As pressure on the compliance function grows in a fast-moving and increasingly complicated regulatory and operational landscape, almost 90 per cent of financial services firms have reported increased compliance expenditure over the past five years, with one in 10 saying costs have doubled.
In this light, 44 per cent of firms are planning to invest more in regtech solutions in the next 12 months to cope with the growing pressure on the compliance function, while a further 41 per cent expect to continue investing the same amount as they did in the 12 months prior.
However, the cost of compliance is rising with demand, with almost all financial firms encountering increased compliance costs over the past five years, while costs have doubled for one in 10.
This insight was brought to light by SteelEye in its ‘Compliance Health Check‘ report, which was largely based on the compliance technology and data analytics firm’s survey of 170 senior compliance and risk professionals working within the UK and US financial service sectors.
Regulatory change and data fragmentation continue to be a challenge
Of the 170 professionals surveyed, 44 per cent states that they struggle with challenges related to data management. This included overlaying communications and trades to mitigate market abuse risk, using management information (MI) efficiently to demonstrate the risk and the consolidation and normalisation of structured and unstructured data.
A fifth of firms identified having to keep pace with regulatory changes as the biggest challenge in meeting regulatory obligations.
Opinions were split on dealing with regulators. While 42 per cent said that regulators are now more challenging to deal with, 48 per cent said they now find it easier to deal with the regulator, which could be down to technology making compliance processes more streamlined and straightforward.
When asked if they think firms are well equipped to handle more stringent regulatory rules over the next five years, encouragingly, three-quarters of respondents believe financial services firms are in a good position.
Compliance teams burdened with fragmented and manual processes
Administrative and repetitive tasks dominate compliance professionals’ work, pointing to the need for greater automation and digitalisation within the sector. In light of this half of the respondents reported that at least half of their firm’s compliance staff engage in administrative or repetitive tasks.
The survey demonstrated a clear trend toward centralised compliance management, with 56 per cent of respondents working within one team that oversees compliance for all branches and regions in which the company operates.
Meanwhile, a mere 12 per cent reportedly deploy a decentralised model where compliance is managed directly within individual jurisdictions, while it’s understandably more common for large organisations at 18 per cent.
In contrast, 88 per cent of small firms’ compliance management is fully centralised. Centralisation of the compliance function can enable businesses to be more strategic and allow for richer learning across multiple jurisdictions. However, this hinges on a strong data foundation for the business as a whole.
Regulation, surveillance and data management top of the priority list
When asked about their top two investment priorities for the year ahead, regulatory reporting ranked first overall.
However, when breaking this down by region it becomes clear that regulatory reporting is a leading investment area in the UK, whereas communication surveillance is the top priority in the US, particularly among banks.
This is unsurprising given the fact that US regulators are clamping down hard on communications rules. Last year’s $200million fine for J.P. Morgan by the Securities and Exchange Commission (SEC) demonstrated the importance of adequate monitoring of employee communications.
Firms are reaping the rewards of machine learning in compliance
Thirty-one per cent of firms said they have fully implemented a degree of AI or machine learning (ML) in their compliance processes. A further quarter are investing in the technology but are still in the implementation stage.
The subsections of larger firms and US-based respondents are even further along in that journey, with 75 per cent and 95 per cent respectively having partly or fully implemented AI and ML in compliance. And those that have implemented AI are reaping the benefits, including a marked improvement in the quality of their MI.
However, many firms are yet to take advantage of the potential of AI. Forty-four per cent have not started looking at AI’s possibilities for compliance. One cause of slow adoption might be the need for a strong data foundation which is necessary for successful AI deployments.
Speaking on the challenges that today’s compliance professionals find themselves currently facing, SteelEye CEO Matt Smith describes “keeping abreast with regulatory change, improving data quality and managing risks and controls within the business” as some of the main contenders.Matt Smith
However, the good news is that the benefits of using technology to remedy complex compliance challenges are now being fully realised, with Smith adding that “85 per cent expect to invest the same amount or more in regtech in the next 12 months.”
“Technology and data are key to establishing future-proofed compliance processes and procedures,” he comments. “It is great to see that a large proportion of firms view the enhancement of data quality as a top priority and that most firms are actively investing in technology.”
Smith adds that by prioritising how disparate datasets are consolidated and making better use of data firms can “more easily address regulatory change and other compliance challenges that will emerge down the line.”
The company remains “hopeful” that compliance programmes and compliance teams will be made more efficient by the influx of these investments.
“Doing so can enable the compliance function to pivot from reactive investigations and firefighting to a more proactive model for compliance management and risk detection.”
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