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Preparing for a Period of Regulatory Change

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Murray Campbell, Business Consultant at AutoRek, considers how the compliance regime for UK financial services firms is changing and how outsourcing can help firms manage the regulatory burden.

In recent years, the UK financial services industry has found itself with an opportunity to redefine the compliance landscape. Brexit has allowed the UK to break away from the EU on some regulatory issues, and offered the chance to take the lead in emerging areas such as digital assets.

This opportunity comes at a time of great economic uncertainty following the Covid-19 pandemic and inflationary shocks caused by supply-chain issues and the Russia-Ukraine crisis, which is why the UK government’s Financial Services and Markets Bill, launched earlier this year, offers regulators the chance to change the rulebook and reposition as enablers of economic growth. That said, the financial industry still faces many challenges when it comes to meeting its compliance obligations.

Challenging time for financial services

The weaker growth and higher inflation of the post-Covid economic landscape are hurting many and putting extra pressure on compulsory compliance functions as companies struggle to budget and resource adequately.

Resourcing has been particularly difficult since the pandemic as the so-called ‘Great Resignation’ has seen some skilled workers leave or change roles. Indeed, experienced compliance staff are highly sought-after and come at a growing cost in a much tighter labour market. While Business as Usual (BAU) monitoring continues as normal, compliance teams struggle to keep up to date with new regulations and reporting requirements, but with fewer staff members and lower budgets. And as the operating environment becomes more complex, firms need to prioritise more effectively to develop a compliance plan for the year and identify higher-risk areas that require a greater focus.

According to the Thomson Reuters Regulatory Intelligence Cost of Compliance annual report, there is increased competition between compliance priorities this year, with some compliance officers “reporting frustrations when trying to deliver on their objectives”. The report noted that competing priorities had exacerbated this situation for compliance functions due to the economic environment and sanctions against Russia.

Automation should easily address some of these issues, but uptake has been slow.

The costs involved have been significant deciding factors in switching to automated compliance services. For some firms, costs outweigh the need, but there will eventually come a breaking point where increased regulatory pressure forces their hand.

Firms are also reluctant to move away from manual processes, with some questioning the contribution of automation to the compliance process. However, outdated manual processes may no longer cope with the compliance burden of today’s marketplace. And while a spreadsheet can do part of the job, firms may struggle to grow and compete with their peers as the burden increases.

Where is UK compliance heading?

In the post-Covid world, there is a need for more detailed knowledge of the rules and regulations. Firms have been filling gaps in their compliance teams by shuffling bodies around, but this can create additional operational challenges within a business.

We think the UK financial services industry is facing an extraordinary period of regulatory change, which it might not be prepared for at a resource level. The compliance function is not growing to meet the challenges of the new landscape, and many firms will struggle to stay on top of the changes.

Most recently, the Financial Conduct Authority (FCA) has set final rules in three regulatory areas – consumer duty, promotions on high-risk investments, and the enhanced appointed representative regime. In addition, operational resilience was finalised earlier in the year, making an impact on different teams and departments. Such changes highlight the scale of the compliance challenge for UK financial services firms.

In such an environment, data and technology will have a considerable impact on the compliance landscape. Technology can support the compliance function if firms allow it and deliver cost savings at a time of increased pressure on margins.

The digitalisation of the financial services industry and the data it is producing is giving firms a far better way of substantiating compliance with the ever-increasing regulatory burden at a time when the FCA is requesting a more data-led approach by firms. The ongoing data revolution in the industry is also making it easier for principal firms to monitor their appointed representatives, particularly when regulators are demanding greater oversight.

However, many firms are clinging to traditional compliance methods. Currently, just 15% of UK compliance professionals already outsource some or all of their functionality, according to the Thomson Reuters report. This is why we believe there will be a more significant trend towards automation as the benefits of outsourcing and automating compliance functions become clearer.

The RegTech industry has grown significantly in recent years as a growing number of firms use trusted outsourcing providers’ considerable expertise while reducing the burden on their often overstretched, in-house compliance teams. Further, as an overwhelming number of new regulations in emerging areas are introduced, firms have realised that best-in-class third-party providers can provide much-needed support to kickstart new projects. By embracing automation and trusted outsourcing partners, firms can remain nimble and ensure they keep costs down in the short term, and ultimately become more profitable.

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