Where the Pandemic Lead Us – What’s Next in Regulatory Compliance
By Christopher Wooten, EVP, NICE
When the pandemic hit, we certainly sensed there would be a strong impact on our social lives. But what was not immediately apparent was the extent that Wall Street and its regulated financial services employees would be affected. The work-from-home revolution had arrived, and now one year later its influence has become evident.
Unfortunately the remote work that ensued, particularly among traders, created an environment that became more susceptible to market abuse. Regulators around the world, like the Financial Industry Regulatory Authority (FINRA), the Hong Kong Monetary Authority (HKMA), and the Financial Conduct Authority (FCA), found that scenarios like insider dealing became easier because many regulated employees weren’t being physically monitored on a trade floor any longer or certainly as directly.
As FCA Director of Market Oversight, Julia Hoggett, explained, “Whilst the fundamentals of the market abuse offences are constant, the ways in which the risk may manifest are not. The manner of surveilling for them must, therefore, also change.” In addition to the new surveillance challenges, the markets saw a dramatic increase in volume and volatility. As a result, most financial services organizations pursued new technologies that could help reveal what’s going on in their markets faster, and in some cases before it happens, so that market abuse can be brought to light more effectively or prevented all together.
In the March to May 2020 timeframe, from pre-dawn to late at night, we were immediately hit with urgent queries from all types of global financial services organizations addressing compliance-related issues. Primarily, they sought guidance as they reshaped and readied their remote or relocated trading floors and compliance operations for the work shifts that were already taking hold. With our around the clock operational approach, coupled with a responsive, savvy professional services team at the ready, our compliance management team supported our financial service organization customers as they managed this new offsite, remote world. There was not a corner of the financial services industry that wasn’t caught up in the shifting dynamics of a pandemic.
When regulators granted safe harbors with certain compliance guidelines, we worked with firms to modernize their operations with cloud-based technologies, and created more automated and agile processes. Where it was already in place, holistic conduct surveillance was further strengthened and became a hallmark of those firms which succeeded in meeting their compliance requirements. Those with vendor partners like us which offered 24-7 “follow the sun” services support, found it easier to work through the new requirements.
Today’s Changes – Real-time Surveillance
At the close of our fiscal year, we noted with surety that the year-end reflected a strong trend to the adoption of surveillance improvements and new capabilities at leading financial institutions, especially with respect to conduct risk. Cloud adoption was no longer a potential option, but a primary strategy. And this is also where real-time (intraday) surveillance gained interest.
What do we expect to see going forward? Many banks and brokers that we are working with today are wanting to change surveillance from a routine end-of-day (or next-day) activity to more of a real-time proactive approach — this shouldn’t be surprising. Firms already monitor other activities as they’re happening, including things such as liquidity and P&L.
Firms which may still be relying on end-of-day or next day surveillance, may already be behind the curve.
Firms are already making plans to change this, and we are actively augmenting the existing real-time surveillance capabilities in our products.
To make the case for near real-time detection, it’s important to consider why firms surveil trades and communications in the first place. First, they do it for regulatory requirements, although at least currently there’s no specific requirement for real-time. There’s just a requirement for detection. But another strong driver for surveillance is to the ability to demonstrate best practices and strong controls, both to the market and to regulators. Near real-time surveillance just makes sense. If you wait twenty-four hours, there’s already a day’s worth of damage done.
While regulators themselves aren’t requiring real-time yet, this practice shows regulators that the financial institution has strong controls in place. Regulators are watching activity in the market more closely these days, and since data is being made available to them very quickly, they are more likely to raise questions when they spot something concerning.
The Wave of New Communications Channels
The world of communications also caught fire in the past year – with Microsoft’s Teams and mobile communications moving front and center as remote workers looked to communicate with one another. However, remote workers’ conversations need to be monitored, as do their chats, videos, WhatsApp messages and more. The mobile phone as the tool of choice for remote workers posed compliance risks and concerns of its own. While the need to record all interactions on the mobile device is unquestioned, the challenge becomes segregating personal privacy concerns from that of compliance requirements on dual-use devices. Clearly, another area that has emerged as a prominent focus is communications surveillance capabilities.
This trend of monitoring remote communications continues to grow, and surveillance is being served with new technologies, such as those which will monitor video conference calls like MS Teams or Zoom. Additional technologies will be available that allow firms to enable their employees to benefit from these new tools, while still ensuring their privacy is protected. We also expect to further launch and will see demand for, increasing communications surveillance technologies that are the next generation of what we showed this year, with continued developments in natural language processing to understand sentiment and emotions. We’re also leveraging artificial intelligence to detect anomalies in behavior, and use these insights to build employee sentiment profiles that help firms predict where conduct risks exist.
Despite certain setbacks and challenges presented by the pandemic, industry analysts believe that the technology investments in trade surveillance will rise over the next few years, mainly driven by the pent-up demand and economic recovery for the key markets. Industry analysts at Quadrant Knowledge Solutions estimate that the trade surveillance and monitoring market will reach $1.38 billion by 2025, with primary drivers for the future growth and adoption of trade surveillance and monitoring solutions including further innovation around advanced analytics, automation, the growing adoption of cloud-based solutions; and the ever-increasing pressure from global regulatory agencies.
As one customer recently reflected, “While we are always following the calendars set down by regulators, sometimes we aren’t stepping up fast enough when it comes to adopting new technology. The pandemic taught us that staying ahead of the innovation curve should be our next big strategy to weather the next revolution that comes our way. If we don’t, we will surely regret it.”