Impact of COVID-19 on the cost of compliance

(Sponsored content) Without question, compliance functions for financial services firms around the world have matured in the decade since the financial crisis, with many firms enhancing their compliance capabilities to embrace the new range of disciplines and specialities required.

Yet today, the risk and compliance functions are at an inflection point that demonstrates the difficult balance between the need for investment in skills and resources and the tight budgets under which many compliance functions operate. This is set against a background — even before the impact of the COVID-19 pandemic is considered — of continued uncertainty about culture and conduct risk issues, regulatory reform, and the growing threat of personal liability.

The Cost of Compliance Report 2020, published by Thomson Reuters Regulatory Intelligence (TRRI), examines this inflection point and offers insight as to how best firms’ risk and compliance functions might face the challenges ahead.

Cost of Compliance Report 2020 findings

Some of the report’s findings include:

  • Board challenges ―The greatest compliance challenges boards expect to face in 2020 are balancing budgets in the face of increasing compliance costs, the volume of regulatory change, driving demonstrable cultural change, increasing personal accountability and the implementation and embedding of regulatory change. This contrasts with the 2019 board challenges which were keeping up with regulatory change, cyber resilience, personal accountability, culture and conduct risk and financial crime.
  • Compliance challenges — The top three challenges for compliance teams for 2020 are keeping up with regulatory change, budget and resource allocation and data protection. In 2019 the top three challenges were the volume and pace of regulatory change, increasing regulatory burden and financial crime, AML and sanctions.
  • Culture and conduct risk concerns — In the last year around a third of firms (34%) said they had discarded a potentially profitable business proposition due to culture-or conduct-risk concerns. This has ticked up from the 28 per cent which reported discarding a potentially profitable business proposition in response to the same question in 2018. The biggest culture or conduct risk facing firms is seen as creating a unified compliance culture.

Impact of COVID-19

The pandemic has clearly increased the pressure the financial services firms face from all sides. They have had to remain compliant with all relevant rules, requirements and expectations, and continue to deliver consistently good customer outcomes. COVID-19 has affected almost every aspect of day-to-day life with the imposition of lockdowns, a closure of international and domestic borders and the need to implement, at speed, remote working capabilities for thousands of employees.

In Thomson Reuters’ Cost of Compliance Report 2020: COVID-19 Update, a further snap-shot check-in to understand how financial services firms are responding to COVID-19, it was found that financial services firms and their regulators have adapted quickly to the seismic changes and continuing uncertainty of the COVID-19 pandemic.

Findings of the Cost of Compliance Report 2020: COVID-19 Update

Many regulators are seen to be having a ‘good’ crisis, having responded with a raft of mitigation measures in the early stages. Firms have implemented sweeping changes at unprecedented speed. They have often implemented wide-scale remote working for employees with, for the most part, significant success.

This report assesses changes in perceptions of the single biggest culture or conduct risk now facing firms and considers how the three key skills required for an ideal compliance officer in 2020 and beyond have altered.

Respondents were also asked their views on the single biggest concern arising as a result of the pandemic. Firms are placing a greater emphasis on developing a compliance culture during the pandemic, the survey found.

Culture emerged as the top compliance challenge for boards and also the greatest conduct risk. This differs from the cost of compliance 2020 findings where budgets and regulatory change were seen as greater challenges. It is important for firms to have a strong conduct and compliance culture embedded throughout their organisations.

Firms are beginning to accept that operating an effective framework for culture, conduct and compliance is equally as important as their financial frameworks.

Monitoring of staff activities was also a key feature of the survey. It was seen as the biggest compliance challenge and the largest threat to conduct risk within a firm. Remote working, lockdowns and a cessation of almost all travel has fundamentally altered firms’ way of working.

Employee welfare has been in the spotlight as never before alongside how to have line of sight to (and to be able to demonstrate) compliant remote activities set against a backdrop of a profound economic shock.

Many firms have implemented remote working satisfactorily and now one of the many challenges facing firms is how they emerge from lockdown and return, at least in part, to an office environment.

Finally, the need for compliance functions to be resourced with adequate subject matter expertise again came across strongly in the survey. This echoes the findings from the cost of compliance report 2020.

The pandemic has been a catalyst for some of the wider change that was already happening in financial services. This means that as firms develop their operations, compliance functions are expected to develop new disciplines and expertise. Delivering on this, at the right price, is a challenge for compliance officers.

The challenges set out in the original cost of compliance survey report have not gone away, and it is possible many of those challenges will have been exacerbated by the pandemic.

Firms’ thinking and approaches to the greatest challenges have shifted, from both the perspective of the compliance function and the board. 2020 was always going to be challenging for compliance officers, but no one could have foreseen quite how challenging the year has already turned out to be.

‘This is a critical time for financial services and those working in financial services - to play an essential and important role in supporting the economic recovery and the wellbeing of the Irish public. Unprecedented as the circumstances are, it is a moment of opportunity for financial service firms to meet their commitments with actions and to evidence their trustworthiness to their customers and wider society. As compliance officers and professionals, you play a critical role, and your role will be vital throughout this crisis in ensuring consumers and investors are protected.’

Derville Rowland, Director General, Financial Conduct at the Central Bank of Ireland. June 2020

Download the Cost of Compliance Report 2020 and the Cost of Compliance Report 2020: COVID-19 Update 

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