Surveillance budgets under pressure?

Surveillance teams have arguably never been under more pressure. Huge enforcements in communications surveillance have been followed by an unprecedented fine relating to trade data. In between, banks – and exchanges – have been fined for failures around calibration and other flaws in the implementation of their surveillance programmes.

All this has occurred in the context of a significant increase in both the complexity of the markets and of regulatory expectations. Venue proliferation, the challenges of digital connectivity and data, the need to improve channel and language coverage in comms, and the growing focus on cross-product market abuse in trade, all imply a need for significant, strategic investment in trade, comms and voice surveillance and the data infrastructure that underpins them.

Internal expectations are rising too. One example is the continued demand that surveillance scenarios and calibration are subject to model risk governance evaluation. This imposes more rigorous – so more expensive – development.

So, to keep up with all this, surely surveillance budgets are on the rise? If you take the findings of 1LoD’s recent Surveillance Benchmarking Report & Survey, then you might think so. Amongst its many findings, 44% of banks intend to buy new trade surveillance technology in the next three years; 73% of banks intend to buy new voice surveillance technology; and 83% will buy e-comms technology.

But off-the-record conversations with surveillance heads reveal a more nuanced picture.

First, budget considerations definitely affect technology choices. For example, in voice surveillance, despite advances in translation and transcription that allow multi-language coverage, banks are not simply buying every language they use. Says one surveillance head, “There is lots of progress [in language coverage] but what do you include? What do you pay for? Because vendors don't give away the language packs for free, right? And you have to think about how that fits into your resource profile.”

Second, it is now much more common to find banks and vendors confirming that technology investment is not simply about improving surveillance functionality and freeing up staff for higher value-added activities, it is about saving money overall – which means reducing staff expenditure. “There is a choice between using technology to reduce costs or to improve effectiveness, but in the current environment the former is an easier internal sell than the latter,” says another surveillance chief.

Third, it is also becoming more common to hear some banks talking about revisiting coverage levels – whether that is ensuring that only regulated employees are surveilled, or limiting language coverage or voice coverage to what they perceive to be the bare regulatory minima. This approach, while resource-driven, is often justified as being ‘risk-based’. So, in 1LoD’s recent Surveillance Benchmarking Report & Survey, when asked ‘are you moving towards a risk-based approach to surveillance and therefore not surveilling entire in-scope populations?’ 46% of respondents replied ‘yes’.

Large banks view this approach as extremely high risk and tend to employ a ‘surveil everyone remotely necessary’ approach. As one surveillance head of a global organisation puts it, “I think the regulatory reaction to that is going be very interesting. I think if you know somebody is in scope and you choose not to surveil them, then how do you justify that and do you have conversations with the regulator about it and do they agree?”

Overall, it is clear that banks are looking hard at surveillance and broader compliance spending and, while they are willing to invest, they want to see clear ROI arguments and are less willing to spend without a definite cost saving or very significant and demonstrable improvement in surveillance effectiveness.