The Compliance Tsunami

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Information about The Compliance Tsunami

Published on March 10, 2014

Author: ComPeerLimited



This research seeks to explore the ways in which wealth management firms have been shaped by the ‘compliance revolution’ – a period of unprecedented regulatory change in the financial services industry that began in 2011. To research the subject, ComPeer conducted 12 interviews with executive or senior managers at firms that are widely regarded as thought leaders in the wealth management industry. These are our findings.

The Compliance Tsunami Tuesday, 4th March 2014

Contents A Tsunami – Really ? Industry Background Research Participants Methodology Findings Questions Conclusions Research Partner

A - Financial Stability & Reducing Systemic Risk ILLUSTRATIVE VIEW OF CROSS SECTORAL NATIONAL, EUROPEAN & INTERNATIONAL REGULATORY LANDSCAPE PIPELINE STAGE 1. Regulation promoting stabilising effects, and reducing systemic risk B - Transparent, Safe & C - Financial Supervision, Competitive Single Market Corporate Governance, Audit promoting economic growth & Accounting Regulation promoting Single Market for financial services as a driver of economic growth PIPELINE STAGE 2. Intent aired by authorities (speech / high level paper drafted by regulator/expert group) PIPELINE STAGE 3. Green paper / White Paper/ Consultation issued PIPELINE STAGE 4. Formal Legislative Proposal/ Market Standards issued PIPELINE STAGE 5. De facto standards agreed; legislation in place; secondary legislation in preparation V20 13/06/04 Regulation promoting and protecting consumer interests New structures to Improve supervision of financial institutions; corporate governance arrangements supporting this Macro-economic Levers/ESRB Risk-free status of Sovereign Debt Payment Systems Super-equivalence/ Single Rule Book Trading Book Review Tax Avoidance Eurozone/Single Market boundary International Reg Convergence Emerging issue or review of policy and existing regulation D - Consumer Protection Corporate Tax Reporting on a country-by-country basis Payment Services Islamic Financial Instruments Competition Authorities Reporting requirements for Pension Funds Extra-territoriality Banking Union/Single Resolution Mechanism Debt Valuation Adjustments (IAS 39) Emerging Markets / Capital Flow FSB Report on Systemically Important Insurers Banking Union/Deposit Guarantee Scheme Proposal on Securities Law Regulation Recovery & Resolution Procedures for nonbanks Green Paper on long term investment Post-trade issues Green Paper on Shadow Banking FPC MacroPrudential Tools Regulation on Money Market Funds Parliamentary Commission on Banking Standards Bank Recovery & Resolution Directive Financial Transaction Tax – enhanced cooperation Broadening the resolution regime to non-banks Action Plan for SMEs LIBOR & other market indices Covered bonds Financial Markets Infrastructure Cross-border debt recovery MiFlD II/MiFIR MAD II/MAR Provision of services by Third Country Firms Anti-Money Laundering Directive IV Review of European System of Financial Supervision Executive Compensation Statutory Audit Regulation Review of Transparency Directive UCITS VI Mortgage Market Review Review of Client Assets Regime Insurance Guarantee Schemes Investor Compensation Schemes Directive Regulation on Key Information Documents for PRIPs Review of Unregulated CIS & Close substitutes UCITS V/Bonus Caps EU Contract Law Banking Reform Bill CRD IV Dodd-Frank Act: Banks / Corporates AIFM Directive Offshore RMB Centre FATCA Non-EEA immigration cap Bank Levy European Venture Capital Funds European Social Entrepreneurship Funds Banking Union/Single Supervisory Mechanism Financial Services Act: FPC, PRA, FCA roles Short Selling / CDS Banking Union/interaction with EBA Financial Conglomerates Directive Internal Governance Guidelines Financial Reporting Dodd-Frank Act: Regulators MODERATE/HIGH IMPACT ISSUE Mortgage Credit Data Protection Directive & Regulation Prospectus Directive LEGEND Retail Banking Package IORP II Corporate Governance & Company Law Action Plan Central Securities Depositary Regulation Omnibus II EMIR/OTC Derivatives & Central Counterparties Harmonising Insolvency Regimes Insurance Mediation Directive Credit Rating Agencies III Solvency II Consumer Credit Commodities Gender Targets for Boards of listed companies Consultation on structural reform of EU banking sector Collective Redress Deposit Guarantee Schemes Directive Retail Distribution Review Dodd-Frank Act: Consumers Global Accounting Standards MODERATE/LOW IMPACT ISSUE IRSG WORKSTREAM/ CROSS-SECTORAL AREA OF ACTIVITY UK ISSUE

Industry Background and Firms Interviewed • Record years for the industry! • However, costs are increasing and some firms are having particular difficulty • £60 billion, 3200 staff • CEOs and Heads of Compliance Research Partner

Methodology • Comprehensive, 60 minute interviews • Covering 5 main topics • Governance • Strategy and Daily Operations • Compliance Costs • The Front Office Research Partner • The IT Department and Compliance Technology

Findings ‘How would you rate the pace and volume of regulatory changes across 2012 and 2013?’ “All the regulation is acceptable in my view. There’s too much whinging going on.” 70% Percentage of participants 60% 58% 50% 40% 33% 30% 20% Research Partner 8% 10% 0% 0% Very high High Normal 0% Low Very low

‘How would you rate the task of dealing with the regulatory workload during 2012 and 2013?’ 35% 33% 33% “External help almost provides us with reassurance, but there has to be collaboration so we can compare notes.” Percentage of participants 30% 25% 25% 20% 15% 10% 8% Research Partner 5% 0% 0% Very difficult Difficult About average Easy Very easy

‘Have there been any material changes since the FSA split into the FCA and PRA?’ 90% 80% Percentage of participants 80% 70% 60% 50% 40% 30% 20% “They’re trying to understand our business model. The FSA never did that.” 20% Research Partner 10% 0% No Yes - increased engagement and focus

‘What difference, if any, have regulations introduced in the previous two years had on the way your business operates?’ Suitability Scalability Research Partner

‘Do you have a defined compliance strategy in place and if so, can you describe it and its implementation?’ said, ‘no’ “Well, I suppose the strategy is to remain compliant at all times.” “…we don’t have a strategy that is documented.” Research Partner

‘For the compliance projects that take up most of your time, are you able to allocate what percentage of the work you would consider to be good business practice?’ 83% 85% “The FCA’s mantra is, ‘if it’s not documented, it doesn’t exist.’” Average percent of total work cited as good business practice 78% 75% 65% 55% Research Partner 45% 35% RDR Suitability

‘What are the main factors driving your compliance department costs?’ 70% 58% Percentage of participants 60% 50% 40% 30% 25% 20% 17% 10% “Regulation! The sheer weight of it hitting our sector is massive.” Research Partner 0% Business Growth The level of regulation Remuneration

‘How would you rate the level of your compliance department costs?’ 80% 35% 75% Percentage of participants 70% 33% 33% 30% 60% 25% 25% 50% 20% 40% 15% 30% 10% 10% 17% 20% Research Partner 8% 5% 0% 0% Much too high 8% High 0% Acceptable Too low Much too low 0% 0% Very difficult Difficult About average Easy Very easy

‘To what extent do you feel the front office has been impacted by the regulatory environment? • 1.8 front office professionals • Generating £500,000 revenue • Opportunity cost = £900,000 Research Partner

‘How easy is it for your IT department to keep pace with regulations introduced over the past two years (both in terms of project and business-as-usual work)?’ found it ‘difficult’ or ‘challenging’ “Giving us six months notice is unacceptable – I.T. is a finite resource and there’s only so much we can ask them to do.” Research Partner

‘Do you use specialist compliance software to help with the management of compliance and if so, what advantages/disadvantages does it bring?’ had no specialist software “There’s nothing out there to help with specific projects.” Research Partner

“It’s pretty difficult to squeeze a risk warning into 140 characters.” Research Partner

‘Is there a compliance ruling that you think ought to be introduced that does not already exist?’ • Level of individual’s compliance salary • Behavioural regulation • Super-clean share classes • Total Expense Ratio • Transparent Exit Charges Research Partner

Conclusions • FCA off to a good start • Belief in good business practice • Adaptability of firms – positive attitude Research Partner • ...but the ‘tsunami’ is going nowhere

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