The concept of 'householding' allows a firm to consider the entire purview of a HNW household when evaluating what is suitable for the customer's situation. With this in mind, NICE Actimize, the purveyor of financial crime prevention and detection software, has upgraded its 'sales practices and suitability solution' with flexible client review models and investigative tools, powered by automation.

Many compliance programmes are proficient at monitoring individual accounts but struggle when several accounts in varying situations are aggregated together. A financial firm in this position might find itself breaking the rules by exceeding the household’s concentration threshold in a sector or by not giving the customer the correct 'breakthrough discount.' It might also fall short when trying to work out whether its sales practices are in line with the expectations of the household and not merely those of the individual. For example, mutual fund discounts on sales charges are identified on individual accounts, but are often overlooked if incorporated into a household agreement because most software is not sophisticated enough to examine data in such detail.

Compliance Matters spoke to Lee Garf, the general manager of the compliance business at NICE who meets officials from FINRA and the Securities and Exchange Commission regularly. He said that the system was useful for trading compliance: "It could be used in the broker-dealer context or in the wealth context. It investigates sales practices. Suitability is the big thing here.

Household virtues

"It introduces the new concept of householding. A number of firms will handle a number of accounts of a number of HNWs. To take an example, at a large private bank you might have an account for yourself, your partner, your child...so you might have a handful of accounts. The existing systems only look at one account at a time. We, on the other hand, can aggregate across the accounts and look at the risk (including ID risk) across the portfolio. The technology doesn't go across firms yet, although that might be in the future."

Garf said that the old problem of 'churning' was still present at private banks, explaining: "A financial advisor could be buying in one account and selling in another, just to generate fees. You do see that still. You can't detect it by looking at that account."

He also thought that the new software was good for helping banks adhere to the risk appetites of their HWN customers: "Suitability should be based on your risk tolerance. You may want only $10,000 allocated from a high-risk swap, for example. When you're in an account you might go below that threshold, but when you look at the household of accounts, it may take it above. It is usually very difficult to detect this and it's generally done manually."

Over here and over there

Garf ventured some additional observations about the increasing importance of suitability in compliance departments: "In Europe there has also been an increase in suitability regulation - through MiFID II, for example. In the US there hasn't been much, although there's one recent regulation that added suitability requirements to insurance. However, we're seeing more enforcement from the SEC and FINRA in this area in the US, with Wells Fargo and others. These decisions impact Europe.

"The other complication is that in Europe, in particular, it's a labyrinth. There are EU, national and even regional regulations, so it's difficult to aggregate risks across this complex hierarchy. This isn't a problem in the American states because I haven't seen the NYDFS and others passing suitability requirements. The state regulators are quiet on the subject. Instead, they pursue breaches of the Consumer Financial Protection Bureau's (CFPB's) suitability rules."

The Consumer Financial Protection Bureau, set up by the Dodd–Frank Act 2010, requires financiers to find out whether products are suitable for their customers and adhere to a strict code of conduct when selling to investors – with householding a clear issue in its own right.

When asked whether US regulators actually followed their 'examination priorities' that they publish every year, Garf affirmed that they did follow them quite closely.