When it comes to compliance, financial institutions are constantly navigating a landscape that is not only highly complex, but also in a state of perpetual flux. Firms must ensure that they are meeting the current standards set by regulators. Furthermore, they must also stay ahead of the curve in a world where regulations are continuously evolving. It’s about keeping up with the rapid advancement of technology, particularly in areas like artificial intelligence. It reshapes both the methods of regulatory enforcement and the strategies employed by those who seek to circumvent the rules.
Accordingly, the importance of technology and data in compliance strategies is ever increasing. Traditional approaches, such as manual data entry and analysis, are increasingly inadequate in meeting the demands of modern regulations. Just look at the frequency and granularity of data reporting that is needed for the EMIR Refit regulations as a practical example.
However, as financial firms have recognised this shift and turned to technology as the solution, the transition has brought new problems of its own. Namely, the fragmentation of data across disparate, siloed systems. So, how do firms solve this issue?
The data fragmentation problem in compliance
The issue of data fragmentation has become a common occurrence in compliance. Firms are often deploying multiple technology solutions to manage their regulatory obligations. Across areas such as trade surveillance, eComms surveillance, best execution and transaction reporting. As a result, they often find themselves grappling with data silos caused by using multiple, disconnected systems.
While these tools are often very good at specific tasks, a lack of data integration between systems will harm a firm’s overarching compliance efforts. These platforms, if sourced from different vendors, may not be able to share data between one another. This ultimately undermines their effectiveness, negating the operational efficiency technology is supposed to add.
The use of multiple systems by firms can happen for a variety of reasons. For example, legacy technology that has been in place for a number of years, the need to comply with different regulations as the business has scaled and changes in regulatory strategy. Moreover, you also need to consider that reporting formats can differ between regions, as can protocols for monitoring market abuse. When you combine all of these variables, it means only one thing – identifying non-compliant activity is trickier for firms to achieve, as is demonstrating compliance to regulators.
This is a major problem as, perhaps more than ever before, different areas of compliance overlap. For example, being able to monitor suspicious messages shared through digital communications channels could help identify instances of market abuse. Or predict when it might take place. This relies on a firm being able to map its trade data over eComms surveillance data to create a complete picture of the activity. Without being able to do this, firms would have to spend huge amounts of time and resources manually cross-referencing data from separate systems. In turn this increases the risk of human error and the danger of breaching regulations.
Why a holistic system supports compliance
Rather than having to implement complex and costly integrations between in-house and third party apps, a holistic compliance platform can provide the seamless flow of data between various sources via straight-through processing. This creates a real-time overview of compliance processes and streamlines workflows, reducing human errors and enhancing efficiency.
With such technology in place, firms have a central digital hub from which to manage their holistic regulatory strategy. If chosen wisely, additional modules can be easily added and integrated to meet new regulatory requirements as they emerge. This allows firms to scale more effectively.
This ‘single source of truth’ also enables compliance professionals to have a broader understanding of trading activity taking place across their organisation. It also facilitates improved sharing of information between different departments, trading desks and regional offices. This ‘joined up’ approach is likely to become even more important. As the financial landscape becomes increasingly interconnected this will be incredibly challenging to achieve without a centralised digital platform.
New regulations such as EMIR Refit require significant extra reporting requirements. The sheer amount of data and the speed with which it needs to be processed means such automation and integration tools are crucial. Moreover, in such a digitally diverse landscape, a holistic system allows companies to assess the numerous data points needed to be compliant without any regulatory gaps.
A future non-negotiable
While many firms are currently grappling with multiple compliance systems and data silos, employing a centralised system will become a non-negotiable in the future of compliance. Not only are regulations constantly changing, but trading strategies are evolving even quicker. This means that instances of market abuse, driven by trends like growing interest in digital assets and AI-powered trading, are only likely to increase. If firms are hindered by disparate compliance systems, they leave themselves open to significant regulatory risk.
The underlying challenge for companies is to find ways to maintain compliance and keep on top of changing regulations while also ensuring these efforts do not place an unnecessary strain on resources. In the face of these challenges, a holistic compliance system offers the simple solution to striking this balance – it enhances the efficiency, accuracy, adaptability and overall effectiveness of regulatory processes. Crucially, it is clear that regulators have growing expectations of firms to take a proactive approach to this challenge.
A centralised regulatory system also sets firms up to integrate more advanced tools like AI. There are already highly sophisticated compliance tools that have integrated features like natural language processing to ‘translate’ messages and link suspicious communication to abusive trading. The more comprehensive and diverse the data, the better these models work at analysing trends and spotting abuse.
A holistic solution to a complex compliance challenge
While a firm’s intention may be to drive efficiency, the adoption of compliance technology without a coherent strategy can in fact create more issues. If compliance systems can’t communicate effectively with each other, errors creep into datasets and gaps in regulatory processes appear. This means firms risk breaching regulations and suffering greater market abuse, with both outcomes bringing financial and reputational damage.
The key lies in integrating these disparate data sources into a single, cohesive, holistic system. By consolidating information, businesses can achieve a comprehensive view of their regulatory compliance. Therefore, reducing the need for cumbersome IT infrastructure and ensuring they remain agile in the face of ongoing regulatory changes. Ultimately, a holistic system simplifies a regulatory and trading landscape that is increasingly varied and complex.