Surveillance Functions for 1ST Line of Defence

Surveillance Functions for 1ST Line of Defence

Major financial institutions are increasingly focused on effectively controlling non-financial risks in their front-office businesses. Drivers of this increased attention include regulatory pressure for greater accountability (most notably the Senior Managers Regime in the UK), Royal Banking commission reforms, well-publicized conduct issues, and recognition that the complexity of front-office activities requires a detailed application of three lines of defense control principles across non-financial risk types.

This focus on improving non-financial risk management is supported by an observed trend toward strengthening first-line accountability.

Surveillance within financial institutions has historically been viewed as a compliance function of limited value, often being conducted in a low-cost, anonymous location by relatively junior employees. Since 2012 that situation has changed. Financial Institutions have now invested considerably in building up large, sophisticated surveillance teams both in compliance and increasingly in the business itself.

Today the size and complexity of the task faced by the surveillance function have never been greater. Across trade, e-comm, voice and employee surveillance, ever-increasing regulation, a greater focus on control in the front office and a need to ensure that well-publicized misconduct issues never happen again has all led to rapid expansion. As surveillance teams analyze more and more data, that generates more and more alerts, all of which need further investigation. This, in turn, creates a need for yet more people.

The challenges are considerable. But there are also lots of opportunities. It is widely accepted that over the coming years technology will provide much of the solution. We are at a generational change in terms of the amount of data that machines can process and the speed in which they can do this. Banks, brokers, and the buy-side are already investing significantly in a plethora of new technologies and that trend is set to continue.

Views from Business Head

1LoD which provides the highest quality intelligence to risk and control professionals quizzed Percy Rueber, global head of financial markets at ING, on how the front office control function is perceived by the business and what it takes to sit alongside his sales and trading teams.


Views from a Global Regulator

1LoD posed questions to Michael Held, executive vice president of the Legal Group of the Federal Reserve Bank of New York, on the evolution of the three lines model and whether we could see a real cultural shift in financial services in our generation.

But technology alone is not the silver bullet. Financial institutions need to evolve from rules-based methodologies to a risk-based approach and surveillance functions need to take their audit colleagues and regulators on that journey.

Institutions need to communicate better internally, especially between the front office and compliance. They are also starting to acknowledge that they need to collaborate with each other in terms of sharing experiences and best practices.

“The firm is making a significant commitment to surveillance. This isn’t just about meeting the needs of regulators, it’s because it’s good business. What we’re doing is consistent with the rest of the industry, and it’s expensive but I expect the investment pipeline to continue for many years to come.”

Rupert Jolley, global banking & markets chief control officer, HSBC (1LoD’s Global benchmarking Survey and Report, published July 2018)


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