The need to ensure that investments are suitable for clients continues to be as important as ever, as perhaps the recently closed property funds and the Neil Woodford saga in the UK have shown. This article looks at how wealth managers stay on their toes and on the right side of the regulators.

After the 2008 financial crisis regulators clamped down on what was seen as an overly aggressive sales culture, perhaps feeling sheepish after certain financial products blew up and claims of mis-selling mushroomed. The word “suitability” was bandied about. The UK regulator sent “Dear CEO” letters to wealth executives reminding them to tighten up their act. The arrival in 2013 (was it really that long ago?) of the UK’s Retail Distribution Review series of reforms to how financial advice is provided was designed to tighten the screws. And the European Union’s MiFID II reform package, taking effect two years ago, was also designed to make financial advice and dealing more transparent and accountable. A lot of work is being done by regulators to explore how the insights of behavioural finance can give advisors a better handle on what is most “suitable” for clients. (We have written about this earlier in the year.) But problems remain - arguably the Neil Woodford fund saga is a reminder that what might appear "suitable" for some investors, is not. 

To explore some of these issues further is Lee Garf, general manager at NICE Communications and Financial Markets Compliance, NICE Actimize. The editors of this news service are pleased to share these views with readers and invite responses. The usual editorial disclaimers apply to comments from outside contributors. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Across Europe and Asia, the term “suitability” seems to be as popular as the tongue-in-cheek reference “Brexit”. With the Financial Conduct Authority in the UK leading the charge, regulators are consistently re-evaluating their expectations surrounding suitability rules, and because of this continual change, there has been uncertainty in the marketplace.

From 2017 to 2018, the FCA alone assessed 1,142 cases in 656 firms and said it was “disappointed” to find the advice sector provided “unacceptable disclosure” in 41.7 per cent and “uncertain disclosure” in 5.4 per cent of the reviewed cases. Although feedback was provided to the evaluated firms, the UK regulator is expecting greater progress from firms as they react to the reviews. According to its more recent annual report, the FCA plans to reassess the suitability of advice in 2019, with an emphasis on customer disclosure.

It is not surprising, then, that suitability remains a serious concern for wealth managers. In a recent research study, benchmarking firm Compeer found that wealth managers still view suitability compliance as a major issue. Forty-four per cent of respondents reported increased compliance costs as a direct result of carrying out ongoing suitability testing. Despite this, one in four firms still handle suitability manually, while 76 per cent use a combination of technology and manpower. On the surface, this dynamic is difficult to explain. Firms are spending more money on compliance and using technology to augment compliance personnel – but they’re still not meeting the expectations of regulators.

How should firms bridge the gap? The answer may lie in changing how wealth managers approach supervision entirely. Sometimes it is not simply what you do, but how you do it.

Wealth managers around the globe communicate with their clients on a very personal level. The information gleaned from the emails, chats and phone calls can be essential to developing a proper investor profile and responding to the needs of individual clients accordingly. But as telling as these communications are, they are rarely analysed to the depth required to develop accurate client risk profiles, to determine if information was properly disclosed, and whether investors were adequately educated on all available options. The surveillance technology many firms have come to rely on simply isn’t up to the task.
 

In fact, according to PwC’s 2019 Surveillance Survey on Market Abuse, most firms are not satisfied with their legacy eComms and voice surveillance solutions. A key component of this dissatisfaction is related to the extremely high number of false positive alerts that these legacy systems generate, which in turn eat up valuable compliance time and resources. The PwC Survey further concludes that in Europe, fewer than 0.01 per cent of alerts lead to reporting suspicious activities to the regulator and it is worse globally with only 1 out of every 29,000 alerts being valid.

These high false positive rates are a direct result of legacy solutions which are lexicon based, inaccurate, and rely on manual processes, such as random sampling of advisor communications. Inaccurate analytics also make it difficult to detect context (which can be complicated even further when multiple languages, accents and specific financial terms come into play). Random sampling is equally problematic. Considering that firms only review between two and five per cent of communications, it’s a given that risky communications will fall through the cracks. In the world of wealth management, this can spell disaster.

By far one of the biggest challenges for compliance analysts is piecing suitability alerts and related communications together. Compliance analysts typically work in different siloed systems. Without an automated way to analyse and bring all of the data together, analysts seldom get clear visibility into the actions and intentions of supervised employees.

For example, correlating communication data with alerts might reveal serious compliance issues, such as conflicts of interest, potential conduct and suitability risks, and lack of proper disclosure. Correlating chat conversations and emails with a related commission or a hybrid switching alert could reveal that a communication was above board, or to the contrary, a sign of something sinister.

If your firm is struggling with these surveillance and suitability challenges, there is a better way. When integrated appropriately into operations, advances in technology can reduce false positives and compliance risk by:

-- Applying AI for more accurate detection;
-- Surveilling 100 per cent of communications; and,
-- Automatically marrying suitability alerts to relevant advisor communications.

AI for more accurate detection
Whereas primitive lexicon searches only provide basic levels of consumer protection, today’s advanced detection capabilities harness the power of AI (Artificial Intelligence) and Natural Language Understanding (NLU) to analyse multi-channel communications and unearth truly suspicious communications, while reducing false positives and compliance risk.

Surveilling all communications
Modern surveillance technology also allows firms to review 100 per cent of communications, across all communication channels that advisors use - including email, instant messaging, voice and more.

Communications can be also be assembled in the proper order so it’s possible to know who communicated what to whom and when. This gives firms complete confidence that advisors complied with regulations around reverse solicitation and didn’t overstep local laws.

Marrying suitability alerts with advisor communications
Beyond surveilling communications to proactively address suitability concerns, wealth management firms also need to keep an eye out for market abuse and intent to commit market abuse, in order to comply with regulations like MiFID II. Being able to holistically combine and leverage data and alerts is the next frontier in this area. Holistic surveillance correlates trade data with related voice and communications data, for deep insight and analysis. With a holistic approach, compliance analysts can quickly reconstruct all pre-trade, trade and post-trade activity related to a specific transaction.

The bottom line to all these issues is simple. When firms are only able to look at individual types of data in isolation, it’s difficult to assess and understand the true sources of risk in the organisation. So, what does the future hold for wealth management firms as far as suitability and surveillance? The answers won’t be found by applying more manpower to the problem, but rather by applying the right technology to truly reduce risk and improve operations. The regulators will undoubtedly look favourably on any organisation which applies this approach to their suitability oversight and supervision practices.