With the New Year comes the global regulators’ announcements of their supervisory priorities and focus areas for the year ahead. Both the U.S. Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) and the UK’s Financial Conduct Authority (“FCA”) have issued press releases regarding their views on technology and the role it plays in regulatory oversight.
SEC announces FinTech and innovation as a 2020 examination focus area and highlights continued investment in technology
On January 7, 2020, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its examination priorities for 2020. One of the new focus areas for 2020 is financial technology (FinTech) and innovation, as specifically relates to systematic trading systems and the use of alternative data.
Financial technology (FinTech) and innovation, including digital assets and electronic investment advice
As FinTech continues to develop rapidly and more types of alternative data come into play, OCIE remains focused on staying on top of new and evolving technologies to assess the effectiveness of related compliance and controls related to firms’ usage of alternative data and technologies.
There has been significant growth in this market, which means increased risk. OCIE will continue to monitor the offer and sale, trading, and management of digital assets, and for firms actively engaged in the digital asset market, examinations will focus on, among other things, investment suitability, portfolio management, trading, safety of client funds and assets, pricing, compliance programs and internal controls, and supervision of employee outside business activities.
Electronic Investment Advice or Robo-Advisors
Areas of focus will include, among others, SEC registration eligibility, cybersecurity policies and procedures, marketing practices, adherence to fiduciary duty, including adequacy of disclosures, and effectiveness of compliance programs.
Continuing investment in technology and data analytics
The report also highlighted OCIE’s continuing investment in technology and data analytics, which continue to mature and help drive many of its risk identification efforts, initiatives, and examination processes.
FCA and Bank of England announce plans for data reforms across the UK financial sector
On January 7, 2020, the FCA and Bank of England issued a press release announcing their plans to develop their data and analytics capabilities.
The FCA has updated its Data Strategy, first published in 2013, to include its “transformation plan to become a highly data-driven regulator.” Specifically, the FCA will increase its “focus on the use of advanced analytics and automation techniques to deepen its understanding of how markets function and allow the FCA to efficiently predict, monitor and respond to firm and market issues.” This includes investments in new technology, the increased use of external data, and investing in the skills and knowledge of its staff.
The Bank of England has published a Discussion Paper (DP), Transforming data collection from the UK financial sector, which, according to the press release, “sets out the issues facing the current data collection system and identifies and explores a series of potential solutions, to prompt feedback from and further discussion with industry.”
In the press release, Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said: “Advances in technology are changing the nature of the firms and markets we regulate. Our Data Strategy provides a clear path for us to ensure we have the necessary skills and processes in place to remain at the forefront of this change. In keeping with our Mission, a data-driven approach to regulation allows us to anticipate harms before they crystallise, better understand the effect on consumers of changing business models and to regulate an increasing number of firms efficiently and effectively.”
In addition, the FCA, the Bank of England, and seven regulated firms have jointly published a Viability Assessment report on the latest Digital Regulatory Reporting (DRR) pilot. The FCA and Bank of England established the DRR project in 2018 as a means of potentially allowing firms to automatically provide data requested by the regulators, thereby improving the data collection process for all involved. Following this report, the Bank of England and FCA have committed to continue to work together to:
- explore joint work on common data standards;
- commission a joint review of the legal implications of writing reporting instructions as code;
- commission a joint independent review of some of technical solutions explored as part of the DRR pilot; and
- collaborate closely while engaging with industry and planning future phases.
Advances in technology have given rise to an increasing number of investment advisers engaging in “systematic” or “algorithmic” trading strategies. Via a collection of computer programs, these firms are capable of ingesting and processing large amounts of quantitative data in a very short period of time. In addition to the concerns regarding the data, these firms also frequently send hundreds, if not thousands, of trades to the market per day. The SEC staff are exploring the controls in place to ensure that there is no potential for market abuse in the execution process, as well as identifying procedures surrounding the allocation of trades and trading strategies to client accounts, among others.
Along with the increase in the number of quantitative advisers, there is also an increasing demand for quantitative data. The result is a rapidly growing number of firms, from start-ups to established firms, who are sourcing, structuring, and then selling data obtained through a variety of collection practices. OCIE is aiming to ensure that investment advisers engaged in the purchase and use of this data understand from where the data is being sourced and whether it is appropriate, or even legal, to use in their research process. The SEC staff will be asking whether there is due diligence being done on the source, including whether they have the right to sell the data, and what collection practices were involved. They are also focusing on the data itself and how it is being used in the investment decision-making process. Of particular concern to the SEC are controls surrounding the potential receipt and use of material non-public information (“MNPI”), or non-public personal information.
The FCA’s recent appointment of a Director of Innovation, their position as chair of the Global Financial Innovation Network (“GFIN”), and this most recent announcement detailing their updated Data Strategy make clear they have embraced technology and innovation to keep pace with technological change in the markets it regulates.
ACA advises firms to review their compliance programs considering the regulators’ priorities and focus areas and continuing investment in technology. The rapid technological changes occurring within the capital markets have prompted global regulators to invest in their own technological capabilities as well as in the experience and knowledge of their staffs in order to understand the technologies available, to enable their supervisory responsibilities, and to create more focused and proactive monitoring.
How We Help
We help financial services firms efficiently and effectively manage their compliance programs through a holistic approach that combines the analytical expertise of our experienced compliance professionals with the smart efficiency of our regulatory technology solutions and managed service offerings.
Our regulatory technology platform ComplianceAlpha® helps global financial services firms of all sizes to strengthen and streamline risk and compliance management across the enterprise from a single platform. Developed by the industry’s largest team of former regulators, financial technologists, and cybersecurity professionals, ComplianceAlpha helps firms automate manual tasks, identify risk through enhanced surveillance capabilities, derive deeper insights through connected data, simplify the submission of requests and disclosures for employees, and free up valuable time for more strategic, higher-value tasks.
Attend our Upcoming Webcast
Join us Wednesday, January 22 at 11am ET for a live webcast discussion about the SEC’s 2020 examination priorities.
Miss Our RegTech 2020 Webcast?
In our recent webcast, Your RegTech Roadmap for 2020 and Beyond: The Outlook for Risk and Compliance Technology, ACA's Raj Bakhru, Carlo di Florio, and Dan Campbell outline trends in the RegTech space and discuss the types of technology that can be utilized to support your compliance program, including machine learning, natural language processing, and artificial intelligence. Also discussed are best practices for evaluating and implementing such solutions as part of an overall governance, risk, and compliance program.
For More Information
To learn more about our Market Abuse Regulation compliance solutions in Europe, please contact your ACA consultant or Sam Reid at +44 (0)20 7042 0560.