Regulation technology (Reg Tech) has caused a revolution in the industry, and is having a major impact on wealth management firms’ compliance teams, financial professionals (FP), and regulators. In this article, I explain what RegTech is and how it may impact your life.
As an FP you must fulfill rigorous regulatory compliance requirements, to protect clients and preserve the integrity of the markets. With the high-speed growth and sophistication of the markets, and rapidly changing regulations, staying in compliance with FINRA and/or SEC standards is terribly complex and time consuming. With SEC’s Regulation Best Interest (Reg BI), you and your firm may have added regulatory requirements.
The time burdens and cost of compliance have increased dramatically and continue to climb. Consequently, in recent years, a growing number of technology start-ups have developed innovative cloud-based strategies to assist financial services firms with compliance. Using big data, artificial intelligence (AI), Machine Learning (ML), data mining and analysis, blockchain, and more, these RegTech companies offer tools to help firms to deliver compliance programs that are far more effective and efficient.
Identifying Non-Compliance in Real-Time
RegTech tools offer comprehensive, real-time data management to monitor transactions, and identify issues or irregularities. Using predictive analytics, AI, ML, deep learning algorithms, etc., the tools can identify fraudulent or suspicious activities at early stages, before they can cause damage. Issues are communicated to the compliance team, to assess whether illegal activities are occurring, and take immediate action. This helps to ensure that supervisory staff are focused on the right issues at the right time. These benefits, together with pressure from the regulators, makes consideration of RegTech tools imperative for all wealth management firms.
Your personal and professional data, including trade activity, outside business interests, and any previous violations, will reside within RegTech systems. Compliance and regulators may compare the data in your professional profile with the trade blotter to analyze your activities, including (but not limited to) the number and frequency of trades, velocity of trading, churning, direct business, exchanges, surrender fees and money movement. If you are implicated in non-compliant activities, human intervention may not occur until you are in enforcement or arbitration.
Complying with Reg BI – Keep Impeccable Records
You will need to demonstrate that you have completely and thoroughly explored your client’s full financial profile, including assets and account types held away from you prior to making an investment recommendation. This is required to demonstrate that you are indeed acting in the client’s best interests and not putting your firm’s or your interests ahead of the retail investor at the time of the recommendation. If you are a broker, it may be a new requirement to capture and retain precise, correct client data. The best place to do this is in your customer relationship management (CRM) system, which will provide your compliance team and regulators access to client data in a central, cloud-based location.
Learn More about RegTech
In September 2018, FINRA delivered an excellent report on technology-based innovations for RegTech in the securities industry.¹ In addition to defining RegTech and discussing potential regulatory and implementation implications for broker-dealer firms, FINRA summarized how RegTech tools are being applied in five areas:
Market surveillance and conduct monitoring of traders, RRs, employees, and customers, utilizing cloud computing, big data analytics and AI/machine learning for accurate alerts and enhanced compliance and supervisory staff efficiencies.
Know Your Customer (KYC) and anti-money laundering (AML) compliance.
Regulatory intelligence, focusing on identification and interpretation of changes to rules and regulations across multiple jurisdictions, to update the firm’s compliance operations.
Reporting and risk management, pertaining to risk-data aggregation, risk metrics creation and monitoring, and regulatory reporting.
Investor risk assessment, leveraging data aggregations and machine learning together with behavioral science to determine a client’s risk appetite in a more scientific way.
Today, there are 378 RegTech firms addressing regulatory reporting, risk management, identity management and control, and compliance and transaction monitoring.² Financial services firms must conduct comprehensive due diligence of potential RegTech vendors. This can be especially challenging due to the complexity of these innovative tech solutions. The analysis needs to include a review of a vendor’s cybersecurity, privacy, disaster recovery and client training policies and procedures.
Once RegTech vendors are chosen, firms must ensure that vendors deliver what was promised. This is because outsourcing aspects of compliance oversight to RegTech vendors does not absolve the firm of any regulatory compliance responsibilities.
¹ Source: Financial Industry Regulatory Authority, “Technology Based Innovations for Regulatory Compliance (“RegTech”) in the Securities Industry”, September 2018.
² Source: Deloitte, July 2, 2020
Infinity Financial Services is a national, independent Investment and Wealth Management firm, founded with a vision: help enterprising financial professionals to grow truly independent, successful practices, leveraging leading-edge technologies and firm support. Based in Oakland, California, with branch offices around the U.S., Infinity's financial professionals offer an array of asset management, brokerage, insurance, financial planning, benefit plan, insurance, and risk management services. This article provides information for investment professionals. It is not intended for use by the general public.