Using video as evidence of compliance

Tomorrow, there's an interesting little conference called "AV in the City" down at Canary Wharf.

Not your usual event as it's all about multimedia projectors and CCTV for banks and financial firms.

I got roped into it as one of my strong beliefs is in using video for finance, as mentioned before, and TANDBERG is launching a solution for recording compliance meetings on video as part of a compliance framework.

This got me thinking, as they asked me to write something about the way this could be used in banks.

Here's my thought:

The basic premise is that the audit, compliance and regulatory requirements in financial services are far more onerous than in many other industries, because governments are concerned about ensuring that our money travels safely from A to B.

In light of the recent financial crisis, something has gone fundamentally wrong with this process however, and so governments are locking down all aspects of bank activities for compliance and audit purposes.

As a result, now is a good time to consider using a high volume but low cost technology coming into prime time – such as digital video recording – to store customer contact and interaction to prove compliance.

Navigating the mass of complex regulatory requirements and being able to prove compliance is a huge challenge for any financial institution, and this challenge is growing daily as a result of the recent crisis, new legislation and the many layers of rules, processes, procedures and supervisors.

The biggest challenge is in managing the complexity of these layers of rules from global to local implementation particularly in light of the recent crisis where, at the global level, the G20 is working closely to draft new rules for bank capital ratios, risk management and remuneration. In April 2009, the first draft of these rules were announced, and included discussions of compliance officers working with government supervisors to even assess executive pay rewards to ensure they were not tied too closely to risk taking.

At the regional level, the USA has key bodies such as the FDIC, Federal Reserve and OCC, whilst Europe has CEBS, CESR and CEIOPS. These groups represent regional supervisors who try to ensure that cross-state and cross-border operations are co-ordinated and consistent across the major regional geographies of the USA and Europe.

At a local level, state legislators and country regulators such as the UK’s Financial Services Authority, also have a myriad of administration and procedures with which financial firms have to comply.

As one can imagine, organising such a myriad of inconsistent and sometimes conflicting requirements is a bit of a nightmare.

There are other changes taking place here as well, especially with regard to the opening of a new client account.

You would think that gaining a new client should be a celebratory process. In fact, in the financial industry, bringing on board a new client is a pain. This is because, over the past two decades, the requirements for banks to store more and more information about their clients and their knowledge of clients’ financial situations has been growing into what today may be considered a mountain of information and documentation.

This need has arisen for a variety of reasons, particularly for:

• proof of identity;
• the identification and avoidance of politically exposed persons (PEPs) – those who may be involved in criminal or other undesirable activities; and
• proof of understanding a client’s financial situation and being able to advise them appropriately as to their financial needs based upon their knowledge and assets.

The customer contact and account management process has become even more challenging of late however, with the USA’s PATRIOT Act, Wolfsberg Committee, European Markets in Financial Instruments Directive (MiFID) and related concerns of terrorism and financial instability leading to a wide ranging growth of new demands for client documentation and knowledge. Any lack of such information is a cause for concern and cost.

For example, the UK’s Lloyds Banking Group were recently fined $350 million by the USA for not conforming with payments rules in cross-border transactions; Swiss Bank UBS were fined $400 million for allowing payments to be made between Iraq and other countries in US$’s before the Gulf War; and US-bank Wachovia has been smeared with issues over their role in enabling drug money to move between Columbia and Mexico.

In summary, compliance processes for client contact have become incredibly difficult to navigate for a variety of key reasons:

• banks are government regulated and must comply with client reporting requirements;
• reporting requirements vary by line of business and geography;
• rules and procedures are changing, and growing in vigilance daily;
• there are two opposing forces at work: client service and criminal avoidance; and
• non-compliance is not an option.

The result is a growing need for recording, storing, filing, indexing and retrieving records of client discussions electronically from the moment a client agrees to do business.

In light of these issues, a high volume and scalable solution for recording customer contact visually and verbally is where the future of compliance is heading.

This is because historically, there is no recording of the account opening and application process, except on paper. Recording such a meeting on a voice recorder is equally dissected from reality. For example, a recording of the words: “I cannot recommend this strongly enough” could later be construed as “I did not recommend this”.

However, at the moment this statement is made, a visual recording of the meeting could show the advisor pointing at documentation which subsequently is the product the customer purchased. This then would be evidence that proves irrefutable as clearly illustrating the advisor recommending the product.

Irrefutable evidence is the key and, like CCTV in the high street, irrefutable evidence is the key to the future of compliance in financial transactions and particularly during the account opening processes.

A video recording captures voice and actions during the account opening process, including all of the non-verbal language of nods, blinks and winks that can subtly alter best advice into worst advice, and vice versa.

This is why visual recordings of client-advisor meetings is the future compliance regime in finance, and those firms that pre-emptively use video and full recording of customer contact for compliance and audit will therefore be ahead of the curve.