Few scandals illustrated the buildup to the financial crisis better than the interest rate rigging case, when banks twisted the rules, and avoided regulators, in order to fill their pockets.
Two years after eight banks were punished with a record fine of €1.7 billion, some of the same firms are investing in Symphony, a financial services-oriented messaging application that allows them to secure their communications, and to permanently destroy their messages.
While American regulators are taking action, Symphony has not caught the attention of their EU counterparts.
Socialists & Democrats lawmakers have contacted EU regulators to see which are “the planned actions to guarantee that any possible legal loophole will be swiftly corrected”, Elisa Ferreira said in a statement.
“We are seriously concerned that messaging platforms like Symphony could lead to EU laws on transparency in the financial markets being undermined,” Pervenche Berès added.
Last Monday (19 October), Danièle Nouy, Chair of the Supervisory Board of the ECB’s single supervisory mechanism admitted before MEPs that she didn’t know “exactly about Symphony as such”. Although she emphasised that for the SSM, it is “absolutely crucial” to have access to data, it is not “our very first priority because we have a lot of priorities”.
Meanwhile, Symphony argued that “the concerns raised by the MEPs reflect a misunderstanding of Symphony’s cyber-security safeguards and compliance-enabling tools, and have already been addressed to the satisfaction of key US regulators.”
According to the EU’s Market in Financial Services directive (MiFID), record-keeping, to keep track of potential abuse and manipulation of the markets, is mandatory.
In the context of strict regulatory compliance, Symphony offers financial institutions a change in the “communications paradigm” to prevent government spying while data deletion is permanent. This attracted the investment of numerous banks, among them Deutsche Bank, Société Générale and HSBC. Symphony recently secured another $100 million in fresh investment, including from Google.
But this secure channel has sparked controversy in the US. Last July, the New York Financial Services regulator sent a letter to the company raising concerns that the use of Symphony could hinder regulators’ and prosecutors’ ability to investigate misconduct at banks, such as the recent rate-rigging (i.e., LIBOR) scandal.
The NYFS reached a deal with four of the participating banks (including Deutsche Bank). According to this agreement, the instant messaging platform will retain a copy of all messages sent to and from the four banks for seven years, while these banks will store duplicate copies of the decryption keys for their messages with independent custodians not controlled by the banks.
“This is a critical issue, since chats and other electronic records have provided key evidence in investigations of wrongdoing on Wall Street,” Anthony J. Albanese, Acting Superintendent of Financial Services, said.
Meanwhile, Senator Elizabeth Warren sent a letter in August to the head of the Securities and Exchange Commission, in order to bring the investigation at the federal level.
“My concerns are exacerbated by Symphony’s publicly available descriptions of the new communication system,” the Massachusets Democrat wrote, as they “appear to put companies on notice – with a wink and a nod – that they can use Symphony to reduce compliance and enforcement concerns.”
For all the controversy on the other side of the Atlantic, Symphony has not sounded alarm bells in the European Commission. A spokesperson confirmed that the EU executive is not looking into the instant messaging system and declined to make any further comment.
“When a new platform sets itself up for financial services firms to communicate with one another in secret, offering permanent data deletion and the ability to avoid paying billions in fines, I think it’s only right that the European Commission looks into it,” MEP Anneliese Dodds told Euractiv.com.
The strict regime we now have in Europe after the LIBOR scandal “is only meaningful if it can keep up with technological developments, and with those who will always want to stay one step ahead”, she added.
Symphony underlined that its platform aims at protecting communications against cyber-security threats “by utilizing end-to-end encryption of all communications sent through the platform.” Moreover, the firm said that “it was intentionally designed to facilitate and enhance customers’ compliance operations.” Symphony added that they can store the data “as long as customers request.”
Symphony’s investors include search-engine giant Google, together with Goldman Sachs, Bank of America, Credit Suisse, Natixis, Société Générale, Deutsche Bank, HSBC, Morgan Stanley and JPMorgan, among others.
This new instant messaging platform aims at avoiding the strict regulation on communications in banking which is crucial to detect any wrongdoing. Over a dozen banks are believed to have been involved in manipulating Libor between 2005 and 2009, the interest rate at which banks lend to each other, leading to fines totalling more than $9 billion.