In an effort to keep current with regulatory compliance requirements, many financial services firms are turning to regulatory technology (“RegTech”) tools to help them meet their obligations effectively and most efficiently. After discussions with over forty participants in the RegTech space, FINRA has provided a summary of how RegTech tools are being applied in five major areas: surveillance and monitoring, customer identification and anti-money laundering (AML) compliance, regulatory intelligence, reporting and risk management, and investor risk assessment. We will be tackling these areas across three different blogs. Our first area of interest is surveillance and monitoring.
Surveillance and Monitoring
For the purposes of this blog, the phrase “surveillance and monitoring” applies broadly to market surveillance and conduct monitoring, such as monitoring traders, registered representatives, associated persons, employees, and customers for regulatory purposes.
Market participants have indicated that they are looking to invest significant resources into this area. They are particularly interested in RegTech tools that seek to utilize cloud computing, big data analytics, or Artificial Intelligence (AI)/machine learning to obtain more accurate alerts and to enhance compliance and supervisory staff efficiencies. For example, several market participants reported significant reductions in false alerts generated by surveillance systems after utilizing such RegTech tools.
Generally, RegTech tools aim to move beyond traditional rules-based systems for surveillance, instead using a predictive, risk-based surveillance model that identifies patterns in data and uses such patterns to inform decision-making. For example, a computer program provided with historical client trade data could be used to identify suspicious patterns and trends in current trade data, or even to predict future patterns and trends. Additionally, these programs generally “learn” and increase in accuracy if provided with current data, helping to refine future alerts.
Some RegTech tools employing a more predictive risk-based surveillance model focus on linking data streams previously viewed largely in isolation. For instance, the relationship between certain structured data (e.g. trade orders and cancels, market data, and customer portfolios) and certain unstructured data (e.g. emails, voice recordings, and social media profiles) have historically been difficult to link together. However, RegTech tools are being developed that could help to integrate these different data forms and sources and then identify and track anomalies that merit attention.
Certain RegTech tools potentially allow a greater volume and variety of information to be readily reviewed, thereby helping enhance the accuracy and overall operation of a firm’s regulatory compliance program. For example, vendors have started offering tools to record, monitor, and analyze different forms of communication (e.g. audio, video, and digital). With these tools, firms may move from sample-based reviews of communications to surveilling and reviewing all relevant communications.
Market participants have also indicated that RegTech tools have enabled them to move beyond a traditional, lexicon-based review; instead of focusing on specific terms, firms are moving towards a more risk-based review, utilizing processes such as natural language processing and machine learning to help identify patterns or anomalies. Additionally, some RegTech tools are able to understand multiple languages, or to decipher slang, tone, code language, and “emotional words” that could indicate a strong reaction.
Of course, as these communications-monitoring tools are still in the early stages of development and adoption, many firms are running RegTech surveillance tools in parallel to their traditional tools, supplementing the automated review with a human review to validate their effectiveness.
For more on the five major areas of RegTech tools identified by FINRA, please see the next blogs in this series, “RegTech: Customer Identification and Anti-Money Laundering Compliance” and “RegTech: Regulatory Intelligence & Risk Management and Assessment”.
For more on MasterSupervision, our automated compliance management system that streamlines the process of compliance for broker-dealers and investment advisers, please visit mastersupervision.com (or just click on the “Technology Services” link at the top of the page).
