Staying alert in the face of regulatory fatigue
As the financial industry makes its way out of one of the most tumultuous periods in its history, there have been some hard lessons learned and new paths carved out of necessity. Thomson Reuters has been assessing the new approaches in regulation and compliance, and the resulting implications over the last six years in its annual Cost of Compliance survey – to gain insight into the reality and challenges of compliance functions around the world. Over time, the survey results tell the story of an evolving industry adapting to new norms.
In 2015, it’s clear that practitioners expect regulatory fatigue, resource challenges and personal liability to increase throughout the year, the survey found. These findings reflect the sheer volume of regulatory change anticipated as firms navigate both international and domestic rules with overlapping global impact. According to the survey, global systemically important financial institutions (G-SIFIs), given their larger size of operations and resources, are better equipped to manage these challenges than smaller non-G-SIFIs.
Thomson Reuters surveyed nearly 600 compliance practitioners from financial services firms including banks, brokers, insurers and asset managers around the world encompassing Africa, the Americas, Asia, Australia, Europe and the Middle East. The survey builds upon annual surveys of similar respondents, offering year-on-year trends and developments intended to help regulated financial services firms with planning, resourcing and direction.
After several difficult but broadly speaking positive years for compliance functions, the 2015 findings show signs of potentially serious resource constraints. Compliance functions continue to face diverse and demanding pressures, with shifting supervisory expectations, no relief in the volume of regulatory change and the start of many of the big implementation programs for major complex legislation.
Key findings from the 2015 report include:
Volume of regulatory change
At the heart of the survey, year after year, is the sheer volume that continues to be expected. Compliance officers are experiencing regulatory fatigue and overload in the face of snowballing regulations. Seventy percent of firms are expecting regulators to publish even more regulatory information in the next year, with 28 percent expecting significantly more. When is it too much? Does the pendulum need to swing back a bit? Are boards preoccupied with the business of regulation rather than with actually improving the business?
Rising personal liability
59 percent of all respondents (53 percent in 2014) expect the personal liability of compliance officers to increase in 2015, with 15 percent expecting a significant increase, compared to 21 percent of G-SIFIs who expect a significant increase in personal liability. While 2014 was a year of record fines, it was also a year when the sweep and scope of non-monetary enforcement action came to the fore as regulators used ever-more creative approaches in their drive to instill “good” behavior in firms and individuals.
Growing resource staffing challenges
From recruitment challenges in finding and retaining suitably skilled staff to increasing pressure on compliance staffing budgets, 69 percent of respondents expect the cost of senior compliance professionals to increase in 2015.
Increased cost of compliance
While a skilled, high-quality compliance function is expensive to build, it will be one of the best investments for a firm and its senior managers. Many firms have simply hired more compliance staff but there is a growing need for hiring more truly skilled compliance officers. The survey results show an expectation that the cost of a skilled compliance staff will continue to rise, and the real issue is in securing a staff with high-quality skills and experience. Over two-thirds of firms are expecting skilled staff to cost more. Thirty-two percent of the larger G-SIFI firms expect the cost of senior compliance professionals to be significantly more. The major reason cited for the expected increase in cost of senior compliance professionals was the demand for skilled staff and knowledge (82 percent). More than two-thirds of firms (68 percent) are expecting an increase in their compliance budget this year with 19 percent expecting significantly more. G-SIFIs are expecting a noticeably greater increase in compliance team budgets with one-third (33 percent) expecting significantly higher budget.
Complex regulatory change
The speed and sheer breadth of regulatory change is an ever-present challenge for firms. According to the survey, 70 percent of respondents expect an increase in information published by regulators and exchanges. The last few years have seen a gentle decline in the level of the expected increase in regulatory information being published by regulators and exchanges (2011: 83 percent; 2012: 84 percent; 2013: 81 percent; and 2014: 75 percent). While the baseline remains high with expected increases, any decline, even if it is only the rate of increase in the volume of regulatory information published, is welcome.
Broadening compliance remit
The remit of the compliance function is expanding to address the changing issues facing an evolving industry, the survey reflects. In addition to a growing focus on culture and conduct risk that needs to be considered when assessing regulatory change, the compliance arena is also broadening its scope to include technology, IT risk and the issues related to cybercrime and resilience. For firms, cyber risks are multifaceted and must not simply be left to the IT function. Compliance functions need to be engaged in the consideration of risks to the business (and by association the potential effect on their customers) from an attack on the wider financial services infrastructure, as well as the implications of a direct attack on the firms themselves. This is just one more example of how this critical function continues to meet the needs of a business that is changing every day.
Given the relentless pace of change and the need to implement layers of often mismatching cross-border regulatory requirements, compliance officers may wish to begin to think through how they can help their firm to “future proof” changes made, and in turn get the very best value out of their investment made into systems, technology and personnel. A firm’s ability to “future proof” will become ever more critical throughout 2015 as many big implementation programs for major complex legislation take effect.
How do these developments reflect on the financial industry as a whole? What do the latest trends say about where the business is headed and what you need to be looking out for in the coming year?
Request the detailed report on the Cost of Compliance 2015 survey.
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