Technology Is Making Compliance Departments More Proactive

Compliance Veterans From Orion, RFG, Angeles And Surge Share How Technology Is Changing Compliance Departments Across The Industry
Larry Roth is CEO of Wealth Solutions Report and Managing Partner of RLR Strategic Partners.
Larry Roth is CEO of Wealth Solutions Report and Managing Partner of RLR Strategic Partners.

Regtech (regulatory technology) has been seen as a necessary evil at firms – it can tie up a lot of funds and resources – but it’s better than the fines and ensuing bad reputation that comes from noncompliance. Fortunately, our industry’s compliance departments have received an injection of innovation within the last few years, which has made some regtech processes increasingly efficient. That being said, there is still more work to be done.

For instance, advisory firms must ensure all their communications are compliant. That’s not just emails but also – as our industry knows all too well from nearly $3 billion in fines – text messages, iMessages, WhatsApp and others. Any overlooked message could draw a fine. On the flipside, there are often many false positives that can be overwhelming to review. That’s where regtech weeds out the unnecessary information while delivering compliance officers a clear view of exactly what they need to see.

Regtech – What Is It Good For?

Kylee Beach, General Counsel, Orion Advisor Solutions
Kylee Beach, General Counsel, Orion Advisor Solutions

Before regtech, the compliance world included lots of spreadsheets and, thus, human error. Tech has automated and streamlined compliance processes a great deal, making audits more efficient and less resource-intensive.

“We’ve successfully evolved the maturity of the compliance challenges regtech can address and their ease of use and made regtech essential to the overall effectiveness of compliance programs,” said Kylee Beach, General Counsel at Orion Advisor Solutions.

Regtech has been able to take increasingly larger data sets and synthesize them down so compliance officers are left with actionable exceptions, noted Rick Ohlrich, Chief Compliance Officer at RFG Advisory. This not only makes compliance professionals more effective but also allows them to increase the range of what they cover. “It minimizes the false positives and filters out low-risk noise,” Ohlrich said.

Sid Yenamandra, CEO, Surge Ventures and Kovair
Sid Yenamandra, Founder & CEO, Surge Ventures

Sid Yenamandra, Founder and CEO at Surge Ventures, takes that a step further, noting that regtech has automated many routine tasks and therefore freed up time for “strategic thinking and proactive risk management.” This means compliance officers can take their role from being primarily reactive to becoming much more proactive, he added.

If compliance officers are only able to address the regulatory issues their firm is levied with, they can never hope to get ahead. Proactivity is key.

As new financial products and services come to market, regtech supports their implementation and subsequent management, noted Yenamandra. Automation in this area brings more products and services to market faster as the regulatory hurdles are quickly met.

What Still Needs Improvement

Ed Lowndes, Chief Compliance Officer, Angeles Wealth Management
Ed Lowndes, Chief Compliance Officer, Angeles Wealth Management

When it comes to regtech, there is certainly a divide between the haves and the have-nots caused by pricing.

“Cost and resource constraints remain significant, especially for small-to-midsize firms,” said Ed Lowndes, Chief Compliance Officer at Angeles Wealth Management. “Providers are exploring flexible pricing models, but still face time constraints and personnel continuity challenges.”

It’s critical that regtech solutions be made available to all firms regardless of their size. After all, the regulators aren’t going to forego giving fines to a smaller firm because its regtech was subpar. Whether firms are capable of adequately meeting the requirements or not, they are held to them.

Another issue depends on each firm’s range of tech literacy. It can be both a blessing and a curse that regtech is getting more complex and tackling more compliance avenues.

Rick Ohlrich, Chief Compliance Officer, RFG Advisory
Rick Ohlrich, Chief Compliance Officer, RFG Advisory

“The compliance officer for their part now needs to have a greater skill in electronic data manipulation and how the tech functions while being skilled in relating the findings and their implication to less tech savvy advisors,” Ohlrich said. “It creates a human capital challenge in maintaining cross training and continuity along with the necessary expertise to operate at a high level.”

As an industry, we need to find a solution to the increasing complexity of regtech. Innovation needs to continue to occur to benefit firms or else the industry will be hobbled by compliance conundrums. So whether it be increased advisor education or regtech firms simplifying implementation and usage, a regtech solution is only as good as those who are operating it.

Regtech is one of those areas that has to evolve constantly in lockstep with regulatory changes, Beach noted. In my view, adaptation in anticipation of these developments rather than lockstep would be better. Regtech developers need not read minds to understand where regulators will focus their attention next.

What Would Make It Better

It should be a surprise to no one that all of these compliance professionals suggested regtech should lean more into AI, machine learning and predictive analytics.

“By leveraging artificial intelligence to forecast potential compliance violations before they occur, compliance officers could shift from a traditionally reactive posture to a more proactive one,” Yenamandra said. “Such predictive capabilities would not only improve compliance efficiency but also help firms maintain a cleaner compliance record and reduce regulatory fines.”

Ohlrich hopes that more machine learning will prove helpful in providing intuition when finding exceptions and predictive capabilities will be beneficial to “source gaps and trends.”

“Continuing to meet compliance officers where they are and bringing together more and more capabilities in a streamlined, cohesive experience is key,” Beach said.

That raises the question of whether all-in-one or most-in-one solutions are more beneficial than highly specialized but narrowly scoped technologies. Given how prone compliance processes can be to error and how costly fines can be, this is a suitable time to employ the most-in-one option to prevent data leakage or missing information.

The Next Frontier

Though the industry is far from perfect as the previously mentioned fines illustrated, we are making headway in many areas including communications storage compliance. But there are always blind spots that are uncovered by the next series of fines and regulatory actions, unfortunately. One that might be cropping up is digital signature compliance.

There have been instances of financial advisors signing documents on behalf of their clients without their authorization, which will prove to be a compliance headache to say the least. Firms would do well to ensure their internal practices are reflective of the latest advances in digital signatures and that their regtech is really up to the task.

Larry Roth is CEO of Wealth Solutions Report and Managing Partner of RLR Strategic Partners.

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