An Inside Look at Four 2022 Trends Shaping Financial Compliance

2021 was a wild ride in the world of financial compliance, and 2022 appears to have even more twists and turns in store. In this blog, three compliance experts with decades of experience weigh in on the biggest trends, and what’s around the corner.

Steve LoGalbo, Steven Logan, Paul Cottee
Trend #1 - Unified Communications Power: The New Digital Workspace

With the Omicron COVID variant making the rounds, many of us are still working remotely. This includes regulated employees in financial services firms. It’s fair to say – we are all now firmly entrenched in our new digital workspace, at least for now.

"It used to be you’d go to the office, log into your computer, there’d be a phone on your desk," said Steven Logan, Director of Product Management, NICE. "If you wanted a meeting, you needed to find a meeting room, or set up a conference call. And that call would be voice only."

Now, think about how much has changed. We have a calendar full of webinars and meetings. We’re in video conferences daily, chatting and collaborating in real-time online with co-workers. The same technological innovations that have altered how we interact in our daily lives have now found their way into our remote, digital workspace.

In just a few short months during the start of the COVID-19 pandemic, corporations increased their usage of unified communications (UC) by 400%. This trend has spilled over into regulated environments. For example, major financial services firms like BMO Global Asset Management (BMO GAM) are adopting UC platforms like Microsoft Teams in growing numbers to support remote workforces too.

Regulated employees who used to simply communicate with voice now have access to real-time collaboration tools that enable them to interact via voice, video, chat, screen sharing, document sharing and more.

The challenge – regulations, like PCI DSS, Dodd-Frank, and MiFID II require these communications to be recorded, and most legacy recording systems aren’t designed for this.

"One of our biggest accomplishments in 2021 was the launch of our NextGen recording platform, NTR-X," said Logan. "It’s an open, omni-channel platform that goes far beyond recording voice to capture video, chat, screen sharing and more. Microsoft Teams is clearly a leader in the UC space and we’ve also partnered with them to deliver the industry’s first compliance recording solution for Teams, running in the Microsoft Azure cloud."

A number of tier one banks are already using the solution to record tens of thousands of regulated employees around the globe.

"Video adoption is particularly widespread," said Steve LoGalbo, Director of Compliance Product Management for NICE. "Only two years ago, there was no need to record video calls, but that’s not the case today. I’m really proud of the fact that we’re able to support these new channels, and that customers are actually using our solutions in the field."

Logan sees more of the same momentum for 2022. "In 2021, we saw early adopters in regulated financial services firms embracing unified communications. In 2022 I believe we’ll see firms swapping out their traditional on-prem communication platforms for cloud-based unified communications on a more wide-spread scale. There’s no reverse gear for this trend."

Trend #2 - Cloud-First is the New Approach in Compliance

2021 also heralded a mind-shift in how financial services firms view the cloud.

"Prior to 2020, you couldn’t even mention ’cloud’ in a discussion related to surveillance, because of the nature of the data we’re dealing with, but that has changed," stated LoGalbo.

According to Logan, the pandemic was a sea change moment because financial services firms couldn’t get engineers into the data center. "Prior to that, everyone was focused on reasons why they couldn’t move to the cloud, but the pandemic reversed this thinking."

Now nearly all regulated financial services firms are taking a cloud-first approach.

"Every surveillance opportunity that we’re working on with customers right now has a cloud-first strategy," said LoGalbo. "For me, that has been the most significant change in our industry over the last 18 months."

Among the new surveillance clients NICE Actimize onboarded in 2021 and 2020, 100% were on the cloud, compared to only 63% in 2019.

The cloud-first approach is taking hold on the compliance recording side of the house too.

"It’s more ‘Why can’t we run this in the cloud?’" added Logan. "I think the other significant shift is the willingness of firms to look at consuming a service rather than simply deploying a technology they manage themselves."

Evolving regulator views toward cloud are moving the needle too.

"Regulators, such as the FCA, have become very much pro-cloud, you could even say cloud evangelists," added Paul Cottee, Director, Global Markets Compliance Advisory, NICE. "I think this has given firms more free reign to implement their own cloud strategies."

As for cloud deployments, the results are paying off. Compliance recording in the cloud can net upwards of 65% in annual TCO savings. Additionally, the cloud delivers a low maintenance, touch-free experience which enables firms to accelerate adoption of new communication technologies, and scale their global recording and compliance assurance capabilities quickly, cost effectively and efficiently.

The benefits for cloud surveillance are largely the same.

By leveraging a cloud-native surveillance solution, firms get everything they need in one platform, for an affordable subscription fee. There’s no need to purchase and commission servers, software and infrastructure, or hire on-site staff to manage upgrades or maintain equipment. Several large tier one banks have been able to reduce compliance costs by 20 to 30 percent through cloud surveillance, equating to savings in the millions of dollars.

"Beyond cost savings, cloud-based software as a service solutions also allow firms to focus on day-to-day surveillance, rather than doing maintenance and integration work," said LoGalbo. "That work can be offloaded to an experienced cloud solution provider."

According to Cottee, consolidation of surveillance data in the cloud affords other opportunities as well. "If you’re a financial organization, and you’ve got all your data in the cloud, it becomes easier to aggregate, and therefore achieve holistic coverage," he said.

Cloud-based surveillance also makes it easier to implement broader conduct surveillance capabilities that rely on disparate datasets and AI-based analytics. In an on-premise world you’d have to stand up various systems to address different conduct issues – suitability, trade surveillance, comms surveillance. It’s all seamless and centralized in the cloud.

Finally, the cloud ensures infinite scalability, an important lesson learned during the 2020 market volatility (when daily trade volumes increased by an average of over 600%). This experience further shifted firms’ mindsets in the direction of the cloud solutions, which can easily scale on-demand to handle these spikes.

No one knows for certain what the future holds, but given all of the factors above, Logan, LoGalbo and Cottee all agree that adoption of cloud-based solutions will continue to accelerate.

Trend #3 – Shifting to Proactive Surveillance

Financial services firms’ approaches to surveillance are changing too – from reactive to proactive.

Whereas surveillance used to solely focus mostly on known problems, and things that already happened (the proverbial smoking gun), today firms are casting a much wider conduct surveillance net, and trying to get out in front of problems. AI now makes that feasible.

"Once a firm has all of this holistic data in the cloud, it can start to leverage AI capabilities like Anomaly Detection, Natural Language Processing, and Machine Learning to understand behaviors, identify and predict risk, and get better detection," said LoGalbo. "That’s where the industry is heading."

For example, rather than simply looking for a specific instance of suspicious behavior (e.g. insider trading) anomaly detection is constantly on the lookout for behaviors that fall outside of the norm. It does this by using Machine Learning to compare potentially risky behaviors (identified in new data) to historical behavior over time, so it can automatically spot risk indicators and bring them to the forefront.

For example, if a trader’s P&L on a certain day is $50,000 (compared to other traders who average $20,000), but historically he has averaged $45,000, that shouldn’t raise an eyebrow. On the other hand, if his P&L suddenly jumps from $50,000 to $250,000, that could be cause for concern.

Using a predictive surveillance approach that focuses on deterrence, instead of simply relying on detection, firms can now even deter rogue traders before they act. This is made possible through the use of AI-powered predictive algorithms. The algorithms analyze a wide range of behavioral, trading and communication data to establish individual risk profiles and scores. This helps firms identify traders at high risk of misconduct so they can be put under heightened supervision.

"Obviously traditional surveillance detection is still very powerful for identifying known problems, but with AI now making proactive and predictive surveillance possible, firms can step up their surveillance with these new approaches," concluded LoGalbo.

Trend #4 - Regulators Focus on Client Abuse

The primary mission of regulators is to protect investors and maintain market integrity. That’s nothing new.

But after years of clamping down on market abuse and manipulation, and chasing ‘big fish,’ regulators are now signaling a shift toward shielding every-day retail investors from client abuse.

"There have been so many examples of financial products which have zero benefit for the buyer, and serve absolutely no demonstrable purpose other than to increase the revenue to the seller," said Cottee. "Regulators have stepped in to stop buyers from getting hoodwinked."

Of specific concern are issues surrounding exploitation of retail investors in terms of non-exchange products. What was sold, why and at what price? Were fees unreasonable? And did the sale of the product ultimately benefit the seller more than the buyer?

Regulation Best Interest (Reg BI) in the US, the FCA’s proposed Consumer Duty in the UK, and the ongoing implementation of reforms stemming from the Banking Royal Commission in Australia, are all examples of this shifting focus.

"These reforms make it clear that an advisor owes their first loyalty to the customer and not their employer," added Cottee. "They cannot charge unreasonable or insidious fees and commissions, and they must ensure that anything sold to the customer is suitable for that customer."

At the end of the day this means firms must put appropriate and robust systems and controls in place to ensure that communications with customers are clear, fair and not misleading; that customers are treated fairly; and that advice and products sold are suitable for the customers they’re sold to.

"In this shifting regulatory environment, ongoing surveillance of suitability and sales practices is absolutely essential," concluded Cottee. "Compliance departments not only need to be able to review communications between advisors and clients, they need to be alerted when an advisor has gone rogue."

With FCA’s Consumer Duty currently in the consultation phase, and Canada’s CFR only recently coming into effect, it’s likely that momentum will continue to build for this trend in 2022 and coming years.