The Model Office Blog

RegTech and Regulatory Levies

[fa icon="calendar'] Dec 11, 2020 11:13:14 AM / by Chris Davies posted in Financial regulation, Financial business development, fintech, regtech, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, MiFIDII, SMCR, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, AI, Risk,, Accountability, Platforms, PROD, Product governance, digital,, Regulatory, Reporting, resilience, cyberrisk

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Twitter has been very active with the latest FCA call for input: Consumer Investments and the issues surrounding ensuring fair levies and identifying rogue firms who should bear the brunt of these costs.

Indeed the Model Office team have replied to Question 29 of this paper What more can we do to ensure that compensation paid for fairly by those that cause the loss? which you can read below 👇🏽It showcases how RegTech can ensure that FCA, FSCS and FOS plus PII underwriters can better assess individual firm risk rather than benchmarking the industry based on hard market risks. 

Q29: What more can we do to ensure that compensation paid for fairly by those that cause the loss?

The issue the industry faces with climbing regulatory levies is unsustainable with retail investment advice firms (RIAs) expected to shoulder increasing compensation levies against their turnover and squeezing margins thus placing pressure on ability to grow business services to meet client needs and passing on levy costs to their clients.

Also, the fact that the Financial Services Compensation Scheme (FSCS), Financial Ombudsman (FOS) and Professional Indemnity Insurers (PII) all tend to assess market risk rather than individual firm risk is a problem.

In many ways (in our opinion) the FCA are tackling the answer to this question from the wrong starting point. Rather than focus on attempting to identify those rogue firms that are consistently causing consumer detriment through misselling and unsuitable advice. There is a case for adopting Regulation Technology (RegTech) tools that can help identify those firms that are consistently meeting advice suitability regulations and running their businesses in a highly compliant fashion.

RegTech has been on the rise for the last few years and has developed to meet market participants needs for identifying, managing and monitoring regulatory governance, risk and compliance (GRC). As can be seen from the below RegTech Associates regulatory change market map, there are many solutions now available for firms to engage with dependent on their business model, compliance and customer needs.

Image 1 RegTech Associates compliance management market map

What is very apparent from our work in the RegTech sector is that technology can provide evidence based practice to identifying good and bad GRC practice and ensure firms evidence they are ‘walking their talk’ on regulatory GRC competence and conduct requirements.

RegTech that monitors a firms GRC can then provide hard evidence that a firm is meeting all relevant regulatory requirements at business operations, systems and controls and people management level. This can in turn, provide valuable data to PII underwriters across their risk evaluation metrics that a firm risk (rather than a market risk) is the main factor for assessing the premium levels and any necessary premium risk loading.

The FSCS can also use such RegTech data to better assess the soft and hard facts across business behaviours in the market and come to an informed (evidence based) judgement on firm levies. Such GRC conduct and competence evidence based data should allow the FSCS to class firms more realistically and thus segment the market fairly into those firms performing well, those who need more support and the rogue firms causing the most damage.

The current ‘homogenous’ approach taken tends to place all firms within the same class and thus we have the issue where compensation is paid by all, not just those that cause the loss (if they are still active and have not attempted ‘pheonixing’).

By using RegTech GRC data, regulatory stakeholders will be able to better segment the market and thus then identify those firms causing detriment who should pay and if found insolvent then any wind up should include terms for payment of a levy from available assets.

For example Model Office-MO® is able to segment GRC activities broadly into 6 keys areas: Focus (all key compliance directives include suitability) Engagement (Client and Stakeholders) Promise (Service proposition, product research and due diligence (incorporating PII risk assessment) advice strategies, tools and technology) Systems (Practice Management operations, systems and controls plus data security and management) People (Human Resource Development, Competence and Conduct) Financial Resilience (Cashflow) The system will then offer a more granular approach across these areas where firms will audit and gain risk based scores across business functions in each key. This offers a risk based approach and ‘hard and soft’ data on the GRC performance on an on-going basis.

Image 2 Model Office 6 regulatory keys

This can then produce a holistic view on a firm’s GRC strategies and gain an appropriate risk based market segmented framework and facilitate a levy directly correlated to the evident firm risk.

We note a risk based approach was investigated by the FCA in CP 18/11 and we would encourage the regulator to adopt RegTech as an enabler to identifying good and bad risk management practice in firms conduct, competence and culture, acting as a benchmark to identify and segment firms by the very nature of the risk they present.

The fact that The FCA Financial Advice Market Review baseline report estimated that a firms direct and indirect compliance costs are (on average) 11% of turnover means there is a real risk that those businesses who are performing well and represent a good risk are suffering and their margins are being severely squeezed, so it is imperative that the regulator walks its talk on RegTech and applies such to ensure firm risk (not market risk) is identified and scrutinised to ensure a fair application of levies and those rogue firms are identified quickly and dealt with appropriately.

If you're interested in finding out more you can book a demo of our software please click below to see MO® in action. 

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Culture, Competence and Conduct

[fa icon="calendar'] Nov 13, 2020 10:21:26 AM / by Chris Davies posted in Financial regulation, Financial business development, fintech, regtech, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, MiFIDII, SMCR, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, AI, Risk,, Accountability, Platforms, PROD, Product governance, digital,, Regulatory, Reporting, resilience, cyberrisk

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Some interesting themes from regulators are starting to emerge when it comes to Governance, Risk and Compliance (GRC). The FCA in particular have run a number of initiatives looking at how companies of all sizes can ensure they have a constructive GRC culture running through their business.

There are two key areas the FCA are focused on:

  1. Competence (Skills) Here it’s all about recruitment, training and competence, ensuring the right people in the right job with the right skills and responsibilities.
  2. Conduct (Behaviour) The FCA’s excellent 5 conduct questions programme (although focused on wholesale banks) provides firms with a clear GRC management strategy across:
    1. Identification of risks
    2. Who is accountable
    3. What mechanisms are there to improve conduct risk management
    4. Who is in control of strategic oversight
    5. What activities could undermine conduct risk management

Conduct in particular, is very much at the centre of the industry with the introduction of the Senior Managers and Certification Regime (SM&CR) as retail investment advice firm’s now have until March ’21 to ensure all conduct rules training, fit and proper and certification processes are in place and actioned.

The European Commission’s latest public consultation on sustainable corporate governance builds on this and looks at the G in ESG looks at whether companies should:

  • Take into account broader stakeholder interests such as human rights violations, environmental pollution and climate change
  • Ensure directors identify the company’s stakeholders and their interests and manage the related risks
  • Introduce a ‘due diligence duty’ across employee rights, health, environmental impact of business activities across the supply chain

The FCA seems dedicated to ensure culture is front and centre in its approach to supervision. There is much resource dedicated to transforming culture in financial services, with the business strategy, tone at the top, leadership, remuneration and reward and good governance the most salient issues.

So, what can you do?

  1. Review how RegTech can help provide diagnostic assessment of your current GRC practice and provide management information and data on how you are improving competence and conduct. This can have significant benefits, for example Professional Indemnity Insurers have stipulated they will provide favourable renewal terms for those firms evidencing they have good GRC strategy within their business
  2. Ensure Human Resources Development practice and communication lines are clear across the business, not just at the top or board levels.
  3. Systems and controls, operations and practice management are all aligned to the front office via a ‘middle office’ so the business is client and staff centred and allows secure data to flow through to all stakeholders e.g., Directors, staff, clients and the regulator

With the SM&CR extension on conduct and certification implementation deadlines, we should not take our eye off the GRC ball, if we have this right the governance will be spot on and firms will showcase resilience and sustainability benefiting immensely when this pandemic becomes a distant memory.

If you're interested in finding out more you can book a demo of our software please click below to see MO® in action. 

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Remote working and Governance, Risk and Compliance

[fa icon="calendar'] Oct 23, 2020 10:40:48 AM / by Chris Davies posted in Financial regulation, Financial business development, fintech, regtech, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, MiFIDII, SMCR, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, AI, Risk,, Accountability, Platforms, PROD, Product governance, digital,, Regulatory, Reporting, resilience, cyberrisk

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Enforcing regulatory compliance can be enough of a challenge when your workforce is in the office. When they are dispersed, how can you be sure that your marketing and communications collateral adheres to FCA rules?

1. Have and communicate clear processes

The first step in managing compliance, whether locally or remotely, is to have clear processes that everyone understands. This means ensuring the compliance team are on the same understanding, systems and controls are managed tightly and SMF’s responsibilities are understood and aligned.  

2. Make sure everyone understands the relevant rules

Training and Competence is crucial here is everyone in your business aligned with the rules relevant to their roles? Are they up to date with their SPS and CPD requirements? With Senior Managers and Certification Regime ‘honeymoon period’ ending March ’21 and ESG, Vulnerable clients, Treating Customers Fairly, Know Your Customer, MiFID II, advice suitability to name a few are all highly relevant to showcasing professional practice, you need to evidence your team know the relevant rules and how they work in practice in their roles and responsibilities.

3. Improve collaboration even when youre not in the same place

Collaborating effectively on marketing projects improves efficiency, reduces unnecessary admin and duplication, and helps you stay aligned as a team and ensure consistency of compliance practice and client service.

4. Consider security

Remote workers are the weakest link when it comes to cyber-resilience. Cyber risk is one of the top business risks facing organisations. Despite this, the majority are not adequately prepared for a cyber incident. You will need to address key issues and employ Cyber strategy aligned to the FCA requirements.

Do you mandate the use of secure work emails? Are there rules about encryption of sensitive material? Are GDPR requirements met? All these issues are potentially exacerbated when teams are dispersed. Read our Cyber-crime blog here 

5. Review technology and automation help?

Our Remote working and FinTech handbook covers plenty of quality technology providers across a range of business strategies that can help during these challenging times. RegTech in particular will help ensure you have the evidence that you have addressed specific issues and have a holistic approach where all the relevant stakeholders are on the same understanding. Download Model Office’s RegTech infographics here.

Your compliance Joke:

'Why do people take an instant dislike to compliance officers? To save time later....'

If you're interested in finding out more you can book a demo of our software please click below to see MO® in action. 

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More Compliance Chat

[fa icon="calendar'] Sep 18, 2020 10:24:23 AM / by Chris Davies posted in Financial regulation, Financial business development, fintech, regtech, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, MiFIDII, SMCR, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, AI, Risk,, Accountability, Platforms, PROD, Product governance, digital,, Regulatory, Reporting, resilience, cyberrisk

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Dear CEO, there you go that made you tremble didn't it? Well the FCA have been as active as ever this week and produced directives that are indicative of the direction in which UK regulation is likely to move forward over the next few years. (Your compliance joke's at the bottom of this blog)

Firstly we have the latest instalment in The FCA's gripping '5 Conduct Risks'series. seriously this is really good stuff and although focused on the banks, applies to all retail investment firms too. This is very important considering the need to ensure your Senior Managers and Certification Regime (SM&CR) certification process and staff conduct training is on track. 

The key messages are:

  • Despite significant improvement, there remains a lack of awareness, in-depth understanding and the ability to identify day-to-day conduct risks
  • Some firms have taken insufficient steps in ensuring the contribution of personal conduct and behaviour to achieve conduct objectives
  • Although most firms have clear escalation and whistleblowing channels, in practice they are largely unused and followed in only the most serious cases
  • Participants were often unclear on their firm's corporate purpose statements and how their role and responsibilities contribute

The Second issue is symbolic of the work done by regulators around digitisation, in both FinTech and RegTech. This will become even more of a priority for them in the changed world created by COVID-19, remote audits spring to mind.

The FCA's digital sandbox for example, goes form strength to strength and the latest pilotwill enable innovative firms to test and develop proofs of concept in a digital testing environment around three use cases related to coronavirus, including:

  • detecting and preventing fraud and scams
  • supporting the financial resilience of vulnerable consumers
  • improving access to finance for small and medium-sized enterprises.

The FCA Dear CEO letter to professional Insurance Intermediaries shows the FCA believes the general insurance sector carries significant risks of potential customer harm, with the most significant risk within the intermediary portfolio being that of customers purchasing unsuitable or poor-value products. This is attributed to inappropriate sales tactics and insufficient or unclear information at the point of sale.

The letter highlights the importance of robust governance and controls, and the need to embed healthy cultures and behaviours within firms. The FCA will focus on these themes and the letter sets out some of the key related issues, such as bonus and incentive arrangements.

Finally, but not least, the FCA are sending out yet another Financial resilience questionnaire to advice firms (they're clearly concerned) at Model Office-MO® we have made our Financial Resilience Diagnostic free of charge so firms gain heat mapped dashboards and assess the strengths of their firm’s financial ratios and cashflow. You can sign up and download it for free here.

Your compliance Joke:

“How many compliance officers does it take to change a light bulb?”

“Three. One to change it, one to check it and one to check it again and file a report.”

If you're interested in finding out more you can book a demo of our software please click below to see MO® in action. 

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Cyber-crime: an IT or Regulatory Challenge?

[fa icon="calendar'] Aug 13, 2020 3:27:34 PM / by Chris Davies posted in Financial regulation, Financial business development, fintech, regtech, Risk management, practice management, FCA, advice, HMT, suitability, FAWG, FAMR, MiFIDII, SMCR, Data, GDPR, Chatbot, Culture, Enforcement, supervision, audit, Conduct, AI, Risk,, Accountability, Platforms, PROD, Product governance, digital,, Regulatory, Reporting, resilience, cyberrisk

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As we have seen with the COVID-19 pandemic, resilience is a key strategy and concern for the FCA. There are two key areas here: financial and operational resilience. What is often overlooked where operational resilience is concerned is Cyber-crime.

 

In their recent paper Cyber-security – industry insights, The FCA are clearly keen to ensure retail investment advice firms (RIAs) engage in good governance practice in this area.

The paper covers some important strategy that can easily be employed across:

 

  • Governance and risk management: Taking a top-down approach and using enterprise risk management approach to assess and monitor cyber-risks across the business operations, technologies, client service strategy
  • Keeping it simple: Move away from management speak and keep language and communications clear and concise
  • Cyber culture champions: appoint influential and experience staff members to take responsibility for addressing cyber-risk
  • Think strategically: Identify who can attack the business, where and how. Identify vulnerable data management practice and understand the extent of cyber-crime networks across the UK and internationally
  • Link risk and controls: Creating metrics and indicators for critical controls is imperative
  • Use existing standards. Standards provide valuable frameworks devised from good practice; consider the NIST Cybersecurity Framework, ISO27001/2, SANS CIS, NCSC’s 10 Steps to Cyber Security or NCSC’s NIS Directive Cyber Assessment Framework, Cyber Essentials

 

It is important to identify what you need to protect so here the FCA provide some simple yet effective techniques that can easily be applied:

 

  • Consider what you know: The GDPR provides great guidance on data security, so leverage this and re-assess your systems and controls plus identify what you don’t know and find solutions fast
  • Take a holistic approach: Too many businesses employ checklist and tick-box strategy which can create a silo approach, firms now need to think vertically and horizontally across all business activities this can then aid change management records, vulnerability scans, anti-virus management and other sources
  • Know who does what: Identifying roles and responsibilities is a key requirement of the Senior Managers and Certification Regime (SM&CR) so here we need to ensure that we know what staff are responsible for, map it out and also re-assess how personal data for staff and client’s alike is processed in line with the SM&CR and the ICO’s GDPR.
  • Watch out for outsourcing: Identifying and managing stakeholders can be difficult so again along with the SM&CR and GDPR, any outsourced suppliers need to be managed carefully particularly when it comes to processing personal data and related cyber-risks

 

So what can be done to ensure data is protected?

 

Effective cyber-risk strategy requires careful planning and use of the right tools and techniques:

  1. Invest in training: Ensure all staff are aware of cyber-risk on an ongoing basis. We conduct plenty of Anti-Money Laundering training, but as some of this activity has shifted online, there are no excuses as to ensuring cyber-crime is not a mandatory annual training standard within your business
  2. Be aware of vulnerabilities: knowing weaknesses and your digital footprint is essential to good research and due diligence in your cyber-risk strategy. Also understanding the digital reach of your business is essential
  3. Cyber-security integrated with change management strategies: Resilience is an essential compliance and business strategy, this can be undermined very quickly via a cyber-attack, so including cyber-security within change management strategy can build a resilient structure
  4. Employ detection tools: As with the GDPR, run a systems check and keep a register so you are able to detect any attempted attacks on systems and business services. This involves:
    1. Mapping roles and responsibilities (similar to SM&CR) and identifying those with privileged access to data e.g. data controllers plus monitor systems behaviour and apply the SM&CR Conduct rules to user behaviour
    2. Design logs to assess your firms data and generate relevant alert systems
    3. Apply string access controls to audit database logs to prevent cybercriminals removing any traces
  5. Respond and Recover: Be aware of emerging threats by participate in industry conferences, forums and learn from others. As with any resilience focus firms will need to:
    1. Test and retest scenarios and your defences
    2. Define business tolerance for recovery of systems
    3. Learn lessons from any failures
  6. Use Technology: identifying and applying technology can aid thwarting and a swift response to any cyber-attacks.
    1. Use encryption, this could involve e-mail encryption services such as Origo’s Unipass Mailock
    2. Back up regularly
    3. Update your services
    4. Create strong passwords
    5. Audit using RegTech systems so you are aware of where all the issues may lie prior to your manual audit process

With Cyber-crime on the up in this pandemic, if you apply strategy, tools and techniques we have discussed then you will ensure your business is cyber-resilient.  

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