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Pandemic pushes compliance envelope: New innovations could remain fixtures at firms

Richard Satran  Financial Journalist, Thomson Reuters Regulatory Intelligence

Richard Satran  Financial Journalist, Thomson Reuters Regulatory Intelligence

The shift to remote work caused by the COVID-19 pandemic has accelerated the adoption of technology in financial services compliance, a trend that was already underway as firms seek digital tools to meet new demands from regulators.

Monitoring remote workers, capturing more data on customer interactions via voice, video and social media, detecting fraud and money laundering, and meeting new privacy requirements over personal data are among the compliance tasks ready for new technological approaches.

After spending billions of dollars on regulatory technology in the post-Dodd Frank era, skepticism had grown among disappointed financial service firms and shareholders, according to a Bain Consulting report. “Since the pandemic took hold, many have told us they plan to increase investments in automation across the board, including those dependent on artificial intelligence and machine learning,” the report noted.

Contact tracing resembles compliance oversight

In contrast with the post Dodd-Frank regulatory wave, the pandemic has driven a change in what had been a piecemeal approach to applying technology solutions. Now, there is a trend toward creating end-to-end solutions from the individual consumer to cross-enterprise compliance models.

Technology responses to public-health needs arising from the pandemic provide such a model for financial services. The Future of Privacy Forum, a consortium of academics and industry participants, stated in a recent paper that the AI models for activities such as contact tracing and other big-data solutions from the pandemic. The lesson is that compliance must “leverage audio-visual data, text analysis, chatbots, and sensors.” Indeed, compliance requires a similar tech approach, and, thus the tools used must ensure fairness in use of data, sensitivity to privacy concerns, transparency, and confidence in the results.


“Advisor reliance on technology to manage all aspects of their practice has been growing for many years, but it has been accelerated considerably during the COVID-19 pandemic.”


Greg Carmichael, chairman, president and CEO at Fifth Third Bancorp, agreed that this technological overlap has moved the needle for the industry. “What the pandemic has done is kind of accelerated digital adoption by our customers, and in some cases, our employees, by about five years,” Carmichael said.

Technology experts say digital tools are solving some of the most daunting regulatory challenges that compliance teams face. The Europe Union’s MIFID II, for example, requires many U.S. firms to have the capability to produce for regulators recordings of all interactions leading to transactions. The Europe’s General Data Protection Rule, and similar privacy laws in other countries and in certain U.S. states, will require firms to produce any personal data on demand from customers.

In addition, banks are being pushed to elevate their anti-money laundering processes to include “event-driven” risks in every account on an ongoing basis. Some describe the task as perpetual due diligence, tailor-made for AI machine learning and “multi-source identity tracking” that can search and sort through multiple databases in real-time to generate relevant data that might signal risk.

Further, financial firms have expanded their monitoring of remote operations, testing their ability to oversee a much wider footprint than just physical office space. This has increased reliance on voice monitoring and surveillance, with machine-learning being used to cover the widening scope and becoming a critical element in how voice monitoring is used.

For investment professionals, the new rules could mean dozens of required reports daily on every potential client contact that offers, or pointedly does not offer, advice, according to some interpretation. Advisers who might once have seen voice recordings as intrusive have become more receptive to technology tools. “Advisor reliance on technology to manage all aspects of their practice has been growing for many years, but it has been accelerated considerably during the COVID-19 pandemic,” said Mike Foy, senior director of wealth and lending intelligence at J.D. Power.

Sophisticated, data-driven compliance

In a recent note to clients, Verint Financial Compliance stated that “the tightening requirements around data capture, record keeping, monitoring and regulatory reporting have paved the way for a sophisticated, compliance-driven communications recording use case,” one that “is essentially built on automation, defined by a centralized architecture, and a strong integration with the extended compliance infrastructure.”


“What the pandemic has done is kind of accelerated digital adoption by our customers, and in some cases, our employees, by about five years.”


Monitoring alone will do little, however, if the firm’s compliance team does not become involved as lead facilitators, working in concert with managers. And these surveillance tools may be increasingly crossing boundaries that were breached between home and office during the pandemic; however, the digital recordings will not replace the work of compliance and front-line managers.

Instead, these recordings will be “humming in the background,” explained Jonny Frank, a partner in the global consulting firm StoneTurn Group and a former U.S. prosecutor. The machines “can help to detect fraud and suspicious activity, but not to give the guidance that investment professionals need.”

Integrity monitoring not machine driven

The pandemic “has reinforced the need for integrity monitoring in a culture of compliance and integrity,” Frank added. “It has required not just the CEO but the managers in banks having more remote meetings, as we have seen in the pandemic, constantly reinforcing what constitutes good behavior.”

Regulators have warned financial firms to be vigilant in their oversight of remote operations. The Office of the Comptroller of the Currency noted in its Spring report on banking practices that “compliance risk is elevated due to a combination of altered operations, employees working remotely” and the heavy flow of stimulus funds.”

The report noted while machine learning has transformed oversight, it needs to be retooled, since the pandemic crisis has changed retail and corporate client behavior. This change “could drastically reduce the effectiveness of machine learning techniques, particularly those trained on past patterns of behavior. Other tools may face similar challenges,” the Comptroller report stated.

Indeed, that’s the job of people understanding people — something even the best algorithms can’t fully manage.

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