RISK MANAGEMENT AND RISE OF REGTECH Here are the things that you need to know
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We’ve witnessed, via some very high-profile misconduct cases, the real challenges some financial services firms are facing in supplying information to support investigations. A case in point is the recently completed Australian Banking Royal Commission (RC). Reporting from the RC included some rather startling revelations. And, the implications of some of the findings are just as relevant to global financial services firms, as to those named in the RC’s reports.
The RC initially requested from the 60+ Australian financial services firms 10 years’ worth of misconduct data, alongside action plans and the corresponding remediation programs. The RC concluded that if these firms were unable to provide the requested information, how could the firms’ senior management or indeed, their boards, be confident that the risk reporting presented to them was complete and presenting a holistic view of the extent of compliance failures?
Data retention requirements permitting, I suspect that many global financial institutions would also struggle to easily, quickly, and comprehensively compile this type of data, and certainly covering a 10year time period. But of broader concern, anyone serving on a Board or ExCo should feel confident that the risk reporting presented to them is comprehensive and complete. And, if the Board or ExCo consider that they aren’t getting the complete picture, their role is to challenge until they are satisfied they are able to effectively discharge their oversight duty.
As those of us who have been actively involved in supporting investigations will know, they can be highly labor-intensive – drawing resources from the first and second line, and often working in partnership with independent and specialist investigative teams. The amount of data collected, collated, and then analyzed (in my experience, sometimes via the ubiquitous Excel spreadsheet or three) can be overwhelming.
With regulatory reforms driving an increasing breadth and variety of controls to be implemented and data to be collected, analyzed, and reported upon, the situation will become still more complicated. There is no doubt that RegTech solutions are providing very innovative ways to address growing and increasingly detailed regulatory requirements. These range from targeted solutions to address specific MiFID II Best Execution requirements, to control tools such as electronic communications surveillance that detect and capture market abuse at the very earliest opportunity.
Firms are continuing to evolve how they measure and manage conduct risk. This may include revising metrics in light of changes to the strategic business model, reviewing the effectiveness of escalation channels and governance in the context of the Senior Managers Regime, alongside reviewing their risk appetite statements and thresholds.
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What is key is for firms to also have an architectural vision showing how the various RegTech solutions fit together and into the broader infrastructure, alongside how the data they hold feeds into the overall risk and control framework. With so many conduct risk data points – complaints, best execution, and internal breaches to name but a few – this is critical. Without this vision, firms run the risk – as highlighted by the Australian RC – of disjointed reporting. And, at the very worst, the information presented to the board and ExCos will be fragmented, and incomplete, presenting an inaccurate picture of the extent of conduct risk issues within the firm.
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