On September 10, the U.S. Financial Industry Regulatory Authority (FINRA) published Technology Based Innovations for Regulatory Compliance (“RegTech”) in the Securities Industry for comment (White Paper). Although the White Paper is directed at FINRA-regulated broker-dealers, we believe that Canadian dealers, portfolio managers and investment fund managers also may find the discussion relevant as they assess the potential benefits and risks of implementing various RegTech tools to strengthen their compliance programs.

The White Paper discusses how RegTech tools are being applied in five areas within the securities industry:

  • Surveillance and monitoring;
  • Customer identification and anti-money laundering (AML) compliance;
  • Regulatory intelligence;
  • Reporting and risk assessment; and
  •  Investor risk assessment.

FINRA noted that RegTech innovations offer potential benefits in a number of areas including:

  • Risk management: RegTech tools based on artificial intelligence (AI) and bigdata analytics can help firms create alerts that facilitate more forward-looking compliance programs, as well as helping them look at data across the firm to conduct enterprise-level reviews.
  • Automation, effectiveness and efficiency: Robotics process automation (RPA) can help firms minimize the need for humans to perform repetitive tasks, thereby speeding up processes, reducing errors and freeing up individuals to perform higher-level functions such as reviewing alerts and developing processes. One firm noted that it had adopted a tool that reduced false alerts by 80%, freeing up staff time to focus on alerts that warranted escalation. RegTech tools (such as tools that review compliance for specific rules before trade execution) also can potentially prevent non-compliant activities before they occur. Finally, some emerging tools have more intuitive, user-friendly and interactive interfaces, which can enable users without technology backgrounds to conduct more complex analyses to support compliance and supervisory functions. 
  • Opportunities for enhanced industry collaboration: Some firms are exploring how to leverage distributed ledger technology to create industry-wide utilities for sharing solutions for customer identification and AML compliance. These innovations may help reduce firms’ compliance costs while increasing firms’ ability to trace the relationship of transactions and related movement of funds across firms. FINRA, however, also cautions firms to be aware of the challenges and regulatory implications that some of these tools pose and recommends steps that firms can take to address those issues. The report focuses on three key areas of implementation risk with respect to RegTech: supervisory control systems, outsourcing to RegTech vendors, and customer data privacy.