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Renewed Need for Proactive Compliance

Infosys highlights internal and external compliance controls

Do you have a best practice-based compliance system in place? Are regulators on their way, or worse, standing outside your door? These are questions all wealth management players, even ones who are not regulated by state and federal laws, are asking in the wake of recent national headlines in which some of the largest, most well known brokerages were paid an unfriendly, and costly, visit by the government.

Once the regulators show up, it's going to hurt your company in ways that exceed the fine; if any part of your compliance system is not in place it will be an expensive, costly, and painful process, and it will damage your company's brand.

And, it will make headlines. The media eventually finds out about everything.

As we have seen recently, it is not just external compliance issues they discover. Increasingly, they are uncovering internal issues where people inside a firm are doing things that are fraudulent. The January issue of the NorthStarNavigator™ focused mostly on external compliance issues such as Reg 9. But, external issues are not the only factor these days.

How can this be avoided?

According to the Infosys Compliance Practice, which has implemented compliance systems for three of the top five brokerage firms and four of the top ten banks, it’s all about the systems – systems that can detect both internal and external compliance issues.

“The key thing that banks and fund managers must concern themselves with is adhering to all regulations set out by regulatory bodies,” says Ed Smith, Associate Vice President, Banking and Capital Markets, Product Services Group, Infosys Technologies.

“ Also, they must adhere to internal compliance practices that may go above and beyond what regulators are asking for. Internally, firms must develop and adhere to their own internal practices so they can identify who is creating fraud within the firm. This was a big issue in the press recently with a leading securities firm.

"One major regulation is anti-money laundering (AML), where systems must be in place to reduce fraud when moving money between different brokerage and banking accounts. This has become a huge area, especially in the last five years. It definitely has become a very big issue for all financial services firms because of threats in the terrorist community and ongoing drug activity.

"These are not new trends, but they are becoming more important, especially fraud. There are multiple types of fraud, such as broker fraud (e.g., suspicious trade activity), identity issues for opening a new account, source of funds and overall identity theft. Also, what's new is that firms must be more vigilant about fraudulent activity associated with deposits, who is putting money into accounts and whether that money was legally earned."

To address these new compliance imperatives, NorthStar and Infosys have recently partnered to offer a pre-packaged, best practices-based solution to compliance issues. As part of the alliance, NorthStar is providing a comprehensive investment policy compliance software system that covers regulatory requirements for the entire investment policy process and for multiple client portfolios including SMAs, capital markets, and trusts. As a result, firms no longer need to conduct investment policy compliance management on an account-by-account or product-by-product basis. Instead, firms can utilize a best practice-based compliance system that helps them detect and avoid compliance issues that could result in a costly regulatory audit or federal watch.

“We chose NorthStar as a compliance software partner because of their flexible, SOA-based platform which has great integration capabilities and compliance hooks that are required so that clients can move data from NorthStar into standard compliance products,” explains Infosys’s Ed Smith.

“We are planning to have a dedicated Center of Excellence for NorthStar in the future. As part of this Center of Excellence, Infosys will build out methodologies, expertise around implementing NorthStar.”

In these Center of Excellence facilities, Infosys runs and stress tests multiple compliance software products. Clients are advised on which software products are the best ones for them to use, given their requirements. Tools to streamline integration of the data that goes into the compliance solution have also been developed.

In addition to the Compliance Centers of Excellence, Infosys has a dedicated compliance practice with domain experts in anti-money laundering (AML), brokerage surveillance, loss prevention, know your customer (KYC), and single client view. These domain experts use a best practice-based methodology for all wealth management compliance projects.

First, Infosys reviews the firms existing compliance process and data.

“The data is really the key,” emphasizes Infosys’s Ed Smith. “We ensure data quality before aggregating the information into the compliance solution. We use a unique data quality management tool to remove wrong Social security numbers, remove misspelled names, and clean up the data.”

Once the data is clean , Infosys aggregates and connects all internal and external data. Next, Infosys sets up parameters and thresholds (e.g., red light flags) to detect compliance issues based on behaviors that a firm is looking for. By spotting deviant behaviors, problems can be spotted — and dealt with — before the regulators. It’s akin to an early warning detection system for both internal and external compliances issues.

“We give clients different views into the data based on roles,” says Infosys’s Ed Smith. “Everyone who has a fiduciary responsibility including the CIO, CFO and CEO see every red light. Once we have all of that implemented, we continue to add on the scenarios and maintain the systems on a regular basis for each firm.”

Typically, the return on investment for this type of best practice-based compliance system is – first and foremost – that firms get to see activity they normally would not see without this type of system in place. Firms can detect abnormal behavior proactively. By aggregating all data, firms can now see a single view of the client – where they know everything they need to know about the client so advisors can give them the right advice to move their money for themselves and their family members. With a single view of the client, advisors can effectively advise people and increase client retention.

Another obvious benefit of a best practice-based compliance system is that firms are able to su bstantially reduce operational and legal costs and expenses.

“It’s better to catch behavior internally before the SEC does,” confirms Infosys’s Ed Smith. “Firms understand this and want to be proactive. As the industry matures, compliance challenges will likely grow.”

What does the future of compliance in wealth management hold?

"The future of compliance in wealth management is going to be even more difficult because what you are dealing with is a higher number of ultra-high net worth clients," says Infosys's Ed Smith. "There are more people putting more money into accounts than ever before. The key challenge is to take and invest this money based on customer dynamics and current regulations. The ability to have a complete view of the client portfolio is a key success factor in determining whether advisors are able to retain clients.

“Given the rise of new, small wealth management firms, investors should make sure that these firms will be a safe haven for their money before they invest. Investors should go to the Web or call their primary bank to get advice on which firm they should invest their money with.

“They should do additional research on whether firms are regulatory-compliant by checking to see if these firms have dedicated staff to manage and monitor compliance within the firm, and whether the firm can generate compliance statements to ensure their money will be invested as they specify.

“These wealth-management challenges will continue to grow. The industry will continue to mature. There will always be people who will try to buck or test the system to make an easy dollar, so this type of fraudulent activity will continue to go on.”