Morgan Stanley Faces £5.4 Million Fine from Ofgem for Breach of Communication Regulations

Morgan Stanley, the renowned financial institution, has been slapped with a substantial £5.4 million fine (equivalent to $6.8 million) by the U.K.'s Office of Gas and Energy Markets (Ofgem) for an alleged failure to uphold communication standards within its wholesale energy trading operations over a span of two years.

The penalty, levied against Morgan Stanley & Co. International (MSIP), marks a significant development as Ofgem's first enforcement action against a company involving the use of alternative communication channels, notably WhatsApp, to discuss energy market transactions. The regulatory authority made the announcement on Monday, highlighting the severity of the breach.

Key details of the violation indicate that Morgan Stanley, during the period from January 2018 to March 2020, neglected to record and retain electronic communications pertinent to the trading of wholesale energy products. Acting on behalf of the U.K.'s Gas and Electricity Markets Authority, Ofgem deemed this lapse in communication oversight as a transgression of the nation's market integrity and transparency regulations, referred to as REMIT.

Ofgem's penalty notice underscored that Morgan Stanley's omission to record and preserve business-related messages exchanged on WhatsApp went against the fundamental principles of maintaining market integrity and transparency. The regulatory body found the company guilty of failing to take reasonable precautions to prevent or regulate relevant communications, specifically instant messages on WhatsApp, leading to a violation of prescribed rules.

Cathryn Scott, Regulatory Director of Enforcement and Emerging Issues at Ofgem, highlighted the broader implications of this enforcement action. She emphasized that the fine sends a robust message to all participants in the market, emphasizing the importance of stringent adherence to REMIT rules. Scott asserted that the failure of MSIP to prevent unrecorded electronic communications not only undermines market integrity but also jeopardizes transparency in wholesale energy markets.

The revelation of these violations came to light through Ofgem's information requests directed at Morgan Stanley, empowered by the enforcement regulations of REMIT. The framework behind REMIT's enforcement regulations aims to safeguard consumers and maintain the integrity and transparency of the market by granting Ofgem the authority to probe and impose penalties for activities such as market manipulation and insider trading.

Though Morgan Stanley had established a policy prohibiting the use of non-company approved messaging systems for business purposes, their compliance approach was not entirely effective. The organization took certain measures to foster compliance, including email reminders, trader commitments to refrain from non-approved messaging systems, and routine training on the policy. However, the company's oversight in effectively monitoring employee communications and evaluating the risks of policy non-compliance came under scrutiny.

In response to the breach, Morgan Stanley demonstrated a concerted effort to address the issue:

• Reinforcing training sessions that reiterate the prohibition of WhatsApp use for business purposes.

• Implementing internal measures to address WhatsApp usage by employees.

• Initiating an internal investigation into the usage of WhatsApp and other non-company approved messaging platforms.

A representative from Morgan Stanley has indicated that the company has no comment to offer regarding the situation.

This significant penalty imposed by Ofgem underscores the imperative for market participants to meticulously adhere to the communication and transparency regulations mandated by REMIT. The enforcement action serves as a stark reminder of the potential consequences companies face for not prudently monitoring and preserving electronic communications integral to their trading activities.

By fLEXI tEAM