The Cost of Compliance

FINRA released advance warning of their 2016 priorities for broker-dealers with its latest Regulatory and Examinations Priorities Letter earlier this year, highlighting data quality and governance as primary areas of concern. But many firms are forgoing the investments needed to upgrade their compliance programs – even as regulators and data issues increase year over year. Is your firm’s passive ignorance a sure path to more fines this year?

The amount of data being created and stored by broker-dealers has increased over the past few years, and data is being stored in multiple and unstructured formats across a multitude of different systems. This has led to siloed processes and sloppy reporting – and FINRA has noticed, firmly outlining the top areas of concern in the new letter:

1. Operational breakdowns specific to changes from legacy to new compliance systems
2. Technology governance and change management practices related to algorithm maintenance (including order-routing algorithms)
3. Back-office and vendor system changes
4. Life cycle development and new system implementation
5. Data quality controls and reporting practices
6. Verification of the accuracy of data sources relied upon to conduct monitoring and surveillance

All this being said, everyone knows that updating technology at financial institutions can be an uphill battle. There is only enough budget to go around each year, and the projects that will actually generate real revenue will always be the ones that get first priority. But broker-dealers – and furthermore, the entire institution – must see the inevitable future and understand the inherent risk they undertake operating in a heavily regulated environment. And this means fines and more fines are coming for firms this year if they don’t take action.

In a post-2008 financial crisis environment, fines are being handed out freely and it’s becoming almost impossible for financial institutions and banks to patch systems in response to regulatory requirement updates. In 2015 alone, there were several fines and censures levied on broker-dealers large, medium and small specific to data integrity and data quality issues. FINRA itself is cracking down hard now, with $95.1 million in fines handed out, along with 736 individuals suspended from trading.

Many broker-dealers continue to use spreadsheets and other manual processes to respond to regulatory requirements, which is an obvious reason for the reporting issues, but it’s also why there is slow movement toward the massive change needed for data governance. Many broker-dealers are averse to moving away from this comfortable process and still don’t view the ongoing calls for new regulatory reporting as a reason to actually change the way they operate.

The fact is, FINRA’s 2016 initiatives are a pretty clear wake-up call that change in both process and attitude is not merely an option anymore; it’s a requirement.

The fear over investing in data risk management doesn’t only have to do with the fear of change, but also fear of what lies under the hood. But advances in technology and processes have made good data risk protection more fluid and about augmentation, instead of wholesale replacement.  Smarter, plug-and-play data handling platforms are now available to remove the need for wholesale process change in response to new stringent requirements, such as those outlined from the recent FINRA letter. New legislation can be implemented quickly, while strategic controls can be introduced in a matter of days. Agile systems such as the Clareti platform from Gresham can process data in multiple formats and automatically verify and validate the information to remove the risk of human error. The result is a fully transparent integrity architecture, which ensures compliance and removes internal risk.

As a result, the processes required are safer, more robust and better aligned with the speed of modern institution. Failure to implement a flexible control framework is a barrier to innovation. When new controls can be added as a simple change to an agile framework, the opportunities for banks are exponential.

Overall, regulations and FINRA’s focus shouldn’t mean a huge upheaval of process. With the right technology in place and a new attitude adapted toward agility around regulatory reporting, broker-dealers will be able to innovate and jump on all opportunities fast – responding to both the speed of the market and changing regulations.