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Managing Compliance Risks For Broking Operations

Monday, August 05, 2013
By Santanu Syam

Santanu Syam is Executive Director- Operations, Angel Broking

Implementing a robust risk management is expensive and complex and it cannot be sacrificed in deference to some other component of a firm’s business. Brokers, who are investing in achieving this critical milestone and improving upon it every day, can look forward to improved customer loyalty, increased business volumes and greater partnership with the regulators in the years ahead.

The  securities business in India is constantly changing and becoming more complex than what brokers have been used to managing through the years . A structured approach to management of compliance risk is imperative in assuring investor protection and the financial health of Broking firms.

Implementation of all regulatory circulars issued by SEBI and the Exchanges need to be tracked from receipt to implementation with a defined process of proactively identifying and addressing exceptions. The “risk” that a broker needs to manage is vast and significantly expensive than ever before. It is in the interest of the Broker to constantly take stock of the common risks that this business needs to deal with today and find ways and means to mitigate these risks.

The key five cardinal principles to achieve a robust compliance framework across the organization are as under:

Invest in a Compliance Risk Management System: Brokers with a large footprint and a large client base have to constantly reach out to employees and authorized persons/ sub brokers to ensure complete understanding and robust implementation of the prescribed circulars. There must be a consolidated database of all regulatory guidelines and circulars available to all staff involved in servicing customers and dealing with the regulators. There are multiple compliance solution providers who have systems and solutions which can supplement the efforts of the Brokers’ Compliance and Operations Teams to bookmark diaries, cross reference and provide explanatory notes and alerts for effective implementation of the prescribed guidelines across the organization.

Build Prevention of Money Laundering and Customer Due Diligence sensitivity across the organization: Brokers must implement robust process and controls to execute the onerous task of implementing “Know Your Customer” guidelines. This regulation will be the key driver of future strategy of compliance implementation across the broking services industry in India. Brokers must be extremely wary to any possible red flags, which may or may not merit the filing of a Suspicious Activity Report (SAR) with the Financial Intelligence Unit (FIU) of India.  Identifying a potentially suspicious transaction is always a subjective determination and it is in the interest of the Broker to adopt a conservative approach to this challenge. In anticipation of the questions that Brokers typically receive from regulators, it is prudent to ask customers the difficult questions revolving around source of funds and validate documents to establish the income levels of the customer. The regulator with the advantage of hindsight looks not only at what the broker did about a suspicious transaction but also whether the broker took adequate corrective and preventive action to ward off any such risks in the future.

Ensure screening of employees and sub brokers/ authorized persons, formal induction and training, mystery shopping and surprise audits at branches and sub broker locations: Employees and sub brokers are the face of the Broker and the commitments they make to customers and their actions, determine the fate of the business in the long term. Brokers must deploy independent screening agencies that provide such verification services for potential employees and sub brokers. Current trends on customer complaints and business sense demands that this scrutiny, though expensive, may prevent many problems in the future. Further,   employees and sub brokers must be trained and inducted into the organization so that the requirements of operating in a regulated environment are well understood.  Mystery shopping posing as potential customers using third party agencies may help Brokers identify and correct malpractices and wrong commitments made to customers. Surprise audits at locations where there are large transaction volumes or significant customer complaints is a necessary operational control that Brokers must implement to mitigate investor complaints and regulatory breaches.

Keep electronic and hard copy audit trails of all customer transactions, customer communications and regulatory reporting: Brokers must have strict controls to generate hard copy and electronic footprints of all transactions, customer correspondence and regulatory reporting executed by them and have a robust archival strategy to keep such records for future reference. All returned mail both electronic and hard copy should be subject to detailed follow up and additional due diligence so that all customer records are current and relevant.  Inability to provide such records and audit trails can attract severe disciplinary action from the enforcement agencies. It will not matter how good the Brokers’ system or process is unless they can prove it to a regulator – the regulator insists on seeing documentation to validate any transaction.

Implement Key Control Standards and an internal self assessment control checklist across the country: Key Controls Standards and Self Assessments (KCSA) are critical for assurance of regulatory compliance across all locations where the Broker is represented. This completed self assessment checklist must be reviewed by the Compliance Team regularly to identify any escalations and take proactive action to close any exceptions highlighted by the operating units.

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