In the post-crisis world, toeing the line on compliance has clearly become more complex and difficult for financial services companies. Contributing factors include the many new rules already in place, more regulations likely coming soon (including the DOL’s proposed fiduciary rule), and more aggressive enforcement by regulators.
For many asset management firms, wealth advisory shops, RIAs, and insurers, this ‘perfect storm’ is widening the gap between their regulatory requirements and what their existing compliance programs can handle.
With these complexities and challenges only growing, firms need to start thinking about new approaches to compliance. One idea that is gaining attention, as noted in a recent piece in InvestmentNews, is the application of Nudge theory in compliance.
Nudge theory is a behavioral sciences concept that gained prominence in 2008 with the publication of a book entitled Nudge: Improving Decisions about Health, Wealth, and Happiness, by Thaler and Sunstein.
At the heart of the Nudge concept is the premise the human beings are creatures of habit and convenience, and that they tend to take mental shortcuts in their decision making. If wrong or less desirable choices are easier or more obvious to them, people tend to pick them over better alternatives. People do so not because they have bad intentions, but rather those choices are simply easier or clearer for them to make.
Applying Nudge in Compliance
Nudge theory focuses on designing choices in ways that encourage people to make a particular decision. By presenting the most desirable choice in this way, people are ‘nudged’ toward the right action or decision indirectly – without force, cajoling or threats of punishment. An example would be putting fruit at eye-level on store shelves instead of banning junk food.
That’s where Nudge theory has applicability in compliance. At most firms today, it’s far from easy or convenient for marketing and distribution teams to adhere to their compliance requirements. Because it’s a distracting, confusing and time-consuming chore, it naturally tempts people to take shortcuts or make other bad decisions.
By applying Nudge theory principals, firms can design their compliance workflows and processes such that the right compliance path is also the fastest, easiest, and most convenient for staffers to follow.
Using Nudge theory concepts, firms can build entirely new compliance cultures in their organizations. But to achieve the requisite nudges with easy, unobtrusive options, firms can’t just go with new or additional manual processes. To effect this change, they need to leverage technology and automation.
The more automation that firms can work into their compliance processes, the less time and effort it will take their staff members to make the right compliance decisions. Automation can enable the nudges that will help marketing and distribution teams move their firms into better compliance positions.