Mon, 02/09/2013 - 14:51
By Advent Software – Although the financial markets have largely recovered from the crisis of 2008, investment managers worldwide are still feeling the fallout in one very important regard: the unprecedented wave of reform that has washed over the shores on both sides of the Atlantic.
It’s a confounding “alphabet soup” of regulation: AIFMD, FATCA, MIFID II, RDR II, UCITS, EMIR – the acronyms go on and on. Five years in the making, many of these new or revised regulations, combined with the provisions of the US DoddFrank act, have begun to take effect or will soon.
Meanwhile, in the UK, two more new acronyms have been added to the investment lexicon. The oversight responsibility formerly held by the Financial Services Authority (FSA) has been divided between two entities dubbed the “twin peaks” of regulation: the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA). The FCA is primarily concerned with consumer protection, fair play and compliance among investment firms. The PRA, overseen by the Bank of England, is keeping its eye on the health and stability of large institutions that could pose systemic risk.
Clearly, regulators everywhere are under substantial political pressure to do a better job of preventing abuses. This means stricter rules and more stringent enforcement, which in turn puts pressure on firms to demonstrate that they have a culture of compliance and the controls to prove it.
Most firms would agree that the compliance burden has increased in recent years, along with its cost. Yet few have actually taken the time to measure that cost. What is the true cost of compliance? Where and how does it affect firms the most? And, perhaps the most important question, how can it be controlled? Only after measuring the cost of compliance and understanding its sources, both direct and indirect, can firms take steps to keep it from spiralling out of control.
Uncovering the Costs – Seen and Hidden
In an effort to uncover the costs of compliance, London-based researchers ComPeer Ltd., best known for their wealth management performance benchmarking service, surveyed 147 UK firms, including investment managers, full-service and execution-only stockbrokers, and private banks. The survey included 30 wealth management firms that account for 35% of the industry’s assets in the UK. Based on their findings, ComPeer estimated the true cost of regulatory compliance for the UK investment industry at GBP420 million (USD659 million, EUR494 million) in 2012. By 2015, the firm projects the cost to rise to GBP500 million (USD784 million, EUR588 million).
While these numbers are just for the UK, they give firms in the US and continental Europe a sense of the magnitude of the cost of compliance. What makes the survey findings globally relevant is uncovering how and where the costs add up in a firm’s operations – and it’s not just in the compliance office.
ComPeer analysed compliance costs from five different perspectives:
The firm also compared the indirect costs for both senior and non-senior staff. Among the key findings:
A staggering 39% of total compliance costs were attributable to FSA fees and levies. This amounts to 3.6% of the industry’s revenue and 17.2% of profits. (Many observers expect compliance costs to rise under the “twin peaks” regime.)
The survey concluded that wealth management firms lack reliable information about their own compliance costs, which makes it more difficult to manage them—and to stand up credibly to regulators. Firms need to gain a better understanding of how compliance affects the bottom line and where they need to focus their efforts to improve efficiency.
Building a Best-Practice Infrastructure for Compliance
If the cost of compliance extends beyond the office of the CCO, so too must the controls needed to ensure cost-effective compliance. The risk of compliance breaches is not isolated to any one area, but pops up at a variety of points in any firm’s processes and procedures. What’s needed is not a compliance “tool,” but rather a firm-wide technology infrastructure that supports compliance at any point.
An integrated, end-to-end technology solution should be able to help firms meet compliance requirements more efficiently by:
In order to achieve effective risk reduction and compliance cost reduction simultaneously, a best-practice solution would need to incorporate the following:
The cost of compliance is the cost of doing business these days, and like any such cost, it needs to be managed. Ultimately, compliance is not simply about meeting the letter of the law, but about safeguarding your organisation from business, regulatory and reputational risk. An efficient operational infrastructure goes a long way toward satisfying regulators that you have the controls in place to protect your clients and their assets. By making the compliance burden easier and less labour-intensive to manage, it also helps drive down the cost of compliance.
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