Regulatory Change the Single Biggest Compliance Challenge

Financial crime, culture & conduct risk, personal liability and technology are some of the other top compliance challenges cited in the latest Thomson Reuters Cost of Compliance report.

Regulatory change remains the single biggest challenge for compliance officers in the years ahead, according to the Thomson Reuters Cost of Compliance 2019 report.

The report findings from Thomson Reuters’ 10th annual global survey of risk and compliance professionals, which seeks to understand the challenges financial services firms expect to face in the year ahead.

For 2019, the top compliance challenges are: the volume and pace of regulatory change; increasing regulatory burden; financial crime, AML and sanctions; and culture & conduct risk. In the 2018 report, continuing regulatory change; data privacy and GDPR; enhanced monitoring and reporting requirements;  and increasing regulatory scrutiny were cited as the top challenges.

One area of particular challenge in relation to financial crime, AML and sanctions is the incoming requirements that 5MLD (the EU’s 5th money laundering directive) will impose when it comes into effect in January 2020.

According to the report, compliance budgets are expected to continue to rise, with 65% of respondents expecting in particular that the cost of senior compliance staff will increase in 2019. In Australasia, expectations are the highest (75%) that compliance budgets will increase, likely to be driven in part by the Australia’s Royal Commission, the report said..

The growth in compliance teams is slowing, with the majority of respondents (59%) expecting team size to remain the same.

The majority (71%) of firms expect the amount of regulatory information published by regulators and exchanges to increase over the next 12 months, with 43% expecting a slight increase and 28% expecting a significant increase. Regionally, more than half (56%) of firms in Australasia are expecting a significant increase in regulatory information published by regulators and exchanges in the year ahead.

In parallel, an increasing number of firms are expecting more liaison with regulators (53% in 2017, 58% in 2018, rising to 71% in 2019). The increase is expected to be a result of information requests from regulators; the need to understand changing regulatory expectations; and more onerous regulatory and reporting requirements.

There has been a steady year-on-year increase between 2017 (48%) and 2019 (60%) in the percentage of firms who expect the personal liability of compliance professionals to increase. The difference was more notable at G-SIFIs, 74% of which expected personal liability of compliance professionals to increase in 2019 (64% in 2015).

The report outlines key initiative in this regard, including the UK’s SMCR (Senior Managers and Certification Regime), Australia’s BEAR (Banking Executive Accountability Regime), Hong Kong’s MIC (Managers in Charge) regime, and proposed guidelines in Singapore and Malaysia.

Personal accountability is also considered one of the top challenges facing boards of directors in the coming year, in addition to keeping up with regulatory change, cyber resilience and culture & conduct risk.

Over a third (36%) of G-SIFIs (28% all firms) outsource at least part of their compliance function, the  highest rate since 2016 when the question was introduced to the survey. The reasons cited for outsourcing any or all of a firm’s compliance functionality include the need for additional assurance on compliance processes (53%), lack of in-house compliance skills (48%), and cost (41%).

Looking further ahead, the most widely anticipated compliance changes over the next 10 years were cited as: the automation of compliance activities; continuing regulatory change; an enhanced role for compliance within the business; the ‘new normal’ of culture & conduct risk expectations; and the rise of technology risk.

“Technology, whether the implementation of fintech and regtech, or the possible threats posed by cyber-attacks, will continue to transform both firms and their compliance functions and will require the expansion of existing skill sets in all areas of a firm,” the report said in closing.

It cited a September 2018 KPMG study which estimated that regtech will make up 34% of all regulatory spending by 2020; that is, a USD 76 billion regtech spend out of an annual compliance spend of USD 270 billion.

The full report is available for download here.

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