On February 18, Scott Burke, Regulatory Product Manager at RIMES, was joined by Danielle Tierney, Head of RegTech and Risk Research at Greenwich Associates, for a fireside chat. The discussion focused on joint research into compliance and conduct risk, with a focus on trade surveillance and communications monitoring surveillance during the home working transition. What follows is a summary of the main points raised during the discussion.
Standard compliance risk factors
Greenwich Associates’ research, for which it surveyed 93 senior professionals from asset managers, hedge funds, proprietary trading shops, financial advisors, banks and brokerages, has established a baseline of risk factors. These factors have challenged firms throughout 2020 and will continue to be key areas of focus.
The main risk factors are: Code of Conduct (synonymous with Code of Business) violations, cited at a medium or high risk by 45% of respondents, insider trading (31%) and front running violations (30%). Trade reporting violations and recording & storage violations are also key concerns, cited as medium or high risk by 28% of respondents in each case. All of these factors are interwoven with the area of communications and trade review, and the underlying theme of data capture and integration with compliance systems.
Given the challenges facing firms, it is important that they have technology in place from the start that is able to reduce risk regardless of the changing environment. Compliance officers need to be able to accommodate both seismic shifts, such as the move to home working during the pandemic, as well as going changes to the regulatory focus, business practices and the available technology.
Home working transition preparedness
Overall, respondents to the survey felt that their firm was well prepared to make the transition to home working, but more so for remote access than for communications monitoring. Firms were successful at communicating around remote access and providing the tools employees require. However, there was a drop off in preparedness when it came to managing the use of unmonitored devices and maintaining compliance to the appropriate standards.
There was a regulatory grace period during the transition to home working, but this period is now coming to an end. Where gaps in communications surveillance monitoring capabilities have developed as a result of the shift to home working, firms now need to show regulators that they have a plan in place to bridge these gaps.
Risk fluctuations under home working conditions
The research also examined risk “fluctuations”: the degree to which risk changed before, during and after the move to home working. Code of Conduct violations were cited at the biggest concern across all three time periods, with recording & storage violations and insider trading violations also key concerns:
Code of Conduct and recording & storage capabilities are two crucial building blocks for an effective market manipulation compliance regime, and are extremely important when it comes to facilitating external reporting enquiries or internal investigations. Meeting compliance obligations in these areas requires a strong focus on compliance culture and policy, but it also demands the right technology.
One of the key gaps that firms will need to address is around the proliferation of new communications media used by employees, including social apps. In the past, best efforts around capture may have been sufficient, but this is no longer the case. And simply looking to ban the use of certain apps or devices at a policy level isn’t tenable in the digital age.
Instead, audio communications capture needs to be ingrained in “business as usual”, and risk oversight elevated. Whatever compliance teams need to monitor for – whether that’s Code of Conduct violations or insider trading behaviors – it is in the communications data. This needs to be stored in such a way that it can be made readily available for review.
On the communications monitoring side of things, firms should look for a system with audio capture and voice to text translation. This needs to be a high-quality solution inclusive of confidence metrics on the amount of data captured and the percentage successfully translated into review. And multi-national companies will require a multi-lingual solution. The overall surveillance system also needs to be able to marry audio data with trade data for a comprehensive approach.
Clearly, compliance managers are aware that their current systems need to evolve: 70% say that they’re planning to increase surveillance budgets next year.
A robust surveillance solution
RIMES takes a data-led approach. This starts with identifying, sourcing and integrating the data needed to meet increased regulatory scrutiny; including market data, order & trade data, communications, employees’ personal accounts, news feeds and more. This data is then integrated and subjected to oversight and analytics workflow to codify and automate surveillance. By using data as the starting point in this way, firms can more accurately detect rule violations, catch anomalies and manage change. Most importantly, it means that compliance officers can spend less time collating data and structuring analysis and more time investigating exceptions and assessing risk.
Regulators are taking similar data-first approaches. If firms want to stay ahead of the regulators, then they need to be doing the same. That requires integrating communications and trading surveillance and automating workflow to identify patterns and achieve a relational view of activity.
The full market study is now available to download. Click here to request your copy.
You can watch the recording for the fireside chat here.
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