Suitability and Surveillance: What Does the Future Hold for Wealth Managers?

Lee Garf, General Manager, NICE Compliance Line of Business

Across Europe and Asia, the term “suitability” seems to be as popular as the tongue-in-cheek reference “Brexit.” With the Financial Conduct Authority (FCA) in the UK leading the charge, regulators are consistently reevaluating their expectations surrounding suitability rules, and because of this continual change, there has been uncertainty in the marketplace.

From 2017 to 2018, the FCA alone assessed 1,142 cases in 656 firms and said it was “disappointed” to find the advice sector provided “unacceptable disclosure” in 41.7 percent and “uncertain disclosure” in 5.4 percent of the reviewed cases. Although feedback was provided to the evaluated firms, the UK regulator is expecting greater progress from firms as they react to the reviews. According to its more recent annual report, the FCA plans to reassess the suitability of advice in 2019, with an emphasis on customer disclosure.

It’s not surprising, then, that suitability remains a serious concern for wealth managers. In a recent research study, benchmarking firm Compeer found that wealth managers still view suitability compliance as a major issue. Forty-four percent of respondents reported increased compliance costs as a direct result of carrying out ongoing suitability testing. Despite this, one in four firms still handle suitability manually, while 76 percent use a combination of technology and manpower. On the surface, this dynamic is difficult to explain. Firms are spending more money on compliance and using technology to augment compliance personnel – but they’re still not meeting the expectations of regulators.

How should firms bridge the gap? The answer may lie in changing how wealth managers approach supervision entirely. Sometimes it’s not simply what you do, but how you do it.

Wealth managers around the globe communicate with their clients on a very personal level. The information gleaned from the emails, chats and phone calls can be essential to developing a proper investor profile and responding to the needs of individual clients accordingly. But as telling as these communications are, they’re rarely analyzed to the depth required to develop accurate client risk profiles, to determine if information was properly disclosed, and whether investors were adequately educated on all available options. The surveillance technology many firms have come to rely on simply isn’t up to the task.

In fact, according to PwC’s 2019 Surveillance Survey on Market Abuse, most firms are not satisfied with their legacy eComms and voice surveillance solutions. A key component of this dissatisfaction is related to the extremely high number of false positive alerts that these legacy systems generate, which in turn eat up valuable compliance time and resources. The PwC Survey further concludes that in Europe, fewer than 0.01 percent of alerts lead to reporting suspicious activities to the regulator and is worse globally with only 1 out of every 29,000 alerts being valid.

These high false positive rates are a direct result of legacy solutions which are lexicon based, inaccurate, and rely on manual processes, such as random sampling of advisor communications. Inaccurate analytics also make it difficult to detect context (which can be complicated even further when multiple languages, accents and specific financial terms come into play). Random sampling is equally problematic. Considering that firms only review between two and five percent of communications, it’s a given that risky communications will fall through the cracks. In the world of wealth management, this can spell disaster.

By far one of the biggest challenges for compliance analysts is piecing suitability alerts and related communications together. Compliance analysts typically work in different siloed systems. Without an automated way to analyze and bring all of the data together, analysts seldom get clear visibility into the actions and intentions of supervised employees.

For example, correlating communication data with alerts might reveal serious compliance issues, such as conflicts of interest, potential conduct and suitability risks, and lack of proper disclosure. Correlating chat conversations and emails with a related commission or a hybrid switching alert could reveal that a communication was above board, or to the contrary, a sign of something sinister.

If your firm is struggling with these surveillance and suitability challenges, there is a better way. When integrated appropriately into operations, advances in technology can reduce false positives and compliance risk by:

  1. Applying AI for more accurate detection;
  2. Surveilling 100 percent of communications; and,
  3. Automatically marrying suitability alerts to relevant advisor communications.

AI for more accurate detection
Whereas primitive lexicon searches only provide basic levels of consumer protection, today’s advanced detection capabilities harness the power of AI (Artificial Intelligence) and Natural Language Understanding (NLU) to analyze multi-channel communications and unearth truly suspicious communications, while reducing false positives and compliance risk.

Surveilling all communications

Modern surveillance technology also allows firms to review 100 percent of communications, across all communication channels that advisors use – including email, instant messaging, voice and more. Communications can be also be assembled in the proper order so it’s possible to know who communicated what to whom and when. This gives firms complete confidence that advisors complied with regulations around reverse solicitation and didn’t overstep local laws.

Marrying suitability alerts with advisor communications

Beyond surveilling communications to proactively address suitability concerns, wealth management firms also need to keep an eye out for market abuse and intent to commit market abuse, in order to comply with regulations like MiFID II. Being able to holistically combine and leverage data and alerts is the next frontier in this area. Holistic surveillance correlates trade data with related voice and communications data, for deep insight and analysis. With a holistic approach, compliance analysts can quickly reconstruct all pre-trade, trade and post-trade activity related to a specific transaction.

The bottom line to all these issues is simple. When firms are only able to look at individual types of data in isolation, it’s difficult to assess and understand the true sources of risk in the organization. So, what does the future hold for wealth management firms as far as suitability and surveillance? The answers won’t be found by applying more manpower to the problem, but rather by applying the right technology to truly reduce risk and improve operations. The regulators will undoubtedly look favorably on any organization which applies this approach to their suitability oversight and supervision practices.

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