The Halo Effect: Regulatory Lessons from Formula 1

29th of November 2020… Lap one. It’s 4pm local time in Bahrain and all drivers are lined up on the Formula 1 (F1) grid to start their race of the Bahrain International Circuit. Not surprisingly, Lewis Hamilton took pole position, followed by Valtteri Bottas and Max Verstappen in swift succession. The countdown begins and before you know it…. lights out! All cars burst into motion, bottleneck round the first chicane, racing furiously to turn two. As the cars launch out of turn 3, the pack starts to bunch up. Roman Grosjean, racing for the Haas team, suspectedly seeing a gaggle of cars to his left, swerves right (not seeing however, his fellow driver, Daniel Kvyat behind). As Grosjean makes contact with the AlphaTauri he gets propelled into the righthand barrier, a ball of flames encapsulating him almost immediately. For those that are not F1 fans, these types of incidents, (certainly in the last 20 years) are very uncommon. Unfortunately, history will show the undeniable severity of such accidents on the track. In 2019, a GP3 driver (single seater motor racing) lost one of its many promising drivers, Anthoine Hubert, in a freak accident.

Four years prior, Jules Bianchi lost his life at Suzuka (Japan) after crashing into the back of a recovery vehicle. Bianchi was the first F1 driver to be killed since Aryton Senna in 1994. Whilst most drivers will never have a bad crash, Grosjean spent approximately 15 seconds in his cockpit whilst his car was on fire. If it weren’t for the robust design and strict compliance to the regulations, he would have suffered massive injuries. Parallels can be drawn here with the likes of Financial Institutions (FIs) and the need for strong governance frameworks and effective operational systems to protect against financial crime. With respect to F1, regulations are put in place to prevent serious injury; likewise, FIs are regulated to protect against financial crime. Although many firms may not be used for illicit activity, if they do not comply to strict regulation then, much like an F1 car, they can crash and burn. Therefore, they need a ‘halo’  - this is the financial crime governance framework and operational controls. Although conceived prior, the halo was introduced in F1 after Bianchi’s accident in Suzuka as a means of crash protection around drivers’ heads. By the same token, FIs need the same protection with respect to regulation. Regulation helps ensure that FIs have efficient management controls in place so correct decisions are made, as well as ensuring that all risks to the business are realised. An example of this (in relation to UK banks) is the Senior Managers Certification Regime (SMCR), which ensures that senior bankers are held accountable for their decisions. A halo (in this instance, regulation) is also important in ensuring that firms hold ‘shock absorbers’, aka capital, to help deal with bad investments. Moreover, with respect to banks, regulation is also used to make it less likely for consumers to remove their funds. In the UK, a deposit guarantee scheme exists (the Financial Services Compensation Scheme[1]) which ensures that, even if a bank fails, all deposits under £85,000[2] will be protected.

UK banks must also hold cash (or assets that can be liquidised very swiftly) to cover unexpected withdrawals. In theory, this would make the scenario of a bank run less likely. So, what are the lessons that can be learned here? Be more like F1 – race to succeed, but know your limits and adhere to the regulations, (because there is a reason they are implemented in the first place). How we can help We work with Financial Crime compliance functions to review their firm’s financial crime provisions and to design and implement improvements. We can review and enhance AML policies, proceduralise them and provide training on those policies and procedures and on general AML themes. Our governance risk and compliance teams aim to provide peace of mind that strategy, risk and regulation support and enable your people, culture and values. We help you embed governance at all levels of your business, ensuring everyone is clear about their roles and responsibilities. We help you meet the challenge of developing a holistic and resilient approach to Governance, Risk and Compliance that embraces change and the risks that it invariably brings. For more information contact By Lauren Parmenter, Consultant at Lysis Group [1][2]

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