The Many Faces of Financial Services Compliance

Compliance in the financial services sector very rarely takes the form of a ‘one-size-fits-all’ solution. The regulatory landscape is as varied as it is complex, and recent developments underscore just how important it is for firms to get every aspect right.

Take, for instance, the recent surge in penalties related to eComms governance. In the first half of 2024, global regulators have issued 12 significant fines averaging $4.9 million each for lapses in monitoring and record keeping of personal devices and private messaging apps. These penalties highlight the ongoing challenges firms face in ensuring comprehensive eComms oversight.

Similarly, trade surveillance continues to be an area of focus for regulators around the globe. The Commodity Futures Trading Commission’s (CTFC) investigation into J.P. Morgan Securities culminated in a staggering $200 million fine on 23 May 2024. This penalty was a result of inadequacies in the firm’s trade surveillance systems, which failed to process complete trade and order data.

These cases are part of a broader trend. In the first quarter of 2024 alone, global enforcement actions related to market conduct resulted in nearly $400 million in fines, affecting a wide range of financial entities including broker-dealers, investment advisers, and major banks.

The common thread? Deficiencies in systems and controls. Regulators are increasingly focusing on how firms manage, test and use technology to mitigate regulatory risks.

From trade reporting to eComms surveillance and beyond, compliance has many faces. For firms, the challenge is to understand these various dimensions and adopt a holistic approach that not only strengthens their regulatory processes, but also drives their efficiency and effectiveness.

1. Transaction Reporting

Regulators rely on trade and transaction reporting to spot and investigate potential instances of market abuse. This year, both EU and UK firms have had to adapt to the new EMIR Refit legislation, meaning that central counterparties and trade repositories now have an increased volume of data fields to report on and also a new format – ISO 20022 XML. These changes will give regulators better insight into market abuse while creating a standardised way for firms to send data.

Moreover, the UK and EU’s respective MiFIR regulations require all investment firms that execute transactions to report activity to the regulator. To do this effectively, the FCA states it must “receive complete and accurate information regarding the types of instruments, when and how they are traded and by whom”. In both instances, the volume of data and the speed with which it needs to be processed means that regulators see automation tools as crucial in helping firms to meet their reporting obligations.

2. Trade Surveillance and Market Abuse

Both the trade and regulatory landscape are constantly shifting with organisational and societal change. New forms of abuse, asset classes and digital communication channels can make it increasingly challenging for firms to demonstrate compliance, especially with mounting pressure from regulators for them to monitor trade diligently and accurately report any suspected instances of abuse.

For firms, there is not only a responsibility to remain compliant and avoid enforcement action, but also an ethical duty to protect the integrity of the markets. This approach centres on the need to foster an awareness of regulatory processes across the firm and reinforce the protocols for reporting market abuse.

However, the threat of market abuse is evolving rapidly, from accelerated interest in digital assets to AI-powered trading strategies. Therefore, trade surveillance technology has become an essential tool in a firm’s regulatory strategy to bolster the accuracy, efficiency and robustness of their governance.

3. Best Execution

Best execution legislation means firms have a duty to show they are acting in the best interests of their clients when executing trades on their behalf. In the US, for instance, the SEC is responsible for managing best execution practices and has proposed “more robust policies and procedures” to existing legislation.

Training employees on what best execution looks like and how to achieve it is crucial. But again, with the increasing range and scale of trading platforms, asset classes and financial instruments on the market, utilising a digital system has become pivotal for analysing the numerous data points required to be compliant. This includes using this data to create cost-saving insights and an understanding of how trades could be executed more effectively.

4. eComms Surveillance

Digital messages can often be the first sign of suspicious and non-compliant behaviour. Therefore, eComms surveillance is emerging as a vital tool in spotting and pre-empting potential instances of market abuse. Regulators have made it clear that they expect firms to take a proactive approach to monitoring communication channels as part of a holistic and integrated trade surveillance strategy.

But with clients and staff sharing messages over an ever-increasing range of digital channels, trying to monitor this activity can be extremely difficult. A robust eComms surveillance strategy can only realistically be achieved through a centralised digital system that automatically monitors all forms of electronic communication across multiple channels. The most advanced regulatory tools use highly sophisticated features like natural language processing and machine learning to ‘translate’ messages and link suspicious communication to abusive trading.

The need for a holistic approach to regulation

There are many dimensions to financial services compliance, and each ‘face’ can naturally overlap with the other. As a result, firms need to adopt a holistic approach to their regulatory strategy.

For example, highlighting suspicious communications activity can help to predict future instances of market abuse. However, you also need to be able to identify the specific instances of non-compliant activity to ensure that you can take appropriate action. Having access to one view without the other simply creates regulatory gaps that leaves the firm exposed to significant risk.

Ultimately, The challenge facing firms is a longstanding one – how do they remain compliant and keep abreast of evolving regulations, while also ensuring that the act of doing so doesn’t become an unnecessary drain on resources? The simple answer is technology and its ability to share data, streamline processes, and enable firms to create ‘one true view’ of their compliance processes. Only then, can a firm claim to have truly embraced a holistic approach to their regulatory strategy.

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