Increasing regulatory scrutiny has brought the need for preventative and detective controls into the spotlight. Compliance with regulation is often seen as an impediment, slowing down the time to execution and acting as a brake on the business. In fact, as we explore here, if implemented in the right way, preventative controls can provide a competitive advantage, speeding up client onboarding and boosting time to revenue for new client requests.
Regulators driving change
Perhaps the most influential and high profile regulatory statement on preventative controls was the supervisory statement (SS5/21) issued by the UK’s Prudential Regulation Authority in 2021 which states that “an international bank with a material trading business should have a mix of detective and preventative trading controls — i.e., pre-trade (soft and hard block) checks and post-trade checks”. This has set the expectation that control failures will no longer be a matter for internal audit to discover. Going forward, regulators will be proactively seeking evidence of effective control frameworks as part of their ongoing inspection activity.
Firms operating across multiple jurisdictions have an especially difficult challenge, with the need to demonstrate compliance across multiple territories with differing regulatory regimes – while simultaneously implementing robust booking model controls. In general, Europe is perceived to have the strictest regulatory obligations for trading controls covering KYC, sanctions, legal documentation, credit lines, and booking entities. Evidencing compliance can be particularly challenging for many firms. Regulators expect firms to demonstrate a clear audit trail of pre-trade decision-making, which is hard to maintain for busy sales and onboarding teams.
The trade-off: efficiency vs. compliance
Typically, teams managing client onboarding are required to respond to urgent “ready-to-trade” queries from sales teams who want to quickly execute new trades and to ensure proper readiness assessments have been undertaken. They often find as much of their time is spent responding to salesperson queries as doing the actual onboarding. Given the hefty workload which this team faces, it slows their ability to onboard new clients, and therefore slows the time to revenue.
With sales staff incentivized to close trades as quickly as possible and onboarding teams trying to ensure they are compliant with a complex set of internal and external control standards, there is an ongoing tussle between efficiency and compliance which has a number of potential consequences:
- Unintentional breaches of regulatory or internal “ready-to-trade” policies
- Unnecessary extra workload for client onboarding teams who are repeatedly asked to validate client readiness from the sales team
- Significant onboarding backlogs
- Constant need to reprioritize precious onboarding resource
- Unnecessary friction in the trade execution process
Not striking an effective balance between regulatory compliance and business momentum could have serious consequences, including fines, reputational damage, and lost revenue.
At Droit, we know from our customers that in a typical institution, client onboarding teams spend approximately 50% of their time dealing with pre-trade queries for sales teams on a variety of product, entity, and client combinations. Implementing the right tools can not only ensure compliance with heightened regulator expectations, but also do away with these manual queries thereby effectively doubling client onboarding capacity.
Repurposing this capacity to increase the scope and pace of client onboarding can yield millions of dollars of incremental revenue.
Implementing preventative controls
Heightened regulator expectations for real-time preventative controls necessitate a technological solution. Manual checks are no longer sufficient and carry significant levels of risk. Regulators want salespeople to take responsibility for checking compliance with internal ready-to-trade policy and being able to evidence the fact that they have carried out these checks. Droit is well positioned to provide a solution for this on both a preventative and detective basis.
Implementing Droit’s automated pre-trade Client Readiness checks can deliver three key benefits for financial institutions:
- Regulatory compliance – ensures compliant products are offered to clients and that automated and fully auditable decisions are made in real-time, removing ambiguity from the process and providing a full evidence base for regulatory inspections
- Organizational efficiency – aggregation of data across multiple internal systems in real-time gives one clear, unambiguous decision, removes manual processes, and ensures sales confidence to act and do their job
- Impact on the bottom line – reduces the time to execution and increases client onboarding throughput, thereby minimizing time to revenue
- Ready-to-trade decisions are made in real-time, with a clear yes or no status visible to sales and client onboarding.
- The decision making process is fully traceable with a clear audit trail to business policies.
- Integrates smoothly into existing salesperson dashboards via API or used via a standalone user interface.
- In-built extensibility to allow for salesperson use as a preventative control and simultaneous application at the trade blotter level to form a robust, complete, and real-time defensive control.
It seems obvious that as regulators flex their enforcement muscles over the coming years, the need for pre-trade controls will become more and more urgent.
However, real-time client readiness checks are not just about operational and regulatory processes, they are also key to organizational efficiency by allowing client onboarding teams to focus more on their core objectives, rather than dealing with manual ‘ready-to-trade’ requests, thereby contributing to business growth and bottom line objectives.