The Association for Financial Markets in Europe (AFME) and Ernst & Young (EY) published a new report considering the role of the compliance function within wholesale investment banks and the potential challenges and changes it faces in its structure and approach. Challenges currently facing compliance teams are driven by:
Evolution of relationship with the first line of defense
Compliance has evolved from a quasi-legal function to one that is more focused on the identification and measurement of risks. Nonetheless, compliance has continued to fulfill many of its traditional roles, such as setting standards through policies, advising the business on regulatory requirements and monitoring for compliance with policies and standards. Getting the balance right between ensuring sufficiently independent monitoring oversight is conducted while still providing day-to-day advice is a challenge, particularly with a finite number of resources.
The speed and automation of processes
Compliance reporting is largely manual and as a result resource-heavy and time-consuming. However, compliance must keep up to speed with an ever-increasing use of automated trading platforms, algorithmic trading, a variety of different communications media, and the increasingly complex transactions and structures being developed by the business. There is risk inherent in these new processes and compliance officers need to understand these new technologies.
The increased accountability demands on senior managers
In order for senior managers to fulfill their Senior Managers and Certification Regime (SMCR) responsibilities, compliance officers must provide a sufficiently holistic view of risk. This means they need the analytical tools to be effective in forming a broader and more strategic view of the compliance profile in their organizations.
Some of the report’s conclusions are that there is an opportunity for compliance to transition from its traditional role into one that provides enhanced strategic advice to senior management. Compliance will become more data and technology dependent as budget challenges and operating effectiveness encourage innovation-driven transformation. But, people and human judgment remain important.
In order for compliance to transition to a different operating model there should be a shift towards it being a data user, not a data generator. Fundamentally, compliance should take a step back and look to use and leverage all streams of data (transactional, behavioral and social) to identify risks and act as an independent overseer and advisor.