A compliance function designed for the roaring 2020's

By James Andrew, ACA Compliance Group

Published: 31 January 2020

The past few years have proven challenging and complex times for often heavily laden and thinly resourced compliance teams at hedge funds. With a slew of post-crisis legislation, the past decade has presented nothing short of a barrage of implementation deadlines for firms to meet.

While we have not reached the very end of this pipeline, 2020 does at first blush appear to present some much-needed breathing room for firms to take stock of their compliance programmes and think strategically about how they are designed and resourced. With an ever-growing number of interconnected geopolitical, economic and environmental changes and challenges, this will be time well spent as firms face a range of uncertainties that may create business disruptions throughout the new decade.

Uncertain times can be tricky and so a well-constructed compliance programme requires nimbleness in order to scale up or down to pressing business needs. This is where the integration of humans and technology working on a complimentary basis can help achieve efficiency and address business priorities in ways that enable innovation and growth, all while minimising risk.

Heightened levels of global regulation combined with increasing scrutiny and cost pressures place Chief Compliance Officers (CCOs) and compliance teams under mounting pressure. Over-burdened teams that are stretched too thinly are ─ as mere humans after all ─ more likely to experience burnout and so are more prone to mistakes, exposing firms to risk. Ultimately this may also contribute to a higher than desired staff turnover.

This is where a pragmatic approach to outsourcing and a move to embrace smart technology can help ease some of the burden, improve efficiency and in real terms amount to a cost saving. Industry research shows:

Over 48% of surveyed CCOs occupy two or more internal functions and perform other non-CCO/legal roles (IAA/ACA’s 2019 Investment Management Compliance Testing Survey).

16% of surveyed firms have had compliance personnel go on extended leave (i.e. medical or maternity leave) within the last year impacting on continuity of resourcing and further burdening remaining staff (ACA 2019 Alternative Fund Manager Survey).

The number of firms choosing to outsource all or part of their compliance function has remained consistent, ranging between 24% and 28%, year-on-year since 2016. 36% of global financial services firms now outsource all or part of their compliance function. (2019 Thomson Reuters Cost of Compliance report).

67% of firms use automated or electronic compliance systems, while 56% of firms plan to increase their use of automated or electronic compliance systems. The most common automated compliance tasks are related to personal trading and code of ethics/code of conduct (78%), gifts and entertainment (49%), client guidelines (41%), and cybersecurity (31%) (IAA/ACA’s 2018 Investment Management Compliance Testing Survey).

It’s clear that, where implemented appropriately, strategic outsourcing remains a highly beneficial tool at firms’ disposal to maintain flexibility and continuity of resourcing, and one where we see a few key themes emerging. These include:

Delegation not abdication: In an era of increasing individual accountability, outsourcing work to a third party doesn't relinquish you from your regulatory responsibilities. Your firm is ultimately responsible for its compliance programme, policies and procedures and monitoring. This is where a 'co-sourcing' approach can come into play; a long-term one-to-one business collaboration with a trusted provider where both partners have a vested interest in the outcome of the relationship. This collaborative approach allows the service provider to support a firm and its compliance activities in a better, quicker, and often more cost-efficient way than the firm doing it itself, without increasing the firms exposure to regulatory risk.

In or out?: In-sourcing (or secondments) is another option for firms during exceptionally busy times. For example, firms can tap into a large pool of compliance professionals on a contracted basis to work in-house for an agreed number of days per week/month, or even full time for an agreed period. This approach can be used to implement a new regulation or control, to undertake specific projects (e.g. a regulatory reporting or market abuse review) or to simply bolster your team during personnel transitions, support while working to secure a full-time hire or to cover staff absences such as during maternity or paternity leave or for shorter-term illness or holiday coverage.

When it comes to service providers, not all are equal: For quality assurance, seek personal referrals and assess the competence, capability and capacity of potential service providers including whether they are members of the APCC (Association of Professional Compliance Consultants). Enquire as to the attrition rate of the provider’s staff, and how many firms they service with the same strategy as yourself and how they can support your firm as it grows.

With support comes efficiencies and deeper insights: Keeping up with the sheer volume and pace of regulatory change, not to mention the volume of data flowing into and out of a firm, can be a challenge. Fortunately for compliance teams, regulatory technology, or ‘RegTech’, is here to help. RegTech can bolster operational efficiencies by allowing for the automation of manual tasks, the generation of instantaneous reports, and the capturing of data for recordkeeping purposes. All of these tasks would otherwise be done manually and laboriously and thus consume precious time and resources. Not only this, but RegTech provides an opportunity to connect structured and unstructured data sets in order to derive deeper insights for identifying additional potential risk.

This is something that is being recognised by the global regulators, including the SEC, FCA, and CFTC, who are meeting the pace of evolving regulatory change through investments in data and analytics that can help them more quickly and efficiently perform their supervisory duties. The SEC’s Office of Compliance Examinations and Inspections (“OCIE”) recently listed financial technology (“FinTech”) innovation as one of its top focus areas for 2020, and the FCA and Bank of England issued a joint statement on their commitment to data and analytics innovation in 2020.

We encourage you to take an enterprise risk view when positioning your firm’s compliance function for success throughout the roaring 2020’s and beyond. Ensuring your compliance programme is optimally designed allows your resources to be deployed to their best effect and enables your compliance teams to focus on significant areas of risk to your core business. Reviewing your firm’s strategic approach to outsourcing and use of technology is a great way to achieve this while reducing risk overall and improving standards in an era of ever increasing accountability.