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High-Risk Behavior Still Top-of-Mind to Regulators

Traders Magazine Online News, May 24, 2018

Robert Cruz

Nearly a decade after the near-meltdown of the global banking system, rogue behavior is still top-of-mind to regulators all around the globe. Hyper-aggressive, high-risk investments are very tempting to a certain profile of asset or hedge fund manager, particularly when markets are as hot as they have been for much of the past few years.

Government agencies are understandably trying to be proactive in nudging firms to treat their clients’ assets with care and caution that was often missing in the middle of last decade. The Financial Consumer Agency of Canada (FCAC) recently called for changes in governance frameworks and control mechanisms to better "manage or mitigate the risks inherent to cultures that are so heavily anchored in sales."  In its annual priorities letter, FINRA cited “identifying high-risk firms and individual brokers and mitigating the potential risks that they can pose to investors” as one of its major areas of concerns. When the Central Bank of Ireland unveiled its new fintech innovation center this spring, one of its spokespeople let it slip that one of the center’s secondary goals was to "give compliance officers the time to focus on important issues like conduct and behavior."

Right Diagnosis, Wrong Prescription 

Although these regulatory bodies have diagnosed the problem, their recommended prescriptions aren’t sufficiently comprehensive enough to identify and contain the potential misdeeds that keep them up at night. For example, the FCAC recommended that branch managers use data gathering and analysis tools to identify low rates of product use, high rates of product cancellation or other indicators of potential mis-selling. It also advised the industry to apply data analytics to customer complaints.

These measures aren’t wrong, per se. However, they don’t go far enough. Advanced analytics and AI solutions need to be applied to all companywide data—product and customer-complaint records are far from the only sources of clues of employee misbehavior. Every firm has certain keywords that raise red flags, whether it be profanity or particular stock symbols, products, competitors’ names or other words that could signal potential problems. Reviewers should be trained to look for these keywords in all datasets, and to connect the dots in context. AI is increasingly becoming a necessity in this endeavor, as no army of humans is big enough to expediently comb through the more than 12 million petabytes of information that financial services institutions will see in 2018.

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