In an advance warning for broker-dealers, FINRA’s annual Regulatory and Examinations Priorities Letter sets out its priorities for the coming 12 months – and in 2016, data quality and governance are firmly in the firing line.
As transaction volumes have increased exponentially over recent years, the amount of data being created and stored bybroker-dealers has similarly increased. This data is often in multiple formats, can be complex and unstructured in format, and held across multiple systems, leading to siloed processes and low quality, inaccurate, incomplete and sluggish reporting.
Recognizing the risks inherent with this inconsistent approach, FINRA firmly sets out its areas of focus in the letter:
- Operational breakdowns specific to changes from legacy to new compliance systems
- Technology governance and change management practices related to algorithm maintenance
- Back-office and vendor system changes
- Lifecycle development and new system implementation
- Data quality controls and reporting practices
- Verification of the accuracy of data sources relied upon to conduct monitoring and surveillance.
It’s an extensive and informed list – and clearly serious.
Data quality and governance: can’t broker-dealers just carry on what they’re doing?
FINRA’s new vigor for data integrity is just the tip of the compliance iceberg. With so much new and forthcoming regulation focusing on data aggregation, transparency and reporting it’s becoming impossible for banks and FIs to merely patch their systems with regulatory updates, or maintain a hole-ridden status quo.
Aside from the risk of rogue activity, fines are on the up and the prosecution of individuals is becoming more commonplace – FINRA itself is more than willing to use the ‘stick’ of punishment where the ‘carrot’ of a more efficient, risk-free compliance culture isn’t enough to encourage change. In 2015 alone, it levied $95.1million in fines and suspended 736 individuals from trading.
So why the reticence to make a wholesale change to better data governance?
Change is perceived as difficult – FINRA’s list alone is enough to give even the most resourceful compliance department a headache. Many broker-dealers continue to use spreadsheets and other manual processes to conduct their ongoing regulatory responsibilities, and it’s no surprise that a shift away from this comfort zone to a new control framework is viewed as disruptive. Indeed, many continue to view fines for non-compliance as ‘the cost of doing business’ instead of a wake-up call to change the way they operate.
Compliance as a business process is too often viewed as a cost center, sapping budget from more valuable revenue generating opportunity. But like the ‘fail and be fined’ approach above, this perspective is a false economy. The existing offline approach not only requires a huge amount of administrative effort that could be better spent on higher value activity, but it leaves huge scope for discrepancies to be missed, or for human error to create false information. There is also the reputation damage caused by these fines too!
Regardless, with FINRA’s renewed focus on data integrity and governance, ‘that’s the way we’ve always done it’ won’t pass muster for long.
The simple route to data integrity
Regulation around data integrity isn’t going to go away any time soon. The good news for broker-dealers is that newer, smarter and disruptive technologies are now available, that can be implemented within weeks and remove the need for wholesale process change.
The most agile, like CTC from Gresham, can process data in multiple formats, from multiple sources, automatically verifying and validating the information to remove the risk of human error. Core regulation and the associated business rules are baked-in, while additional controls can be added in days – making new regulation a simple flexible system change, instead of additional homework for the compliance department.
But aside from assuring data integrity, when compliance can be aligned with the speed of the market, it allows broker-dealers greater scope to innovate and jump on opportunity more quickly. And this is perhaps the most persuasive argument of all.
For more on FINRA’s objectives around data integrity and simple steps to ensuring data integrity without disruption, download the latest guide in Gresham’s Regulatory Compliance Series.