By David Wagner
Fines from the two of the country’s leading financial regulatory bodies are down big time. FINRA sanctions dropped from $173.8 million last year to just $64.9 million in 2018, and there were fewer fines overall. This trend was also true of the Securities and Exchange Commission, suggesting that regulators are taking a newly relaxed approach to the rules. Look behind the numbers, however, and the reality is just the opposite.
The enforcement chief and top staff members at both agencies left this year, limiting the agencies’ ability to pursue wrongdoing. The focus of enforcement is also shifting to retail crimes, which produce lower fees.
FINRA CEO Robert Cook was quick to rebut the numbers in recent remarks. “Our commitment to enforcement has in no way changed,” he stated, explaining that enforcement had actually increased in the second half of 2018. Despite what the numbers indicate, they’re clearly an anomaly and not evidence of a new approach to enforcement.
The decline in fines is attention-grabbing, but the statements from FINRA are the real takeaway: Regulators are not taking their focus off enforcement or making a conscious attempt to fine lightly. In fact, they’re likely to double down on compliance in the near future.
Regulation at the Brink of Transformation
Traditionally, regulation has been a manual process reliant on human input. That is beginning to change now that technology has become so adept at data collection and analysis. The advent of artificial intelligence vastly expands both the depth and breadth of what regulators can investigate.
The combination of AI and machine learning allows investigators to root out noncompliance with far greater speed, scale and precision. Once regulators have these tools in their arsenal it’s only logical that penalties and fines will swing upward.
Technology will not transform regulation overnight, but it won’t take ages either. Predictions show we will have a computer that matches the power of the human brain by 2020. And by 2050, we will have processing power on par with the whole of human consciousness.
These breakthroughs will transform what regulators are capable of finding—and fining. So while it might be tempting to look at the reduction in fees and write off noncompliance as a manageable cost, that would be shortsighted. Instead, firms need to make compliance management a top priority.
Staying on the Right Side of Regulators
Enforcement is evolving, and the way firms approach compliance should evolve as well. Otherwise, it will be difficult to manage the ever-rising cost of fines, penalties and damaged reputations. Follow these strategies to stay compliant no matter what tomorrow’s regulatory landscape might look like:
- Get great with data. In order to avoid noncompliance, companies need to have all their data in one place and be able to manage it carefully. Regulators will expect firms to turn over precise pieces of data upon request. Integrating data from all your communication channels onto a platform with unified search makes it easy to comply. Plus, it allows firms to effectively govern their own data and periodically review it for regulatory issues. Regulators are quickly getting great at combing through huge data sets. Firms need to get great at keeping that data in order.
- Revise supervisory procedures. Whenever regulations are updated, those changes need to be reflected in the written supervisory procedures of every affected client group. If they’re not, it’s possible to make the same mistakes multiple times and invite a massive penalty. It’s recommended to review these documents quarterly—even if regulations don’t change—just to monitor for any potential issues. When regulations do change, utilizing a supervising manager makes it much more efficient to update procedures across client groups without mistakes or oversights.
- Join a peer group. No firm in history has been perfect at compliance. It’s such a complex challenge that any single firm can be overwhelmed by the effort, especially when regulations change or expand. Joining a regional FINRA group or another association of peers helps firms work though compliance issues cooperatively. They can discuss common problems, develop shared solutions, and devise a set of universal best practices. The collective wisdom of the crowd is a huge asset for the many firms that struggle to manage compliance individually.
- Partner with a consultant. Firms need to be honest about the limits of their own capabilities. They may excel at wealth management but be overmatched when it comes to compliance. When this is the case, a consultant is a great resource. They offer the expertise that firms lack in-house. Plus, they understand the latest updates and granular details of applicable regulations.
- Embrace new tech. The same tools that regulators are using to enforce compliance can be used to preserve it. Data-driven tools make it easy to manage information on a large scale. And when the vendor understands financial regulations, these tools also help with compliance management. They automate the most time- and labor-intensive processes while eliminating costly mistakes. As enforcement becomes more high-tech, compliance should keep pace.
Compliance and complacency are not a good mix. Instead of watching what regulators did last year, prepare for where they’re headed next year and beyond.