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Tuesday 25 June 2019


FINRA consults on rise of RegTech

Written by Peter Walker

The Financial Industry Regulatory Authority (FINRA) has released a white paper outlining the potential opportunities and implications that developments within regulatory technology (RegTech) may have for broker-dealers.

The US regulator of brokerage firms conducted an in-depth review on the emergence of RegTech tools within the securities industry, highlighting five areas where industry participants have most prominently leveraged RegTech innovations: surveillance and monitoring, customer identification and anti-money laundering compliance, regulatory intelligence, risk management and investor risk assessment.

The paper identifies potential benefits that RegTech innovations may offer, including better risk management and improved efficiency through automation, while also assessing potential issues, including supervisory control systems, outsourcing structure and vendor management, customer data privacy and security risks.

The paper noted that some of the RegTech applications may use highly complex and sophisticated AI algorithms, which are designed to learn and evolve based on data patterns. “Compliance and business professionals may not have the technical skills to understand in detail how these algorithms function, so auditing the methodology or logic used by an AI-algorithm to generate a specific output or decision can be challenging.”

It therefore suggested establishing a cross-functional technology governance structure, implementing a process to identify and address errors or malfunctions, and conducting proper training of personnel.

In terms of outsourcing compliance and reporting functions, the paper reminded firms that giving control of an activity or function to a third-party does not relieve them of their ultimate responsibility for compliance.

As for security concerns, the paper stated that RegTech tools may involve linking to and pulling in data from multiple internal and external sources on an ongoing basis, which could potentially lead to new sources of security risks. “Similarly, working with multiple new vendors and providing them with access to a firm’s systems could also potentially create new sources of risk.”

“Regulatory technology is playing an ever-increasing role for broker dealers and regulators must ensure they are keeping pace with industry innovations,” said Haimera Workie, senior director in FINRA’s Office of Emerging Regulatory Issues.

FINRA has requested comments and feedback from interested parties by 30 November, 2018.

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