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January 17, 2024
Understanding Compliance Risks in Wealth Management

As the wealth management industry becomes more regulated and stringent standards for privacy and data security are enforced, effective compliance programs addressing data privacy risks are essential for wealth managers.

Wealth management firms face heightened vulnerability to compliance risks.

While compliance risks are present across financial services firms, wealth management firms face heightened vulnerability due to the unique compliance requirements associated with their industry. Mitigating compliance risk starts with understanding how your firm handles and stores client information. It is essential to know what data you collect, how long you retain it, and ensure its secure storage through industry best practices. In addition to safeguarding client information, employees must be aware of cybersecurity best practices when using computers or mobile devices, both in the workplace and at home. Protecting against cyberattacks is crucial for maintaining compliance integrity.

What strategies can wealth managers implement to mitigate compliance risks?

  • Comprehend the data and its usage within your organization. 
  • Establish a privacy program encompassing well-defined policies and procedures. 
  • Adopt a security strategy incorporating encryption and tokenization. 
  • Leverage a data management platform to streamline data organization.

Wealth managers must understand and protect their data assets.

To safeguard data, wealth managers should first comprehend the personal information they handle, including customer investment details, social security numbers, tax identifiers, and payment account information. The next step is to establish policies that ensure the confidentiality of this data by granting access solely to authorized personnel who require it for legitimate purposes like service provision and client billing. Additionally, it is vital to verify that any third parties receiving data have robust security measures in place to prevent misuse and restrict access if unnecessary.

Wealth managers should form a comprehensive privacy and security plan that specifically tackles compliance risks.

The wealth management industry is highly regulated worldwide, necessitating wealth managers to grasp their compliance risks and formulate strategies to mitigate them. This entails: 

  • Gain clarity on the type of data they possess and its location. 
  • Establish comprehensive data privacy and security policies. 
  • Implement a privacy program and a data protection program. 
  • Continually monitor and evaluate the effectiveness of these programs, including regular testing. 
  • Train staff on relevant laws and regulations. 
  • Conduct frequent risk assessments. 
  • Develop protocols to address breaches of sensitive information and unauthorized access attempts. 
  • Notify clients of significant changes in regulations or business practices pertaining to safeguarding client data from unauthorized third-party access, such as vendors.

A thorough privacy program enables firms to comprehend and effectively handle the risks associated with collecting and utilizing data.

Crafting a carefully planned privacy program is vital as it serves as a strategic tool to effectively manage the risks associated with data collection and usage. An ideal privacy program should be tailored to tackle compliance risks, including customer due diligence, internal controls, recordkeeping requirements, and more. Moreover, it should also encompass specific privacy concerns linked to various aspects of data management. These include the manner in which information is obtained from clients or business contacts, stored on computer systems, shared with third parties, accessed by authorized employees, transferred across borders, and appropriately disposed of when no longer necessary for the firm.

Wealth management firms that establish robust data privacy and security policies can steer clear of regulatory fines, client lawsuits, and reputational harm.

Ensuring data privacy compliance is not only a legal obligation but also a risk to the overall functioning of your business. Additionally, the financial repercussions and damage to your reputation resulting from data privacy fines can be substantial. Failure to comply with data protection laws puts your business at risk of:

  • Regulatory fines: The implementation of the EU's General Data Protection Regulation (GDPR) in May 2018 introduced stringent rules governing the collection and usage of personal data by companies. Non-compliance can result in regulators imposing fines of up to 4% of annual global turnover or 20 million euros ($22 million), whichever is greater. Such fines can have a severe impact on an organization's financial health and should be avoided. 
  • Potential client lawsuits: France has witnessed numerous high-profile lawsuits against banks for unauthorized sharing of customer data. While some cases are still ongoing, several have been settled out-of-court, leading to significant financial settlements by banks such as BNP Paribas SA ($1bn), Credit Agricole SA ($1bn), and Societe Generale SA ($600m). These lawsuits not only incur substantial monetary costs but also tarnish a firm's reputation in the eyes of clients and the market.

Ensuring data privacy compliance in wealth management

Wealth management firms face potential risks when it comes to data privacy compliance. Without proper policies and procedures to safeguard the personal information of clients, these firms are vulnerable to data privacy breaches. Furthermore, incidents involving the loss or unauthorized use of client data can lead to significant reputational harm for the firm. To address these concerns, the Financial Conduct Authority (FCA) provides guidance on how wealth management firms should effectively manage their obligations under the General Data Protection Regulation (GDPR).

This includes: 

  • Having clear and well-defined policies on the collection, usage, and storage of personal information. 
  • Regular reviews of data privacy policies to identify any gaps or outdated processes. 
  • Thorough training on data privacy rules and regulations for all staff members.

Why managing data privacy compliance in wealth management should be personalized

Maintaining data privacy compliance is an ongoing and dynamic process. As new technologies continue to emerge and regulators modify their requirements, it is crucial for your data privacy compliance program to remain flexible and adaptable. A well-designed data privacy compliance program should have the capability to promptly and efficiently adjust to any necessary changes without imposing substantial time or financial burdens on your organization.

What should be considered when developing a data privacy compliance program?

  • What are the potential risks associated with processing personal information, and how can you effectively mitigate them?
  • What are the necessary steps to ensure your organization's compliance with relevant laws and regulations? 
  • How can you accurately identify the personal information you possess, determine its storage locations, and track who has access to it? 
  • How can the incorporation of PbD principles in system design prevent privacy violations and unnecessary vulnerabilities? For instance, by minimizing the collection of unnecessary information, restricting access, providing clear notices on data handling, and implementing robust security measures. 
  • How can a designated privacy officer with sufficient authority ensure an independent approach to privacy management, minimizing conflicts of interest with other business functions such as marketing or sales teams seeking excessive access to customer records?

How to Manage Personally Identifiable Information (PII)

Personally identifiable information (PII) encompasses any data that can be utilized to identify an individual. For instance, if your grandmother's name and address are present on her mortgage application or tax return, they may not automatically be categorized as PII. However, when you upload a picture of her on Facebook accompanied by her birthday in the caption, it transforms into PII. This is because this information, when combined with other data like her email address or phone number, could potentially be used to identify her as an individual. Furthermore, PII can be encountered in various locations, including documents, emails, databases, and social media accounts.

Data privacy risks can emerge from either the systems employed by the wealth manager or the utilization of third-party suppliers and contractors.

In the realm of wealth management, data privacy risks can stem from the following factors: 1. Inadequate security measures or misuse of technology within the wealth manager's systems. This could entail utilizing platforms like Facebook or LinkedIn for professional purposes, which may leave sensitive customer data vulnerable without encryption or proper protection. 2. Engagement with third-party suppliers and contractors lacking sufficient data protection requirements, yet having access to sensitive customer information.

Strategies for mitigating your data privacy compliance risk include the following measures.

At RegVerse, we offer comprehensive assistance in managing your data privacy compliance risk. Our team is well-equipped to support you in meeting regulatory obligations regarding data security and protection. We take the responsibility of ensuring that your company adheres to all necessary guidelines. 

With our expertise and experience, we can identify any existing gaps in your data protection policies and practices. We will then develop tailored solutions to address these gaps, which may include employee training on best practices or the implementation of new processes for handling sensitive information. You can rely on RegVerse to guide you through the complexities of data privacy compliance with efficiency and expertise.

RegVerse can help you address emerging compliance risks.

RegVerse specializes in assisting organizations like yours in effectively addressing emerging compliance risks. By collaborating closely with our clients, we gain an in-depth understanding of their unique data privacy compliance needs. Our team of seasoned experts boasts decades of experience in information security, equipping them with the knowledge to safeguard your company from cyberattacks and other threats. 

Together, we will develop a tailor-made plan to manage your data privacy compliance risk. This comprehensive plan encompasses every stage, from identifying potential issues to implementing robust solutions and conducting ongoing monitoring. Additionally, we will ensure that all employees are appropriately trained to utilize their devices without compromising the security of sensitive information. With RegVerse by your side, you can confidently navigate the challenges of data privacy compliance.

Key takeway

In the realm of wealth management, adherence to various regulations and laws, including data privacy, is crucial. By developing a comprehensive privacy and security plan that effectively addresses compliance risks, wealth managers can steer clear of regulatory fines, client lawsuits, and detracting damage to their reputation. 

At RegVerse, we offer our expertise in assisting you in creating a tailored data privacy compliance program that aligns with your firm's unique requirements. By helping you gain a clear understanding of the personal information collected by different individuals within your organization, we can significantly reduce the risk of breaches or violations. Together, we can build a solid foundation of data privacy practices, allowing you to confidently navigate the complex landscape of compliance.

Sid Yenamandra
CEO of RegVerse