This article is by Chris Kaye, chief executive of co-comply, a software product in the asset management market that aims to give a single view of a firm's compliance framework.

Editor’s note: This
article is by Chris Kaye, chief executive of co-comply, a software product in
the asset management market that aims to give a single view of a firm's
compliance framework.

One of the major impacts of the FSA’s Retail Distribution
Review will be the merger and acquisition of smaller regional wealth management
firms and independent financial advisors. In addition to the operational risk
that these mergers will cause and the potential for increased regulatory
breaches, wealth managers will also experience an increase in the complexity of
regulatory reporting and monitoring required. RDR will result in wealth
management being firmly in the regulators’ focus, resulting in more
inspections. Is the wealth management industry prepared to comply – to quickly
demonstrate to the regulators that they are on top of the issues?

“Grow to survive” is the message that has been touted ever
since the Retail Distribution Review was first mentioned. In a future world of
declining revenue and increased operating costs, smaller firms will need to
sell and banks, desperate to improve their prudential base, will ditch these
businesses as margins decline.  And firms
have listened. In the last two years the newswires have been buzzing with
stories of wealth managers acquiring competitors and IFAs. Stories include Close
Brothers’ acquisitions, BNP Paribas ditching its wealth management arm and developments
at Williams de Broe. There appears to be no end in sight to the changing
marketplace as the deadline gets ever closer.

At a time when the regulatory bodies are seeking to improve
the image and trust in the industry through initiatives such as the RDR, all of
this change will be setting off alarm bells and these firms will now be very
much in their sight.

Compliance workload

This is already a busy time for the compliance departments
of these firms. Stretched by the regulatory impact of the RDR on the existing
operating and business model, businesses have to also integrate and adapt
multiple compliance teams and control frameworks resulting from the firm’s
voracious acquisition trail.  The impact
will be pervasive and will stretch to breaking point compliance controls that
have been built up over the years and implemented in a light touch way.

Compliance controls that would have previously been seen as
“back-office” are now very much front-line as the regulators drive down their
message that compliance must be central to all of this corporate activity, and
be fully represented on the main decision boards.  

Let’s look at just a few of the compliance obligations and
controls, and the impact acquisitions will have on them:

Regulatory filings

How many firms will have considered this as a major impact
when putting together their plans and budgets? 
Many Compliance teams prior to all of this business activity would have
probably struggled to document the filings the firm had to make, as trust would
have been built-up over time that the supporting departments (finance, legal),
were on top of their obligations and anyway, there are more important things to
worry about.  But suddenly the number of
entity level filings has exploded.  The
firm now has multiple finance and compliance departments who are all trying to
integrate at the same time as legal entities are coming and going.  Can the oversight Compliance must exercise
now be left to trust? How will they build that picture of the filing obligation
universe and how will they evidence to regulators that it is happening!

Monitoring and testing

One only has to read the industry briefings about the future
shape of the Financial Conduct Authority to know that independent compliance
monitoring and testing will remain central to their plans. The principles and
guidance around monitoring and testing refer to an approach that is appropriate
to the regulatory risk faced by the firm. It does not take much imagination to
conjure up a picture of the changing risk profile of these firms as they
transition from pre-acquisition to tomorrow’s integrated business. As the risk
profile increases, so will the demands on the compliance team to oversee an
integrated and effective monitoring programme. 
A programme that operates across all of the new business entities is
often made worse by the demands from the bank’s central compliance function who
themselves want to evidence their oversight and control. Will acquisition
budgets provide for this increased monitoring activity, will the compliance
departments be able to centrally evidence the robustness of the approach?

It is common knowledge that the greatest challenge to any
acquisition is the people. Inevitably reporting lines change, roles change,
processes and procedures change.  This is
difficult enough in a non-regulated or light touch environment, but in retail facing
financial services firms the risk this presents is enormous.

While integration is happening, more than ever, the firms
will need to rely on the “old guard” who just know how things work. This is
particularly important when processes and procedures are poorly documented or
locked into the head of specific individuals.  If these people leave then the ability of the
firm to maintain an effective compliance framework during the transition will
diminish, just at a time when the regulator comes knocking.