Posted October 3, 2017 by Nick Nichols
A crime that is rapidly growing in notoriety and, if reports are to be believed, frequency is senior and vulnerable investor (SVI) abuse. It has become so widespread that elder financial abuse in particular has earned the dubious distinction of “the twenty-first century crime.”1 It’s no wonder criminals have set their sights on these investors when you consider criminals clear (on average) $36,000 per victim2, most SVI crimes go unreported3, and there is a large pool of investors for criminals to draw upon.
Given the rise in SVI abuse, it’s not a surprise that recent regulations, both at the state and federal level, are aimed at having financial services and advisory firms take a more active role in identifying and preventing it.
For the past two years, the Financial Industry Regulatory Authority (FINRA) has cited senior investor protection as a top priority.4 FINRA will now require broker-dealers to make “reasonable efforts” to obtain a “trusted contact” for their elderly customers’ accounts.5 Additionally, if firms suspect fraud may be occurring on an account, they are permitted to put “holds” on disbursements of funds.6 These regulations are aimed at firms playing a more proactive role in identifying and responding to suspicious activity and enlisting appropriate individuals to assist since the customer may not be able to protect their assets or make appropriate financial decisions due to their diminished capacity.
Product suitability and concentration has also become a top focus. This stems from concerns that broker-dealers may recommend products that are not appropriate, especially as it relates to vulnerable investors who are often unable to distinguish between a safe and a risky investment or understand important product features. As a result, examiners are increasingly looking to firms to have the capability to perform concentration tests and the ability to detect and issue alerts on accounts that are overly concentrated in a specific security or sector.7
Several states have now adopted the North American Securities Administrators Association (NASAA) Model Act (the “Act”). According to the Act, when there is reasonable belief that financial exploitation has been attempted, has occurred, or may occur, the broker-dealer is required to report the information to a state securities regulator and state adult protective services agency.
With SVI fraud continuing to soar and firms facing increased regulation and oversight requirements, how are firms responding?
Cognitive impairment is a key reason why SVI investors are often targets; however, even mild cognitive impairment can impact an individual’s ability to make financial decisions. Hence, based on our observations, many firms have implemented specialized education and training to help their associates spot potential red flags for diminished cognitive capacity or possible financial exploitation.
To help raise awareness within the community and among investors, firms are increasingly working with law enforcement and local and state organizations, such as Adult Protective Services (APS) and NASAA on education outreach efforts. Firms are also helping government agencies identify trends in fraud by filing suspicious activity reports (SARs) when financial abuse is suspected. A strong fraud network that leverages local and state agencies can help firms gain a deeper viewpoint of fraudulent behaviors, training needs, and protocols.
Training and education are important components of an SVI program, but they are not enough – even when augmented by internal controls and external relationships. And as regulators become more focused on the reporting of financial abuse, it is becoming increasingly vital for firms to boost quality and consistency of outcomes.
Firms also need to factor in extra costs. Regulation – no matter how well intended – often results in increased compliance costs for firms. Firms frequently need to add staffing expertise to analyze changes and help ensure compliance, implement technology and operational improvements to accommodate the new requirements, or augment resources to help maintain ongoing operational delivery.
One of the most significant challenges firms face is effectively and efficiently managing the daily monitoring of accounts and transactions across lines of business and product types. The deluge of data can be daunting.
When we consider the need for firms to identify out-of-ordinary behaviors and signs of financial abuse, sophisticated data analysis (including behavioral analytics) takes on even greater significance. Without a robust process for collecting a wide range of data and then systematically analyzing it, SVI efforts can become fragmented and yield inferior results.
This can lead to missed opportunities to protect clients from fraud and potentially cause firms to run the risk of incurring regulatory fines or reputational risk. Given examiners’ continued focus on SVI abuse, we believe that firms need to demonstrate how they are proactively protecting their investors.
As the industry continues to evolve and additional regulations are introduced, there is a clear need for firms to streamline fraud detection across product lines without compromising their regulatory obligations. At a minimum, for most firms, this will require them to enhance their ability to identify and detect unusual patterns of activity and develop more robust risk reporting and ranking capabilities.
DST’s SVI Fraud Surveillance services provides firms with tools to assist them in their efforts to detect, identify, and alert on potential fraud and unusual activity in accounts of the elderly and the vulnerable through daily monitoring of transactions and analysis of those accounts against criteria set by the firm. By leveraging sophisticated algorithms, preconfigured tests based on client-selected parameters, and behavioral analytics, SVI Fraud Surveillance is designed to minimize the occurrence of false positives. As a result, firms can execute monitoring and testing activities more accurately and efficiently, with the goal of improving outcomes for them and their clients. This allows firms to focus their attention and resources on the riskiest items as part of their obligation to monitor for and report on instances of exploitation.
With many firms under intense operational pressure and rising compliance costs, ease-of-deployment and quick time-to-value are important considerations for firms looking to implement additional tools into their SVI program. Delivered through SaaS-based tools, SVI Fraud Surveillance can help firms quickly scale up their program. Dashboard views, case management, and compliance alert detail views are some of the features that firms can benefit from immediately in their day-to-day oversight activities.
DST also offers an outsourcing service that leverages our industry knowledge, extensive business process outsourcing capabilities, and experience and understanding of clients’ needs. As a firm’s SVI needs increase, outsourcing all or a portion of their SVI compliance functions to DST can further help boost efficiency, reduce cost, and mitigate risk through our standardized and streamlined operations. Our services include ongoing transaction monitoring (again, using preconfigured tests based on client-selected parameters), SAR filings, and suspicious/patterned activity reporting. Additionally, clients gain access to well-defined processes and technology investment as well as regulatory analysts, which in many cases is cost-prohibitive for firms to maintain in-house.
Understandably, a BPO vendor with a proven track record is a priority for firms who are considering outsourcing their SVI compliance operations. Since the early 1990s, hundreds of financial services clients have delegated certain aspects of their AML and fraud detection duties to DST. Hence, we have experience to help us to understand the data and know what to look for, and work to support firms with our comprehensive approach.
When it comes to SVI fraud, many firms are looking to enhance their surveillance and detection efforts. And with the regulatory landscape around SVI fraud intensifying, this is becoming even more important. The question that now remains is how are firms leveraging behavioral analytics to increase the efficiency and effectiveness of their fraud detection program, and can they ultimately help protect their clients from SVI abuse?
Is your firm leveraging automation and behavioral analytics to increase the efficiency and effectiveness of your SVI fraud detection program, and ultimately help protect your clients from SVI abuse? DST can help. To learn more, visit www.dstsystems.com/sales.
1 North American Securities Administrators Association (NASAA), http://www.nasaa.org/1582/nasaa-leads-fight-against-elder-financial-abuse/.
2 “2016 Safeguarding our Seniors Study,” Allianz Life Insurance Company, https://www.allianzlife.com/about/community-outreach/preventing-elder-financial-abuse/safeguarding-our-seniors-study.
3 “2016 Safeguarding our Seniors Study,” Allianz Life Insurance Company, https://www.allianzlife.com/about/community-outreach/preventing-elder-financial-abuse/safeguarding-our-seniors-study.
4 “2017 Regulatory and Examination Priorities Letter,” Financial Industry Regulatory Authority (FINRA), http://www.finra.org/industry/2017-regulatory-and-examination-priorities-letter.
5 “Regulatory Notice 17-11,” Financial Industry Regulatory Authority (FINRA), https://www.finra.org/sites/default/files/Regulatory-Notice-17-11.pdf.
6 “Regulatory Notice 17-11,” Financial Industry Regulatory Authority (FINRA), https://www.finra.org/sites/default/files/Regulatory-Notice-17-11.pdf.
7 “2017 Regulatory and Examination Priorities Letter,” Financial Industry Regulatory Authority (FINRA), http://www.finra.org/industry/2017-regulatory-and-examination-priorities-letter.