Conflicts of interest are at the core of many regulatory compliance issues. But solely reacting to conflicts of interest after the fact is not enough to meet current regulatory expectations.
In remarks made at the PLI Broker/Dealer Regulation and Enforcement 2021 event in Washington, D.C on October 6, Gurbir Grewal, Director, SEC Division of Enforcement stated that the agency will “design penalties that actually deter and reduce violations, and are not seen as an acceptable cost of doing business”. He went on to say that the agency will be focusing on “proactive enforcement” to address risks before they cause any harm to investors.
Taking a predict and prevent mindset around managing conflicts of interest can provide the proactive approach that regulators are looking for—and the right technology can provide the means to get there.
Conflicts arise when an employee’s personal interests can impact their conduct in the workplace. When employees give in to the temptation to act in their own best interests to the detriment of the firm and its clients, both the individual and the organization are subject to fines, loss of business and reputational damage. Read more about examples of conflicts of interest in the financial services industry.
And regulators are paying attention. In recent months the SEC has sanctioned several registered investment advisers for failure to provide full and fair disclosures regarding conflicts of interest. At the PLI event Grewal also told firms that they should be thinking “about modeling excellence in your compliance efforts, as you do in your performance. This means that firms need to think rigorously about how their specific business models and products interact with both emerging risks and Enforcement priorities, and tailor their compliance practices and policies accordingly.”
Grewal noted that he's “talking about more than putting together a stock policy and giving a check-the-box training. This requires proactive compliance, and this type of approach has never been more important than today— a time of rapid and profound technological change.”
Join MCO and Virtus LLC for a CCO Webcast: Key Issues in Small Firm Compliance for an overview of what firms need to know right now for proactive compliance to finish 2021 strong.
Take a predict and prevent approach
With warnings that harsher penalties and stiffer enforcement actions are on the horizon, firms should be taking a predict and prevent approach to managing conflicts of interest to meet these heightened expectations.
Starling’s 2021 Compendium Culture & Conduct Risk in the Banking Sector features insight from over 30 industry practitioners, regulators and academics on trends in the supervision of culture and conduct risk, including the move from a traditional ‘detect and correct’ approach to conduct risk management towards a ‘predict and prevent’ imperative. With a predict and prevent approach, firms use analysis of leading indicators and predictive metrics to identify areas where there is a high likelihood of poor risk management outcomes.
The Starling report concludes that indicators of culture can provide a “smoke alarm” for firms, regulators and investors that helps detect and anticipate conduct risk issues. Cultural factors that can lead to conduct risk include normalization of risk taking, silencing, and a lack of listening and integrity. Learn more about Conduct, Culture and Accountability Regimes across the globe.
The report also talks about how the “normalization of deviance” can mean that employees who work in an organization may think that their culture is “normal” because that is what they are used to. First described by sociologist Dr. Diane Vaughan of Columbia University, “normalization of deviance” is the process where deviance from correct or proper behavior becomes the norm in a corporate culture.
A Staff Working paper on Organizational culture and bank risk published this year by the Bank of England found “robust evidence that poor culture leads to substantially higher risk”. Firms who are struggling to manage employee conduct and implement a culture of compliance will continue to face regulatory actions, financial loss and reputational damage.
Technology and automation help firms take a more forward-looking view
Technology can facilitate proactive compliance through a prevent and predict approach and help establish a culture of compliance. Automation provides efficient and effective monitoring and technology lets you scale up your compliance program.
In a Q&A section of the Starling report, recently Acting Comptroller of the Currency Brian P. Brooks notes “The best RegTech eliminates burden of data entry and retrieval, minimizes risk of human error, and helps identify patterns and indicators that may go undetected by the human eye”. The report goes on to say that RegTech provides the reliable risk intelligence that firms need for more timely, efficient, and effective interventions.
MyComplianceOffice provides firms with a fully integrated suite of Employee Compliance solutions to monitor, identify and remedy code of conduct and conflict of interest issues.
- Our comprehensive system helps firms take a proactive approach by allowing for preventative pre-approvals.
- Having a centralized data source allows firms to develop an understanding of conflicts of interest across the organization, in areas including personal trading, gifts and entertainment, outside business activities and authorizations, registrations and licensing.
- Looking at data in aggregate can help the compliance team identify whose behavior is outside the norm and predict who might be on the path to bad behavior to be able to mitigate the situation before harm can be caused
- Easy to use interfaces and standard processes, along with alerts and reminders for both the employee and the compliance team, help to keep compliance on track
If employees clearly know what is expected of them—and are given the technology to meet those expectations easily and efficiently—compliance becomes a part of the everyday culture and operations of the firm.
At MCO, we recognize the need to operationalize employee conflict of interest polices and embed them into everyday processes. Our affordable solutions drive efficiency and help to establish consistent and repeatable compliance.
Contact us today for a demo.