West: Getting good quality data is a key challenge in implementing effective surveillance approaches
MARKET conduct has been in focus in recent years, especially after high-profile financial scandals such as the Libor rigging case of the noughties. Globally, regulators and financial institutions have become more aware of the need for market abuse surveillance in order to promote a trusted financial market environment for stakeholders.
Market abuse can be divided into two main areas — insider dealing and market manipulation.
According to PwC UK director Alex West, these abuses are tackled first by ensuring that the organisation has the right cultural context, then by measuring conduct in a way that allows organisations to validate that employees are following good conduct at all times and, lastly, by tackling this issue through surveillance.
“We have to recognise that there will always be individuals who will break the rules and want to cheat because, unfortunately, that is human nature. Surveillance is about implementing systems and processes that proactively monitor what people are doing to detect misconduct,” says West who specialises in misconduct investigations and market abuse surveillance.
As conduct gets increasing attention in Europe and the US, partly due to the push for regulation, it is also gaining attention in Asia because of the global focus on conduct. However, the discussion on market abuse surveillance technologies is still in its infancy in Asia.
“Big international financial institutions in Asia will already be operating controls for market abuse. Aspects of the regulations in the US and Europe have extraterritorial impacts and there will be organisations in Malaysia that will be or are already doing surveillance.
“As for the local market, the current focus is the conduct agenda, which is to get the culture and the broader conduct control framework right. I anticipate that in the next two to three years, we will see an increasing prevalence of surveillance as financial institutions move towards more technology-driven approaches,” says West.
Europe has the EU Market Abuse Regulation, which was established in 2016 to curb market abuse. It is designed to safeguard the integrity of the financial markets and improve the protection of investors and their confidence in the markets.
It is worth noting that banks have spent substantial amounts on surveillance technologies since the regulation took effect. In PwC UK’s Market Abuse Surveillance Survey 2019, the firm found that the 21 banks in Europe it surveyed spent a staggering US$737 million on surveillance technologies over a period of two years.
West believes that one of the biggest hurdles for financial institutions to adopt surveillance technologies is the cost. “PwC’s 2019 Market Abuse Surveillance Survey showed that US$737 million was spent by 21 banks over two years on surveillance, and they are expecting to spend similar amounts in the future. While not every firm will need such high levels of investment to implement proportionate surveillance, cost is undoubtedly a key factor for financial institutions contemplating implementing surveillance.”
Apart from cost, banks also struggle with data quality to ensure effective use of these surveillance technologies.
“Getting good quality data is a key challenge in implementing effective surveillance approaches. Many banks use legacy systems, which may not capture certain fields required for effective surveillance. That can lead to additional complexity as multiple data sources have to be connected to provide the right level of data enrichment. There can be a lot of work to re-engineer the data architecture to capture the right data to support effective surveillance,” says West.
Another key challenge for banks is to understand the risk individual financial institutions are trying to mitigate. The various risks for financial institutions depend largely on the financial product that is being traded.
“Global banks have worked hard to understand where risk arises and to implement appropriate surveillance to mitigate it. You want to ensure that when you do have risk, you have the right coverage,” says West.
For markets such as Malaysia’s, where surveillance technologies are still fairly new, West believes it creates an opportunity for banks to leapfrog and overtake bigger international banks in terms of technologies. “In the UK, banks are starting to move towards more sophisticated technology, for example, making use of machine learning to deliver more efficient surveillance. As part of this, banks will need to be able to provide evidence of the efficacy of models to regulators before they move away from traditional approaches. In Malaysia, banks may have an opportunity to jump straight to these sophisticated approaches based on learning from accepted international standards.”
Going forward, West believes the market will see more investment in surveillance technology in Asia. “As far as I know, it is pretty much a manual approach currently, but the market here is extremely tech-savvy, and people like tech and are interested in it. Furthermore, as the focus on conduct increases and the importance of trust in capital markets grows, we will see more organisations investing in it.”