The 2024 Surveillance Benchmarking Survey & Report from 1LoD, co-sponsored by MCO, contains insights from thousands of conversations with surveillance leaders across the financial services industry.
As the report points out, compliance surveillance is a never-ending story. Surveillance for market abuse and employee misconduct will never be done. It’s an iterative and ongoing process.
The Evolving Landscape of Surveillance: Regulators’ Influence and Technological Shifts
The 2024 Surveillance Benchmarking Survey & Report from 1LoD and co-sponsored by MCO features in-depth analysis from 30+ leading global banks on the state of trade and communications surveillance in financial services today.
The report uncovered some interesting statistics about banks’ budgets and plans to purchase new technology:
- One-third of banks will be increasing their surveillance spend in the next 12 months
- 83% of banks are going to purchase new eComms technology in the next three years
- 73% of banks need to upgrade their capabilities or start from scratch in cross-product market abuse
Three big-picture takeaways are highlighted in the report.
Regulatory influence on the surveillance function is more pervasive than ever
The report found that banks under the threat of enforcement or remediation will focus in detail on the area of failure and spend whatever it takes to comply. For example, participants noted that last year’s WhatsApp fines drove increased spending on messaging surveillance tools. When remediation is complete, spend and focus will tail off. That approach opens the door to future compliance lapses and challenges as regulations and communications technologies evolve beyond current requirements.
MCO Director of Solution Sales Keith Pyke reminds firms to keep an eye on the big picture of compliance. According to Pyke, “messaging surveillance and retention is just one part of an effective compliance program. Better compliance moves beyond point solutions that surveil communication activities in silos and towards an integrated platform approach that also includes other areas of potential risk including employee trading activities, MNPI and automated watch list monitoring.”
An integrated approach delivers more than just a more comprehensive view of compliance. Using the same compliance framework including data, workflows, questionnaires and attestations provides significant operational efficiencies and increased ease of use for both employees and the compliance team.
With the current levels of regulatory attention, mid-tier banks can no longer get away with minimalist surveillance
The largest financial institutions have borne the brunt of most of the regulatory attention so far. That doesn’t mean that mid-size and smaller firms should think that they will continue to fly under the radar. Regulators are beginning to turn their attention to smaller institutions.
The SEC recently charged a small registered investment adviser with widespread and longstanding failures to maintain and preserve electronic communications— with a $6.5 million penalty. The firm was also charged with failing to enforce its code of ethics.
Get the message. Preserve eComms or Face Steep Regulatory Consequences
Recordkeeping failures have been a consistent enforcement theme for the last few years. According to MCO VP of Sales Jason Patel, regulators expect firms to have archiving systems with capabilities that extend beyond solely storing messages. Ideally, an archiving system should be able to store communications across channels in a single repository and also provide reporting, intuitive searching, collection management for e-discovery and export functionality to provide an audit trail for regulators and senior management.
Patel also notes that “SEC Rule 17a-4 and FINRA Rule 3110 also state that the communications must be supervised. And many firms can find that element of supervision hard to put into practice effectively.” Communication surveillance technology provides firms with a best-practices framework that makes supervision attainable—and defensible.
At the end of the day, all financial services institutions can have a negative impact on market integrity and significant influence in particular assets or markets if misconduct runs rampant across their firm. Regulators expect that firms will have sufficient surveillance tools and practices in place to identify and mitigate risk proportionately.
Technology is driving a profound transformation of the surveillance function
The inability to effectively eliminate false positives has been a significant concern that firms have faced with outdated systems. The report notes that compliance surveillance professionals have traditionally been pessimistic regarding resources to replace legacy technology to improve the efficient identification of areas of true concern.
The survey shows that a majority of banks think that AI capabilities will change the calculus and that funds will become available to invest in new surveillance technology. The report also predicts that new technology will also force financial institutions to improve outdated data practices as these practices become unsustainable and obstacles to efficiency and effectiveness.
If technology is not implemented carefully, it can cause new problems even as existing ones are fixed. The report points out that technology change, both internal and external, can create coverage gaps as new data feeds are missed or venues reconfigure existing feeds without informing banks. To reduce that risk, understanding the implementation process and choosing a vendor with significant industry experience should be critical to the compliance technology vendor selection process. Read more about optimizing the software selection process for the best outcome.
Take an integrated approach to compliance surveillance
The regulatory landscape is also evolving. Regulators will continue to introduce new rules but will also continue to pay close attention to perennial concerns like trade and communications surveillance and record keeping.
In this era of rapid technological advancements and heightened regulatory scrutiny, surveillance practices have become more critical than ever for financial institutions. As the report points out, firms require reassurance that they are covered from a regulatory standpoint.
MCO’s innovative solutions for managing trade and communications surveillance compliance provide that reassurance by addressing many of the challenges outlined in the report and faced by the industry, including:
- Communications monitoring to reduce false positives and flag the areas of highest risk covering email, text, WhatsApp, IceChat, Teams, Bloomberg and more
- Consolidated communications archiving and audit capabilities
- Insider lists and MNPI
Ready to learn more about how MCO can help your firm improve communications and trade surveillance as part of an integrated compliance technology solution? Contact us for a demo today!
