In more than 25 years of defending companies and individuals in the financial services sector during regulatory proceedings and litigation, I have seen reputations ruined overnight. One client complaint, one regulatory proceeding, one court proceeding, one article in the newspaper or one bad employee or client can cause a securities dealer, insurance company, advisor, portfolio manager or insurance agent to lose their otherwise squeaky clean reputation.
The reason in question could be an isolated incident, such as a client complaint or error in judgement; it can be several related or unrelated events that culminate to cause a bigger or systemic problem; or it can be one big terrible mishap. Regardless of the circumstance, there are allegations of failure to observe industry requirements — usually rules/regulations/legislation/common law. There could also be allegations of failure due to inadvertence, such as a misunderstanding of the requirements, or allegations related to neglect or an intentional act.
The cases I have seen in which there’s a conscious decision not to comply with the rules are usually because of ego, sometimes mixed with greed. This is a lethal combination that could lead to a ticking time bomb. The individuals or dealers know they’re supposed to carry out certain duties, but it’s more profitable not to and they believe they will never be caught because they have never been caught in the past. Simply put, they’re often making a lot of money and they believe they’re above the law.
Cases of this nature usually lead to a dealer’s dissolution and/or the end of registered individuals’ careers as their reputations are shot. We have seen this in the U.S. (i.e. Bernie Madoff) and in Canada (i.e. Adam Woodward). The facts of these two cases are all over the news — even when there are only allegations not yet proven in court. Such serious allegations reported in the media — even before anything is proven — can be enough to ruin reputations permanently.
Even if the company or individual has a dose of reality and faces the music and is willing to offer apologies, monetary penalties and time out of the industry, it may be too little, too late as the reputational damage has already been done and cannot be recovered.
If the incident is minor, isolated and inadvertent, the penalties and reputational damage may not be as dire. There are cases, for example, in which it’s alleged that advisors invested a single client’s assets in an unsuitable manner and the client complains. If the advisor doesn’t have a solid paper trail to contest the matter successfully, particularly in circumstances in which it was a result of a misunderstanding or error in judgment, the advisor will likely have to pay the client for losses. If the regulator pursues the matter, then there might be proceedings and a further financial penalty.
Any regulatory settlement is circulated on the Internet. Even isolated incidents can attract a financial penalty from the regulator and publicity on the Internet to any current or prospective client. This negatively impacts a firm’s or advisors’ reputation, but can be explained away to clients and prospects depending on the seriousness of the contravention.
What about systemic problems? The more cautions a company or individual received, and ignored — and/or the more clients impacted — the worse the consequences and reputational damage.
As a result, dealers or individuals need to understand the serious and permanent ramifications of reputational damage before they engage in any activity. They need to understand that their obligations to avoid mistakes can be costly. In turn, they need to educate themselves and surround themselves with others who will help them be compliant and protect their reputations from any people or activities that can lead to the end of a firm or a career.