mr Hannam disclosed inside information to third parties on 9 September 2008 and 8 October 2008. On both occasions Mr Hannam received inside information from a client and on both occasions he disclosed the information to a third party or third parties by email.”
The issue, in layman’s terms, is fraud. According to Michael Rhodes, a senior fraud consultant at SAS, this is something the finance industry can and should control. “The fines levied by the FSA are by no means insignificant,” he comments, “and bring to light the importance of having comprehensive monitoring tools for suspicious activities.” The problem, he says, is how to monitor the millions of transactions that take place every day – high-performance analytics with real-time alert and detection capabilities are necessary. “If an individual is caught acting in an improper way and fined, the knock-on effect is felt by the bank, who will be tarnished for ‘allowing’ illegal activity to take place...
“This is where detection and protection comes into its own,” he continues. “From stored user profiles banks can monitor suspicious activity such as the hours that a person is working in the office, the language that they use in communication, holiday patterns and all anomalies in performance and behavior compared to their typical behavior or their colleagues’. With such a powerful, real-time analysis solution banks can protect themselves from suffering the ignominy of housing a rogue trader.”
And there is one small side benefit. “Banks that can illustrate they are investing in effective solutions for compliance may have their capital requirements reduced... A small reduction in capital requirements could result in 10s or 100s of millions in increased liquidity.”