Theta Lake: Helping compliance teams with KID validations for PRIIPs

Currently, there is an unprecedented level of regulations entering the market, but only some of them receive the lion share of attention, such as GDPR and PSD2. Marc Gilman, general counsel and VP of compliance at Theta Lake has explored how firms can ease challenges for PRIIPs KID verifications.

The EU Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products came into effect on January 1, 2018. Among the changes to operations, financial services are now required to make a standardised key of information document (KID) available to retail customers within “good time before any transaction is concluded.” Essentially, this is referring to the conclusion of the purchase of any in-scope packaged retail and insurance-based investment product (“PRIIP”).

Gilman added, “In basic terms, whenever an investment adviser, broker or representative recommends an investment product or insurance policy like certain unit trusts, derivatives, or annuities with fluctuating returns, they must provide a KID to the prospective investor before executing the sale.”

These new KIDs need to meet a set format standard and cannot be more than three pages long. Through the paper, the firm must summarise the specific risks of investing in any particular PRIIP, as well as potential returns from the product and how the consumer mat lodge complaints.

He added, “The specificity of these content and formatting requirements convey the EU’s emphasis on transparency, clarity and simplicity as key components of investor protection. According to the Regulation, anyone offering PRIIPs—whether a manufacturer, partner, distributor, or other third-party—is bound by the requirement to distribute KIDs. Firms offering PRIIPs in any capacity must abide by these new rules.”

In the UK, the FCA is responsible for the enforcement and penalties of non-compliance with KID distribution requirements. Potential fines for failures are up to €5m or 3 per cent of the manager’s total annual turnover. As a result, Gilman stated that many financial services companies are dedicating a significant amount of effort to update their business processes and documentation. A number of these firms have taken to web pages and email systems to support their KID delivery.

However, Gilman believes there is “oversight of individuals engaged with retail investors and validation that KIDs are being provided in all instances is challenging given the state of available supervision tools.” The issue is, KID may be referenced during phone calls, or videoconferences with representatives, and some firms lack the transparency and capabilities to sieve through those content and conversations.

Marc Gilman said, “Recent MiFID II mandates expanding the scope of voice recording for investment conversations are an additional complicating factor as firms are now tasked with supervision of an ever-increasing amount of data. Between PRIIP and MiFID II firms have an increased supervisory burden related to their multimedia content and must find a manageable surveillance mechanism.

“At Theta Lake, we’ve enhanced our platform to detect KID and other PRIIP-related information. Theta Lake’s software presents results in an intuitive interface where each potential violation is pinpointed on an audio or video timeline, enabling reviewers to focus on sections of the recording that present the most risk.

“Our audio classifier parses conversations to determine if the KID has been discussed in the context of a PRIIP conversation. The Theta Lake application surfaces statements about the KID, the mention of a web site containing the KID, or if a commitment to send the KID has been made. Our video detection algorithm identifies the text of the KID itself as well as URLs linking to the document. The video module analyzes any viewable content and detects KID- and PRIIP-related information regardless of how it may have been shared. The platform recognizes information viewable over a screenshare, instant messaging window, or file sharing application.”

By detecting and escalating KID and PRIIP discussions for review enables companies to focus on the associated legal and regulatory risks. Theta Lake audits the entire review process, producing actionable evidence of identified issues and productive insights.

Earlier in the year, Theta Lake closed its Seed funding round on $5m following investments from Neotribe Ventures and supported by Firebolt Ventures. The capital will be used to fuel the platform’s development and boost its market presence.

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