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Five Ways to Improve Compliance—And Not Feel Overwhelmed

Abiding by expanded regulations will take more time, input, effort and oversight—said differently, maintaining the status quo will require more investment.

By David Wagner

Compliance is a constant struggle in the financial services sector. As soon as one audit is done another arises, locking brokers into an endless effort with hefty consequences for failure. And that effort evolves and expands with new communication tools.

Every year, FINRA evaluates about 10 issues to consider for updated regulation. This year, that list includes both anti-money-laundering initiatives and the issue of suitability. Depending on how new regulations shake out, brokers and financial advisors could face burdensome requirements for data management.

Detecting money laundering requires massive amounts of data, which advisors will have to capture and store. Detection also requires access to any and all relevant business communications, which creates another archiving obligation. In order to prove to regulators that nothing untoward is occurring, financial professionals already provide a lot of verification.

Proving that investments are suitable to a client based on fiduciary principles creates a similar burden. Brokers use all manner of electronic communication to provide clients with recommendations. Saving all these communications demonstrates to regulators that every recommendation is, in fact, suitable. As baby boomers become the “Silver Tsunami,” the issue of suitable, late-life investments for seniors will likely be a priority for regulators and investors alike.

 Regulators Aren’t the Only Risk

There is a whole raft of regulators who mandate and monitor that financial service providers are archiving their information properly—SEC, FINRA, DOL and state governments. Each has its own mechanisms to apply pressure, but the most common is to levy fines.

Some companies consider regulatory fines to be the cost of doing business. That attitude may change as the cost rises. In 2016, FINRA issued $173.8 million in fines to broker/dealers, which was an 85 percent increase over the previous year. Any cost rising that fast will create financial strain.

There is also the remote but still real risk of having a trading license revoked. That would happen for only an especially egregious offense, but it would effectively put a trader out of business. And even though regulators tend to threaten this action rather than actually revoke licenses, it still underscores the danger of not getting regulatory requirements right.

Finally, there is the client cost to consider. Clients are understandably sensitive when their own data is involved. Learning that their trusted broker/dealer failed to archive important communications and comply with security standards raises troubling questions about security overall, not to mention ethics. It’s not a surprise that clients tend to flee from brokerages that are on the wrong side of regulators. 

Consistent Compliance with Less Time and Effort

Brokers find themselves in a tricky position. Compliance is a requirement, but it’s also a workload. Abiding by expanded regulations will take more time, input, effort and oversight, said differently, maintaining the status quo will require more investment. The key is to look for evolving approaches to compliance that will satisfy regulators without overwhelming brokers and their staff. Here are some suggestions: 

  • Revise Written Supervisory Procedures Regularly. Because WSPs essentially dictate every aspect of the broker-client relationship, they must incorporate any new rules related to electronic communications. Reviewing these documents and updating them as needed is recommended semiannually, but a quarterly review is ideal. Relying on a supervision interface ensures that updates are applied across client groups and to all relevant WSPs. Without this asset, it may be prohibitive or impossible to make revisions as often as required. 
  • Work with a Group of Peers. Every broker can struggle with compliance, and perfection is unattainable. This is especially true when new and unfamiliar regulations hit the books. Partnering with a regional FINRA group or another association of peers allows participants to discuss revisions and share issues, ideas and approaches. That way, an individual broker’s approach evolves in parallel with the best practices of the industry.
  • Bring in a Consultant. Financial experts are not experts in financial regulations. Bringing in a consultant ensures that brokers don’t suffer because of a lack of in-house resources or planning that takes place in a vacuum. Consultants specialize in regulatory minutiae, work with multiple brokerages and offer realistic solutions. Partnering with counsel is often essential and always an asset. 
  • Implement New Tools. Tech vendors have designed a number of tools specifically to meet the information-collection mandates placed on the financial services sector. If the old approach to compliance was already inconsistent or ineffective, it won’t accommodate new requirements. Finding a vendor who understands these pain points and can engineer solutions to accommodate them is essential.
  • Respond to the Regulators. Take advantage of the fact that regulators are eager to improve stability and security, not to act punitively. If regulators offer a warning before a fine, it can empower brokers to improve their approaches to compliance.

It’s uncertain when new regulations will hit the books or what forms they will take. What is certain, however, is that new rules are coming. European regulators recently updated requirements to include the archiving of voice. Similarly, the U.S. will make updates to adjust to the way brokers are communicating.

Regardless of the regulations that will follow, information preservation is clearly a global financial priority. It’s up to brokers and advisors on how they will approach compliance and whether they will take advantage of new tools and best practices to better serve their clients and their business. 

David Wagner is the president and CEO of Zix. He has more than 25 years of experience in the IT security industry.

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