Wealth managers are increasingly seeking to embed compliance knowledge into their systems, but too many seem to pursuing a lightweight approach unlikely to deliver full value, one expert argues.

Thomas SchĂ€ubli, Marketing Lead at Apiax, explains why some more lightweight approaches to embedded compliance aren’t sufficient to lessen the regulatory burden or level the playing field. This piece forms part of this publication's new report "Technology Traps Wealth Managers Must Avoid 2022," published in partnership with EY, which is available for complimentary download now.

Something journalists and potential customers often ask me when we first engage is: “What is ‘embedded compliance’ and how common is it among financial institutions today?” At a high-level, embedded compliance isn’t particularly rare now. However, it is generally in a very lightweight fashion, rather than our level of vision. As a result, financial services firms are seldom lightening the compliance load as much as they might.

What you may see are extremely simple internal rules engines working on a perhaps five-step set of rules, which are given to the business through the intranet via a simple UI (user interface). This tells them “These are all the things we don’t want to do,” as a fairly casual way for personnel to check the risk of an activity.

Is that fully embedded and automated? No, I wouldn’t say it’s usually used that way. For us, embedded compliance is about very complicated interactions and transactions that are fully automated in the system. And is that being done today? No, I wouldn’t say it is.

Spanning the business
To have a sense of how embedded compliance should work, imagine that you are using your CRM or trading system as usual, but every now and then you have a pop-up saying that you aren’t allowed to do something. You could start to organise a trip to meet a client, but are told that you aren not allowed to meet them at that location; or a trade order management system could prevent you from executing a trade because it doesn’t fulfil the criteria.

This way practicable compliance advice is right at your fingertips, embedded right where you need it in the system that you already use: CRM systems, portfolio management tools, trade order systems, and many more.

We’re also starting to build tools for marketing and sales teams, so that they can know whether they can approach a certain prospect or distribute a research report in a certain country; or whether they can attend or take clients to a certain event. Marketing compliance and data protection are very compelling use cases for embedded compliance and we have a huge set of rules related to privacy regulations as well as the more traditional ones concerning the marketing and sales of financial services and products.

Bedding down embedded compliance 
So how does embedded compliance actually get implemented?

Larger firms tend to be most interested in Apiax as a platform to digitise their in-house compliance expertise, carry out the governance and maintenance on that expertise and then spread it out through the organisation via Application Programming Interfaces (APIs).

Here, you would take your handbooks and corporate knowledge to build a decision tree, adding rules for each country until you have an incredibly complex decision tree with perhaps dozens of conditions and thousands of results, so that for every scenario you have a global view of all the rules that apply. Institutions also then get the freedom to build in their own rules to adjust to their particular risk appetite at any particular time.

There is a governance challenge implicit in that approach, however. Usually, the people formulating the rules will simply update them whenever something crosses their desk telling them there needs to be a change, or if an analyst or someone in-house raises a flag, which is frankly a bit hit and miss.

Levelling the playing field    
The second option is to buy that decision tree from one of the providers on our platform. Though less flexible, this approach is particularly appealing when time to market is a consideration. And when institutions are keen to level the playing field and though they may not have in-house expertise, still need high-reliability results.

The move to the kind of heavyweight embedded compliance we offer is typically inspired by a mixture of three drivers. 

The first is the urge to make more money, as you are able to do more business in more countries with more people because you know the rules that apply.nWe worked with a small private bank which was able to start selling products and offering services in more than 10 countries within months after setting up shop, because their relationship managers know the rules immediately via the apps. Time to market was entirely dependent on them being able to remain very protective of the brand while aggressively expanding. In fact, the CEO of this private bank has said he now has more confidence in our apps over the handbooks and training-heavy approach.

The second driver that also touches on is the need to make compliance faster and less expensive. 

The third thing is the risk mitigation and control factor because we always provide clear dos and don'ts - that’s more precise than anything most firms have today.

Big savings
Larger volumes mean the bigger institutions have been able to report some particularly impressive numbers in terms of efficiency savings achieved through rules-based compliance. One Big 4 consultancy’s report on an Apiax implementation confirmed 80 per cent efficiency savings for compliance monitoring and a 90 per cent reduction in compliance support because relationship managers were provided with a yes or no and the remarks and restrictions. They simply don’t need to talk to compliance anymore in the vast majority of cases, so it’s easy to save lots of money there.

Importantly, as this is something all institutions are pursuing, this institution is enjoying 20 per cent higher relationship manager productivity because they are able to book meetings much faster as they can understand whether they are allowed to have those meetings and calls and don’t waste time. There was also a 60 per cent reduction in client meeting preparation time. All in all, RMs are able to gain 1.5 hours more client-facing time per day when embedded compliance is in place.

Related is one final further benefit: strategic planning. Here, you almost turn the decision tree on its head to ask “What do we need to do to do X, Y or Z in a certain jurisdiction?” The sound starting point that provides, the reduced number of stakeholders who need to be involved and their ability to make changes to rules directly means time-to-market could be dramatically better, auditors of our solution have confirmed.

AX as well as CX 
Alongside the heavy-hitting rationalistic arguments for properly embedded compliance that coalesce around profitability and risk management, we’re also interested in the emotional impacts around new technology adoption.

You can imagine the relief all types of personnel could experience when their firm starts embedding compliance in the way we advocate. You could further imagine just how powerful such a tool could be in attracting and retaining the best talent, not least through supporting the advisor’s bottom line. Savvy institutions have realised that the advisor experience of technology should be given as much consideration as the client experience; AX as well as CX, you might say.

My concluding advice for financial institutions considering their compliance capabilities would be for them to weigh up whether a lightweight approach is actually going to move the dial for them in the key areas most firms are targeting. By pursuing embedded compliance “lite”, they may be carrying out a majority of the work necessary to upgrade properly but enjoying only a very reduced form of the benefits available. A full-bodied version of embedded compliance is likely to pay far greater dividends.

About Apiax 
Apiax provides financial institutions with immediate answers to their most pressing regulatory questions right where and when they need – embedded in their existing systems, tools and processes. Apiax’s embedded compliance solution enables business leaders to make critical decisions faster, delivering answers to the financial industry’s most pressing regulatory issues in real time. It’s the easiest, fastest way for highly regulated entities to put the client back at the heart of business operations. https://www.apiax.com/