The rise of compliance
Written by: Kirsten Morel

Increased regulation and demands for transparency have meant the compliance burden for financial service providers has become more onerous. Kirsten Morel examines how these firms have been affected

You don’t have to work in the finance industry to be aware that compliance plays a key role in the day-to-day operations of financial services companies. Since 2008, we’ve all experienced the repeated requests from our banks, insurers and credit card providers for more proof of identity and source-of-fund documents. The fact that we, as individuals, all notice a stronger focus on compliance only underlines how pronounced the change must be for those in the industry.

“The financial crisis has brought compliance into sharper focus,” says Kristian Walton, Associate Director of Risk and Compliance at global fiduciary service provider Elian. “The desire to get it right from the top down is much more focused, and every financial services organisation has had to adapt to what has happened and respond effectively.”

That compliance has been brought into sharper focus since 2008 is not to say that it was previously being ignored. Rather, some see it as part of the natural development of the regulatory environment.

“Compliance requirements were increasing anyway,” says Nadia Lewis, Head of CI Compliance at Deutsche Bank. “Take the UK for instance, the rule book was already enormous.”

Add to that rule book a host of new regulations including FATCA and AIFMD that are being brought to bear by external jurisdictions and organisations, and it becomes easier to sympathise with the 32 per cent of people who, according to the Deloitte Compliance in Regulated Organisations in Jersey 2013 survey, believe ‘current levels of regulation have a detrimental effect on the island’s ability to compete’.

Whether the Channel Islands are putting off clients because of their desire to be seen as well-regulated jurisdictions is a moot point, particularly as the same survey shows that 49 per cent of participants ‘believe current levels of regulation allow Jersey to gain a competitive advantage in certain markets’. Although counter-intuitive to many, this perspective is an acknowledgement that Jersey and Guernsey compete on the global stage and have established reputations for being well-regulated financial centres.

Shifting focus

While the rulebook may have always been hefty, a changing regulatory approach that focuses on business conduct as opposed to ticking boxes means the role of the compliance department is also transforming.

“Compliance has become very different,” says Lewis, pointing out that regulators want to see compliance at the forefront of everyone’s mind. “Regulators are looking to speak to people in the business rather than just compliance officers, so ideally everyone has a mini compliance officer inside them.”

Such ongoing and quite extreme change is hitting all companies, big and small, and there’s no doubt that smaller companies in particular find it hard to keep up. Wayne Atkinson, Senior Associate in the Commercial Team at Channel Island law firm Collas Crill, says companies need to maximise the efficiency of their processes to deal with this.

“We’re reaching that point where firms have evolved their own processes for demonstrating what they need to do, and perhaps they aren’t always as efficient as they need to be,” he says. “It’s a global issue, and it’s how those companies choose to implement the standards that determines whether compliance is more onerous or not.”

Internal processes and procedures can be used to comply efficiently, but with FATCA (both US and UK versions) and the upcoming Common Reporting Standards demanding firms big and small report new information in new ways, there’s more work than before, and this has resulted in more staff being taken on, according to Deloitte’s ‘Compliance in Guernsey’ 2014 survey.

‘There was a pronounced headcount increase in 2011 and to a lesser extent in 2012. This seemed to tail off in 2013 before accelerating again in 2014,’ the survey finds, while also noting ‘increases were largest in insurance and banking’.

In Jersey, the proportion of companies reporting increased headcounts has steadily risen since 2011. Interestingly, while firms may be hiring more compliance officers overall, in firms with 100 or more staff, the ratio of compliance staff to non-compliance staff has decreased since 2010, suggesting that efficient processes are being used to manage the compliance burden.

Inside out

As a non-fee earning business function, compliance will always be under pressure to work efficiently, and although the Guernsey survey shows firms are hiring, it also notes it’s not without scrutiny from the top.

‘Looking forward, 27 per cent of functions intend to increase compliance staff in 2015, but many compliance officers reported that they were being challenged over costs/budget,’ the survey reported.

Given the increasingly important role of the compliance department and the constantly changing regulatory environment, it’s perhaps unsurprising that Deloitte also found that ‘the use of external assistance has increased since the last survey, with growth in consultants particularly noticeable’.

Sue Guilliard, Executive Director at Madihan Risk Assurance in Guernsey, sees this as a response to the changing environment rather than a lack of suitable staff. “More and more businesses are bringing the compliance function in-house. However, utilising external expertise to build the framework and embed the culture into the organisation is an effective approach,” she says.

Across the water in Jersey, it’s a similar picture. “Outsourcing will be a continuing theme in the years ahead. The specialisation element is important,” says Kristian Walton. “There is a demand for skilled people. Some say it’s a shortage but I’ve not found that here. I’ve been delighted with the candidates we’ve seen.”

Whatever the reason for outsourcing, Walton is unequivocal about where responsibility for compliance lies. “It’s important to understand you can outsource the work but not the responsibility,” he says.

Technological advances

When it comes to tools that drive efficiency, technology is next to outsourcing in popularity, and compliance is no different to any other department in this respect.

While technology is already being used to help with the due diligence process, and FATCA implementation has seen a variety of reporting tools on the market, the cost, customer nuisance factor and increasing complexity of compliance are behind the development of technologies to address these issues.

Seemingly more futuristic – but very much available today– is Amelia, a US-developed artificial intelligence that is being trialled in large organisations. According to IPSoft, Amelia’s developers, Amelia ‘automates knowledge work across a broad range of functions’. These include direct communication with clients and the ability to learn processes once and stick to them. As a result, IPSoft believes that compliance will be ‘a strong point’ because ‘Amelia will always follow the governance processes she is asked to follow within any process’.

 While technology may be able to deliver efficiencies and, to some extent, reduce headcount, that doesn’t necessarily mean Amelia is set to take over quite yet.

“There’s a minimum standard that can be prescribed formulaically,” says Mehul Kotedia. “But you can’t avoid human interaction. There’s an element of human intelligence that will never be replaced. What’s important is how you use human intervention and technology together to remain efficient.”

The regulatory environment is certainly increasing in complexity, but that doesn’t necessarily equate to compliance becoming a dominant force within firms. Nor does it mean that compliance departments are growing monstrously.

Instead, it’s the perception of compliance that’s changing. As Nadia Lewis says: “Compliance is becoming the industry’s moral compass.”

To achieve this, the compliance function needs to be fully resourced, and that means having the confidence of the board, skilled staff and the right technologies. Bring these together and Channel Island firms can find themselves on the right side of the regulator, and the local regulator on the right side of international regulators.
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