As we enter a new year, it provides us with an opportunity to review the past years activities and look ahead at what is to come. Indeed January is named after the Roman god Janus, who had two faces so he could see the past and future. What Janus may have told us from a regulatory perxpective.is the FCA are 'one one' with their future vision and learning from the past when it comes to firms regulation data and compliance analytics.
The ongoing focus on Environmental, Social and Governance (ESG) investment highlights the financial services industry's ongoing instrumental role in the transition to net-zero, through its ability to mobilise capital and engage with investors, companies and citizens.
Let’s start with the top three challenges firm’s face when it comes to GRC management.
We currently have a festival of football with the UEFA European Championship, and you can be assured that each national team coach will be using data analytics to assess their own and opposition teams and players strengths, weaknesses and winning formations.
As of May 2021, RegData completely replaced Gabriel as the FCA’s platform for data collection after a lengthy roll-out to 52,000 firms and 120,000 users. Firms and their users were moved to RegData in groups, based on their reporting requirements.
The FCA first published their duty of care paper in July 2018. Two years on it is now consulting on introducing a new consumer duty. This consultation ties in with the new FCA ‘outcomes’ focused principles based framework and is open until 31st July 2021 and following section 29 of the financial service act 2021, should be introduced by 1st August 2022.
With Daniel Kahneman’s co-authored latest book, ‘Noise’, we have another instalment for the case of behavioural science in decision making.
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?
“Business is no difference to sport, data and technology is a very powerful tool, but only if every individual in your team knows how and why they are using it” Sir Clive Woodward England Rugby world cup winning manager
At Model Office we love sports analogies and we would recommend any business who either believes in data analytics or not read or watch Moneyball, an account of Oakland Athletics baseball team’s 2002 season and their general manager’s attempts to assemble a competitive team. The story focuses on the adoption of a ‘sabermetric’ system that employs quantitative diagnostic technology to collect and summarise relevant data from game activity.
This data can measure and predict performance trends and showcase players who are most suited to influencing how a team wants or needs to play to win.
Why is this relevant to financial services I hear you ask?
Well the rule book demands a certain standard of performance as do clients and yes business stakeholders. We are witnessing a digital revolution, some call it the 4th industrial revolution and this provides retail investment advice firms, networks and support services to employ data analytics and diagnostics so they embed an evidence based practice and can assess behavioural trends such as individuals and firm competence, conduct and how this influences their culture and clients. Great for compliance with the Senior Managers and Certification Regime (SM&CR).
The results for a business who does employ such technology can be impressive. RegTech alone can offer high level and granular analysis of how firms governance, risk and compliance management processes are effecting performance. The FCA’s 5 Conduct Questions Programme showcases that firms who monitor and manage compliance risk management create a constructive culture which has a positive effect for sustainable professional performance.
How can RegTech help?
Utilising diagnostic technology can help market participants due to:
- Increased evidence to showcase good practice that can help reduce regulatory levies such as professional indemnity insurance (PII) and streamline audit practice saving time and costs
- Technology integration where application programming interfaces (APIs) can enable tech to ‘talk’ and data share and deliver streamlined regulatory reports across key areas such as:
- Client data quality
- AML/KYC/PEP sanctions
- PROD and Client Segmentation ensuring;
- Services and products are suitable for end client needs
- ESG analysis to assess client needs and objectives
- Vulnerable clients are identified and provided the correct services
- Assessing missing information from client valuations
- AI text analysis to auto-audit compliance policy documents and automat client file reviews
- Advice suitability checks identifying underinsured or underinvested clients
- Assessing adviser supervision and adviser training and competence requirements
- Ensuring Investment, Mortgage, Insurance advice is compliant with COBS, MCOBS and ICOBS
- Self-Audit and aligning business models with the regulations ensuring firms know they comply and assess and rectify blind spots and weaknesses
- Increase Management Information (MI) and cut time and costs associated with compliance
- Move away from ‘swivel chair’ compliance where disparate solutions (mainly spreadsheets) are used, to a single source SaaS or Cloud based dashboard providing heatmapping, AI algorithms to highlight trends and produce streamlined reports
One message that the FCA presents in their business plans is that both financial services providers, networks and support services plus the bodies that regulate them must act to adapt to, and enjoy the benefits of, technology and innovative approaches. This takes courage and a medium-long term view so the real benefits that RegTech can deliver more cost and time efficient practice than current strategies.
Back to sport, you only have to look at examples such as Sir Clive Woodward’s excellent speech at the PFS 2017 Festival of Financial Planning at how important it is for business to adopt and embed analytic and diagnostic technology into their everyday practice. This way they will have all the evidence as to how to ensure sustained professional practice and win!
So, with such benefits in a changing market, the question has to be asked: ‘RegTech, if not now when?’.
Having attended another excellent Octo-Members virtual pub event Wednesday (I also enjoyed a ‘virtual’ alcohol free beer 🍺) the topic circled the old chestnut for suitability and appropriateness of centralised investment propositions (CIP) for the business and their clients.
This is a subject that has stood the test of time in generating debate over issues such as value chains, fund managers ego’s, regulatory stance of shoe-horning or retro fitting and off course the old ‘can I use one platform or investment proposition across my client base’ question…
The truth of the matter when debating and attempting to find solutions is that there is no definite solution, it all depends on variables such as the client’s on-going needs and objectives, the firm’s business model, regulatory directives such as PROD and advice suitability, technology solutions and research tools and good old trusted professional behaviour across all relevant stakeholders such as product manufacturers, fund managers and wealth managers, advisers and planners.
What is crucial is that the trusted behaviour meets the high standards the FCA set across conduct (behaviour) and competence (skills) plus ensuring the right culture is in place for individuals to ‘do the right thing’ by their clients. Integrity is key.
It was clear (to me) from the Octo-members virtual pub debate that there are many moving parts but also each component is no silver bullet. For example technology built well is an enabler to efficiency’s across communications, operations, systems and controls but on its own is not going to solely fix the CIP or advice suitability conundrum.
What’s needed is a joined up approach with suitability being the end product of the sum of many parts coming together seamlessly.
The PROD rules can help here. They are aimed at ensuring the product manufacturers build their products with the end user’s needs in mind I.e. the client. Plus, they also need to ensure such products are distributed correctly to the end user, so the Retail Investment Advice (RIA) firms research and due diligence comes in as does, wait for it…client segmentation.
Figure 1 Product Governance Product manufacturer requirements