More Digitization in the Duplicate Process at Banks Due to Turbulent Stock Markets

The turbulence in the stock market is causing a rapid rise in the number of compliance-relevant duplicates. During the 2020 corona crisis, the number of stockholders in Germany increased by more than 25 percent in a single year. Bank staff are also involved in stock trading but often trade via third-party banks rather than through their employer.

According to the German Securities Trading Act (WpHG), the latter must be informed about staff transactions. One established method is the duplicates procedure, in which the custodian bank sends a copy of the securities transaction’s documentation to the employer bank. However, what used to work well as a manual process has shown itself to be a showstopper during the latest turbulence in the stock market.

How corona is turning the stock market upside down

There have been hardly any attractive investment products in recent years, given zero and negative interest rates. At the start of the corona crisis, the price slump was like a starting signal, prompting many private investors to enter the stock market.

Travel restrictions, closed clubs, and lockdowns that did not allow people to go out shopping also contributed to this trend. As more money remained in bank accounts, the savings rate in Germany shot up to more than 16 per cent in 2020. By comparison, it was just under 11 per cent in 2019. On the other hand, people had more time to look into the stock market. According to Deutsches Aktieninstitut (DAI) analysis, the number of private investors with stock portfolios rose by 900,000 in 2020, and those with funds and ETFs rose by as much as 2.2 million.

German Banks expect investor numbers to rise in 2022

A survey by Finanz Business shows that banks expect demand for stock products to keep rising in 2022. Although Deutsches Aktieninstitut (DAI) is seeing a slight downturn in figures, the institute concludes that “on balance, a slight drop of around 280,000 investors need not be cause for concern against the backdrop of good overall figures.”

What does the stock boom mean for banks in their role as employers?

The German Securities Trading Act (WpHG) obliges financial institutions to monitor staff transactions to prevent market abuse and insider trading. If staff carry out their securities transactions via external portfolios, e.g. with neobrokers, their employers must be informed.

What is the duplicates procedure in Compliance?

That is the purpose of the so-called duplicates procedure. It ensures that banks carrying out securities transactions report them to the respective employers, and the employer’s compliance department then checks and archives the documents.

The manual work of inputting duplicates is bringing compliance departments to their knees

For a long time, inputting duplicates was a task to which no significant attention was paid. In 2020 though, the forwarding of duplicates rose abruptly, to a level that has been maintained to this day. The manual inputting of duplicates was suddenly tying up important resources and entailing costs that were well beyond the budget. One financial institution reported a doubling of duplicates compared to the previous year.

Digitisation of the inputting of duplicates as a logical consequence

There is rising pressure to make inputting duplicates more efficient to compensate for the rise in costs caused by higher case numbers. The biggest problem is that, to date, there is no uniform process or format for the forwarding of duplicates. The reports are received as PDFs or letters and must be laboriously inputted. Apart from the significant amount of time required, there is a high risk of error. The fastest way out of this cost trap is via a digital solution that enables extensive automation of processes in the duplicates procedure.

Five steps for digitisation of compliance-relevant duplicates

1. Digitisation of the received compliance-relevant duplicates: scan the paper reports or file the PDFs received by email.
2. Capture the content via OCR (optical character recognition). Ideally, templates for the most important duplicate forms are on hand; this helps to minimise the error rate in OCR and data mapping.
3. Detect incorrect or missing entries using automated checking routines. As few transactions as possible should be processed manually.
4. If the plausibility check is passed, the transaction is automatically processed further.
5. Check for market manipulation or insider trading: As with the monitoring of customer orders and in-house traders, third-party bank transactions can also be checked with the aid of rule sets to detect violations of internal guidelines and possible insider trading or market manipulation.

Digital inputting of duplicates requires around 90% less manual work

Automatic scanning, data mapping, and plausibility checks reduce manual work by around 90%. At least, that is what is shown by figures from pilot projects at financial institutions that have measured how much time they need for manual versus digitised methods. Added to this are savings from automation of the subsequent processes checking for insider trading or market manipulation.

Conclusion

A process such as the inputting of duplicates, which is minor compared to business operations, can be made so significant by external circumstances that a strategic response becomes necessary. The new turbulence in the stock market has clearly demonstrated this. If compliance-relevant duplicates suddenly proliferate, tie up important compliance-relevant resources and cause enormous costs, that is when it is worthwhile getting involved in the digitisation of the duplicates procedure. Just as banks expect stock trading to remain at a high level in 2022, especially among private investors, it is also assumed that bank staff will actively participate in securities trading. If they handle their financial market instruments via third-party banks or neobrokers, their employers are required to organise the management of duplicates in an appropriately professional manner.