As firms implement FinTech and RegTech, they cannot simply set it and forget it. Compliance, operations, and IT personnel must work together in real time to ensure that systems reflect current regulatory requirements. Technology is a great tool, but it is not the complete answer to regulatory compliance.
Most larger firms rely on fintech for a variety of heavy-lifting tasks including collecting data for the regulators. Management must integrate the compliance and regulatory professionals with the IT folks to ensure that the systems match the legal requirements. Compli-pros must learn to “speak tech” to properly advise their employers and clients.
An FBI sting operation ensnared an unlawful non-U.S. based securities dealer that offered securities-based swaps without registering. The Austrian-based defendant operated an internet-based platform that offered contracts for difference, which operated as securities-based swaps based on publicly-traded U.S. equity and indexes. An undercover FBI agent opened an account with nothing more than a username and a password and traded CFDs with bitcoin. The platform served as the counterparty and collected the bid-ask spreads. The SEC charges the platform with failing to register the securities offering and the platform as a broker dealer. The SEC also asserts that the CFDs were required to be traded on a registered securities exchange.
OUR TAKE: We love innovation and technology. However, when you apply new technologies to a highly regulated industry, you must follow the same rules as everybody else. Trading in securities with U.S. persons implicates the whole panoply of U.S. securities regulation including the regulation of the offering, the parties, and the venue. Also, never assume that law enforcement or the regulators won’t find you. Your competitors and clients have an interest in helping the investigators find those who are cutting regulatory corners.
OUR TAKE: We love compliance regtech as a tool to leverage compli-pros’ efforts to uncover wrongdoing. However, over-reliance on technology without professional judgment and intervention will lead to a false sense of compliance security. An automatic hammer will not build a house without the architects and the builders.
A KPMG study reports that the overwhelming majority (94%) of hedge fund managers recognize the importance of investing in technology to compete and that compliance is a top reason (90%) to invest in technology. The report explains: “Given that — in 2013 — we estimated that compliance was costing the industry upwards of US$3 billion per year (and that number has likely risen much higher since), it is not surprising that compliance ranked as a top objective among our respondents.” The report also explains the importance of technology in the back office where improved data management allows firms “to meet the increased regulatory and investor reporting demands being placed on them.”
OUR TAKE: Technology that organizes and presents data has become a critical element to meet ever-increasing regulatory requirements especially in areas such as personal trading, email review, and investor reporting. Technology alone, however, is not a regulatory silver bullet. Firms must still retain top compliance talent who can assess, interpret, and react to the data and then advise senior management on how to proceed.