SMBC Nikko starts down hard path to reform after trading scandal
After announcing penalties for top executives over a market manipulation scandal, SMBC Nikko Securities is now scrambling to regain trust by vowing to improve compliance and reform its culture to put customers first.
However, as the brokerage prioritizes immediate problems like compliance, this latest stumble may further delay efforts to adapt to changes in the financial industry.
The scandal involved market-moving transactions by the Japanese brokerage's proprietary trading division that boosted prices of certain shares to ensure the success of large off-market block trades, bringing in profits at the expense of market fairness. The compliance division failed to prevent these transactions.
SMBC Nikko released a report Friday with measures to prevent a similar incident from happening again, including identifying potentially problematic proprietary trades and improving day-to-day monitoring.
The brokerage will also need to address an excessive focus on sales, a problem acknowledged by SMBC President Yuichiro Kondo, who will forgo six months' compensation over the scandal.
"Because we prioritized the front office and were slower to invest in the second line of defense [the compliance division], the second line became unable to speak up to the front office," Kondo said.
SMBC Nikko has been ramping up staffing in the compliance department, adding another 50 or so employees over six months after expanding it to 236 as of the end of March.
Customer trust has also been damaged by the news that fellow group member Sumitomo Mitsui Banking Corp. shared information on clients with SMBC Nikko against their wishes. The brokerage says it will enable high-risk items to be flagged in its systems to nip potential future problems in the bud.
SMBC Nikko has now racked up administrative penalties four times since joining Sumitomo Mitsui Financial Group, following past scandals involving insider trading and a sales employee defrauding customers.
"I have asked each employee to think of this as an issue that concerns them," Kondo said in a briefing.
But this attention to compliance at SMBC Nikko comes when other brokerages around the world are rethinking their basic business models.
Western financial institutions, for example, have moved away from a commission-based model that incentivize short-term trades to one where their income grows as they manage more customer assets. Companies such as Goldman Sachs have been restructuring investment banking operations and rushing to tap into emerging digital fields.
SMBC Nikko has only just started down this path, including changes such as reworking the commission structure for retail customers, and moved more slowly than peers to build a global network.
Kondo plans to stay on for now, but only temporarily. "We'll instill a risk-aware culture and awareness of compliance," he said. "Once we're on track, I intend to take responsibility and step down."
But reforming a company's culture is a long process. With earnings suffering as well -- SMBC Nikko logged a record net loss of 9.4 billion yen ($64 million) in the first half of fiscal 2022 -- making such changes while holding the organization together a difficult task.
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