Regulators are focused on the efforts of financial services companies to identify and prevent misconduct at its root. Conduct risk frameworks will be expected to include enhanced monitoring and surveillance, inclusive of advanced technologies and data analytics, as well as ongoing metrics, reporting, and governance. In addition, the framework will be expected to be integrated throughout the operations of the company as part of a culture of ethics and compliance, including demonstrated support by senior management and the board and clear consequences for misconduct. Key areas of concern will include customer data privacy, sales/trading practices, and fair treatment in addition to conflicts of interest, market conduct, incentive compensation plans, and third-party oversight.

Technology transformation

• Financial services companies are investing in tools and capabilities to identify patterns and trends that can proactively detect and prevent incidents of ethical misconduct, including market manipulation and financial crime; regulators and stakeholders are increasingly expecting investigations of ethical misconduct to help prevent misconduct through diagnosis of systemic weaknesses in control and risk trends
• Automation can enable data validation and aggregation, provide a more formalized reporting loop, and offer an integrated view of potential misconduct; technologies capable of culling data from supporting documents (e.g., pdfs, Word documents) can support investigations and inform multidimensional metrics, enhancing predictive qualities
• The expanding use of artificial intelligence is raising ethical conduct issues related to transparency and machine bias, customer data privacy and digital rights, and third-party data usage

 

Customer interaction

 

• Conduct risk management frameworks should be applied enterprise-wide to capture and assess relevant information on incentive compensation plans, customer sales practices, trading activities, and market integrity in order to demonstrate proactive monitoring and prevention of misconduct and related customer harm
• Qualitative data, such as information gleaned from customer surveys, focus group outreach, complaints portals, and social media commentary, should augment quantitative/hard data statistics regarding ethical conduct and corporate culture

 

Payments modernization

• Across bank and nonbank participants and the scope of payment channels and delivered services, regulatory concerns and industry standards focus on fair treatment/access and customer protections, including data privacy, funds availability, fee disclosures, fraud prevention, error resolution, and technology controls
• Innovative and evolving technologies facilitate faster transaction screening to keep pace with payments modernization, but can also introduce new regulatory and customer protection risks and increase expectations for supplier and third-party procurement and risk management

 

 

Market expansion

• Conduct and culture issues might be exposed during efforts to expand market presence, such as cultural integration challenges when engaged in M&A activities; employee incentive/reward programs that promote integrity related risks; and the presence of subcultures that do not align with the values, ethics, and risk culture of the company
• Continuing talent acquisition challenges will hinder firms’ abilities to define and operationalize their conduct risk frameworks

 

Cost efficiencies

• Leveraging technologies to efficiently define relevant taxonomies at sufficient levels of granularity that aids in uncovering trends, patterns, and correlations in order to generate insight and identify root causes of misconduct

 

 

The excerpt was taken from KPMG article, “Ten key regulatory challenges of 2020.”