RegTech Insights

The Connection between Compliance Risks in Wealth Management

July 21, 2023
min read

Sid Yenamandra

Sid Yenamandra is the Founder and CEO of Surge Ventures, an esteemed entrepreneur and executive with a remarkable track record in the cybersecurity and technology sectors. With successful exits from three startups, Sid has left a lasting impact on the industry. Notably, he founded and led Entreda, a top provider of cybersecurity compliance software for financial services firms, which was acquired by K1 Capital and RegTech Unicorn Smarsh. Sid's leadership also included the acquisition of Privva, a leading provider of third-party vendor risk management software. His expertise in driving growth and innovation is further exemplified by his key roles at Plato Networks and PacketFX, both of which were acquired by prominent companies in the tech industry. With dual B.S. degrees in Electrical Engineering and Computer Science from UC Berkeley and a wealth of experience, Sid is widely recognized for his authoritative knowledge and ability to develop groundbreaking solutions in the cybersecurity landscape.

The wealth management industry is becoming increasingly regulated, with strict privacy and data security standards. Now more than ever, wealth managers must have an effective compliance program addressing data privacy risks.

Compliance risks exist in almost all financial services firms, but wealth management firms are especially vulnerable.

Compliance risks exist in almost all financial services firms, but wealth management firms are especially vulnerable. Why? The answer lies in wealth management and its unique compliance requirements.

The first step toward mitigating compliance risk is understanding how your firm handles client information and where it's stored. You should also know what types of data you collect from clients and how long you keep it--this will help ensure that any information collected is stored securely by following industry best practices for protecting sensitive data.

In addition to knowing how your firm stores client information, it's crucial for employees to understand how they can protect themselves against cyberattacks by following best practices when using computers or mobile devices at work (or at home).

How can wealth managers reduce compliance risks?

  • Understand the data you have and how it is being used.
  • Set up a privacy program with clear policies and procedures.
  • Implement a security strategy that includes encryption and tokenization.
  • The use of a data management platform can help in managing your data.

Wealth managers need to start with a thorough understanding of their data assets and how to protect them.

The first step to protecting your data is understanding what it is. Wealth managers should be aware of the types of personal information they collect, store, and transfer between their companies and third parties. This includes information about customers' investments (account names), social security numbers (SSNs), tax IDs, credit card numbers, and other payment accounts, such as PayPal accounts used for online payments.

The second step is to implement policies that protect the confidentiality of this information by limiting access only to authorized individuals within your organization who need it for legitimate business purposes, such as providing services or billing clients.

You should also ensure that any third parties you share data with have appropriate security measures in place so they can't misuse any personal data they receive from you--or even get access at all if they don't need it.

Wealth managers should also develop a strategic privacy and security plan that addresses compliance risks.

The wealth management industry is one of the most regulated industries in the world. As such, wealth managers need to understand their compliance risks and develop strategies that mitigate them. This includes understanding:

  • What data they have and where it is.
  • Defining their data privacy and security policies.
  • Implementing a privacy program.
  • Implementing a data protection program.
  • Monitoring these programs for effectiveness (including testing).
  • Training staff on applicable laws and regulations.
  • Conducting regular risk assessments.
  • Creating procedures for responding to breaches of sensitive information or unauthorized access attempts.
  • Providing notice to clients when there are significant changes in regulations or business practices related to protecting client information from unauthorized access by third parties (such as vendors).

A carefully designed privacy program will help firms understand and manage the risks of collecting and using data.

A well-designed privacy program should be a strategic tool for managing the risks of collecting and using data. It should be designed to address specific compliance risks, such as those related to customer due diligence (CDD), internal controls, recordkeeping requirements, and others.

In addition, it should also address specific privacy risks associated with how information is collected from clients or business contacts; stored on computers; shared with third parties; accessed by employees with access privileges; transferred across borders; disposed of when no longer needed by your firm.

Wealth management firms with strong data privacy and security policies can avoid fines from regulators, lawsuits from clients, and damage to their reputations.

Data privacy compliance is a legal requirement but also a risk to your business. Moreover, data privacy fines can be expensive and damaging to your reputation.

If you're not complying with data protection laws, you could be at risk of:

  • Regulatory fines - The EU's General Data Protection Regulation (GDPR) came into force in May 2018, bringing new rules on companies' collection and use of personal information. Under these rules, regulators can impose fines of up to 4% of annual global turnover or 20 million euros ($22 million), whichever is greater - so they're not something anyone wants hanging over their head.
  • Lawsuits from clients - In France, there were several high-profile lawsuits against banks regarding the illegal sharing of customer data; some cases are still ongoing, but others have already been settled out-of-court for large sums paid by banks such as BNP Paribas SA ($1bn), Credit Agricole SA ($1bn), Societe Generale SA ($600m).

Data privacy compliance in wealth management

Data privacy compliance can pose risks for wealth management firms. For instance, a firm may be at risk of a data privacy breach if it does not have appropriate policies and procedures to protect the personal information it holds about clients.

The firm could also be exposed to reputational damage if there is an incident involving the loss or misuse of client data.

The Financial Conduct Authority (FCA) has guided how firms should manage their obligations under the new General Data Protection Regulation (GDPR).

This includes:

  • Having clear policies on how they collect, use and store personal information.
  • Carrying out regular reviews of these policies.
  • Providing staff training so that everyone understands how important it is for them to follow these rules.

There is no 'one size fits all' solution to managing data privacy compliance in wealth management.

Data privacy compliance is a dynamic process. As new technologies emerge and regulators adapt their requirements, your data privacy compliance program must be flexible enough to stay up-to-date with the latest changes.

A good data privacy compliance program will be able to adapt quickly and efficiently when required without requiring significant time or money from your organization.

What needs to be addressed in a data privacy compliance program?

What needs to be addressed in a data privacy compliance program?

  • The risks of using data. What risks are associated with personal processing information, and how can they be mitigated?
  • A privacy program. What steps must be taken to ensure your organization complies with applicable laws and regulations?
  • Understanding data assets. How do you know what personal information you hold, where it's stored, and who has access to it?
  • Privacy by design and default (PbD). How can PbD help ensure that systems are designed from the outset so as not to violate privacy rights or create unnecessary vulnerabilities for individuals' personal data - for example by ensuring only necessary information is collected in the first place, limiting access, providing clear notice about how that information will be handled; making sure there are appropriate security precautions in place.
  • A designated senior executive accountable for the overall governance of privacy within an organization (usually referred to as "the privacy officer"). This person should have sufficient authority within an organization so that they can act independently when necessary without having any conflict-of-interest issues arise between his role managing privacy issues within an organization versus other business functions such as marketing or sales teams who may want more access than necessary into customer records.

Managing Personally Identifiable Information (PII)

PII is any information that can be used to identify an individual. For example, the name and address of your grandmother might not be considered PII if it's on her mortgage application or tax return.

However, if you post a picture of her on Facebook with her birthday written in the caption below it, then that becomes PII because it could be used in combination with other information (like her email address or phone number) to identify her as an individual.

Further, PII can be found in many places, including documents, emails, databases, and social media accounts.

Data privacy risks can arise from the wealth manager's systems or the use of third-party suppliers and contractors.

Data privacy risks in a wealth management context can be caused by the following:

  • The wealth manager's systems (e.g., failure to implement adequate security measures) or inappropriate use of technology. For example, using social media tools such as Facebook or LinkedIn for professional purposes may expose sensitive customer data without being encrypted or otherwise protected.
  • The use of third-party suppliers and contractors who are not subject to adequate data protection requirements but have access to sensitive customer information.

How to address your data privacy compliance risk

Surge can help you with your data privacy compliance risk. We can help you with your data privacy compliance, too. And we'll even take on the burden of ensuring that your company meets all regulatory obligations regarding data security and protection.

Surge has the experience and expertise to identify potential gaps in data protection policies and practices, then develop solutions for addressing those gaps, whether training employees on best practices or implementing new processes for handling sensitive information.

Surge Ventures can help you tackle emerging compliance risks.

Surge Ventures can help you tackle emerging compliance risks. We work with our clients to understand their data privacy compliance needs and develop solutions that address them. Our team of experts has decades of experience in information security, so they know what it takes to keep your company safe from cyberattacks and other threats.

Our team will work with you to create a customized plan for managing your data privacy compliance risk--from identifying potential issues through implementation and ongoing monitoring. We'll also help ensure that all employees are trained on using their devices without putting any sensitive information at risk.

Key takeaway

Wealth management firms must comply with a wide range of regulations and laws, including data privacy. Wealth managers can avoid fines from regulators, client lawsuits, and damage to their reputations by developing a strategic privacy and security plan that addresses compliance risks.

Surge Ventures can help you create a data privacy compliance program that meets your firm's needs while also reducing the risk of breaches or violations by helping you understand what personal information is being collected by whom within your organization.

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