Will COVID-19 Bring the Regulatory Easement the Buy-side Was Hoping For?
Beginning in 2016, waves of regulations hit buy-side firms relentlessly. Starting with MAR in Europe, overnight buy-side firms based in, or doing business in EMEA could no longer rely on their sell-side providers to handle compliance monitoring and controls. MiFID II followed shortly thereafter, requiring drastic changes in trade reporting, best execution, comms surveillance, research and suitability.
The steady drumbeat of regulations continues – PRIIPS, SM&CR, SFTR, and most recently Regulation Best Interest (in the United States) and Client Focused Reforms in Canada. With each new regulation, firms struggles to comply with reporting and administrative requirements, understand surveillance technology capabilities and implement them, and manage or mitigate employee conduct risk, all increase exponentially. With the advent of COVID-19, most firms were hoping for a roll back of regulations, or at least a breather. Early guidance from regulators eluded to providing relief as firms shifted to at home work. But much to the dismay of firms, that relief has not materialized.
What has come to light are many underlying vulnerabilities. The global quarantine has done more to reveal broad stroke weaknesses in many buy-side firms’ surveillance processes and technology. This has caused regulatory bodies worldwide to abandon any relief, likely eliminating any chance of regulatory easement going forward.
Investment Banks around the world are signaling remote work environments may last until 2021, in some cases into 2022. This means only critical staff will work in the office, and that only if COVID-19 doesn’t get any worse in the near-term.
This clearly complicates matters as compliance was challenging under normal conditions. It has now grown radically more challenging in remote work mode. With no relief, and conditions likely to continue for the foreseeable future, Firms are beginning to think about what a retrospective examine might even look like. Many are asking themselves "have we taken the ’reasonable’ necessary steps to remain diligent in monitoring for market abuse and misconduct?"
Since retrospectives will happen, as most regulators have already signaled, here are a few things they will likely be looking for when they do occur:
- Resilience in operations and technology systems
- Monitoring and continuity of recording, tracking and reporting recording failures
- Manual capture/notes where recording isn’t available
- Behavioral deviations and conduct risks that could have been mitigated
Forward-thinking firms will look ahead of the regulator, using this as an opportunity to improve the resiliency and agility of their risk and surveillance systems. Depending on their jurisdiction, firms must be prepared to answer how the following tasks have changed or have been augmented to address the challenges imposed by the working from a home environment:
- Handling insider information
- Personal account dealings
- Recording of phone conversations
- Surveillance of regulated employees
Aside from simply regulatory or reputational drivers, firms should also be asking "how can we use this time to improve our operational controls, and reduce risk going forward?"
In the midst of profound change, some proactive firms are also experiencing a cultural shift – reframing compliance as an enabler of the business, as opposed to viewing recording and surveillance as simply a regulatory check the box.
For example, firms are now realizing that they can gain a treasure trove of insights from communication data for use in many compelling compliance use cases. Proactive firms focusing on integrated surveillance systems, recording existing and new communication channels (Zoom, etc.) will have the added business value of being able to share data and alerts seamlessly with anyone in the organization, anywhere, at any time. This is a huge competitive advantage in an environment where speed and information are of paramount priority.
While COVID won’t bring relief from regulations, it certainly is providing an unintended opportunity for firms that embrace ’a bring it on’ mentality to take their compliance operations to the next level. For example, the industry is likely to see an acceleration of cloud-based recording and surveillance adoption, as well as taking a holistic approach to the data challenges across the organization.
This will enable firms to leverage advanced technology such as machine learning to accurately detect risks to the organization in the face of sky-rocketing data volumes. Firms that achieve holistic surveillance will have little trouble proactively presenting to regulators just how effective they are at adhering to a myriad of regulations.
So will the situation bring about the regulatory easement the buy-side were looking for? Highly unlikely. But it could have unintended positive consequences. Sometimes the biggest progress is made in times of the greatest change and adversity.