Technology

How Low-Tech Compliance Hits Competitiveness

Thomas Imhof, Apiax, Regulatory Engineer, Zurich, 29 March 2021

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It is becoming increasingly apparent how costly a low-tech approach to compliance management can be – and in many senses. Thomas Imhof, Regulatory Engineer at Apiax, explains how firms are turbocharging their competitiveness through cutting-edge regtech tools.

Those in the financial services sector will know that regulation comes at staggering costs. So much so, that it has been estimated that compliance eats up 6 to 10 per cent [i] of revenues for half of banks.

“Throwing people at the problem” is a time-honored means of coping with compliance complexity. Yet it is an increasingly unsustainable one, not least because the magnitude of change (and risk) has rightly elevated the status and therefore compensation of compliance professionals. In developed markets, even entry-level compliance managers can command annual salaries touching $110,000 [ii]. Such is demand, that experts can expect a leap of 8 per cent for accepting a new role [iii].

The bottom line is also hit hard in more hidden ways, particularly when firms are maintaining compliance across multiple jurisdictions. A low-tech approach invariably means too much of the burden is borne by client-facing and investment management personnel, with them having to attend compliance training and interpreting internal policies and manuals. This time could clearly be spent in far more profitable ways.

Even more under appreciated, and arguably most damaging of all, is how much compliance complexity constrains the competitiveness of institutions on the world stage - and by extension their client advisors.

Rich seams unmined 
Our Staying compliant across borders study makes this crystal clear. In a global world with increasingly mobile clients, cross-border compliance is an almost universal concern, and obviously even more so for serious players in the wealth management space. Of the 43 major financial institutions we surveyed, 93 per cent provide services and products in multiple countries; 51 per cent are dealing with over 20.

But these seemingly buccaneering figures obscure what we see as a real limitation (or perhaps more accurately self-limitation) of firms’ ambitions. Although 55 per cent of firms actively market their cross-border services, only 45 per cent offer them passively. Strikingly, over a third (36 per cent) of the most globalized firms offer all their cross-border services only on a reverse-solicitation basis. Rich seams are being left unmined.

You might say that client-centric firms will do their utmost to deliver if asked. Otherwise, they may often conclude that actively pursuing certain services and cross-border products is more trouble than it is worth. We know that rising complexity frequently deters institutions from pursuing lucrative markets. It also involves agonizing decisions to pull out of them.

Endless puzzling   
As compliance management practises currently stand, it is easy to see why.

Over a third of firms admit that they struggle to provide clear dos and don’ts, leaving many to simply “puzzle it out” from reams of internal and external resources. Worse, and quite incredibly for the year 2021, client advisors at three-quarters of firms are still having to pore over paper-based cross-border manuals to know what they can offer.

Burying advisors in a veritable library of books (or PDFs, which are little better) when they should be nurturing client relationships is clearly a misuse of their very expensive time. You could certainly say the same for the 40 per cent of investment teams who have to monitor country-specific restrictions at the investment product level.

Clearly, few areas of the business will be untouched by the constant challenge of unpicking interlinkages between an entity's license framework, regulatory requirements and country-specific offering exemptions. Compliance training, monitoring, maintaining cross-border manuals and the approval processes for advisors’ (hopefully soon to be reinstated) travels are absolutely in the fray. So too are marketing and all the other business activities impacted by country-specific regulations, for which read virtually all.

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