In a new report, FINRA examined the emergence and adoption of technology-based innovations for regulatory compliance ("RegTech") by broker-dealers. FINRA highlighted five areas where RegTech tools are being applied: (i) surveillance and monitoring, (ii) customer identification and AML compliance, (iii) regulatory intelligence, (iv) reporting and risk management, and (v) investor risk assessment.
FINRA reported that market participants are investing in RegTech tools that utilize cloud computing, big data analytics and machine learning to improve compliance efforts. FINRA stated that RegTech tools "allow a greater volume and variety of information to be readily reviewed," and that new technology is being leveraged to automate processes involved in (i) risk-data aggregation, (ii) risk metrics creation and monitoring, and (iii) regulatory reporting. According to the report, RegTech tools can provide firms with better risk management, fewer false alerts and more opportunities for enhanced industry collaboration.
FINRA cautioned that broker-dealers should consider several supervisory and governance areas when adopting RegTech tools, including: (i) establishing a cross-functional technology governance structure, (ii) maintaining a simplified summary of RegTech tools broker-dealers deploy, particularly describing algorithms to ensure that non-technical staff understand the intended functions, (iii) developing a data quality program, (iv) creating a process to identify malfunctions and (v) training of personnel.
FINRA also noted several regulatory and implementation issues about which broker-dealers should be cautious when using RegTech services:
- security risks;
- outsourcing structure and vendor management;
- customer data privacy; and
- supervisory control systems.
Comments on the report are due by November 30, 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.