Pace of regulatory change an issue for 'nearly every' wholesale bank

Nearly every respondent to a recent survey by the Financial Conduct Authority (FCA) ranked regulatory change as either the first or the second most significant challenge to their business. The second most commonly cited challenge was adequate staffing of the compliance function itself, with new regulation and new technology among the reasons given for the need for more compliance staff.

The survey findings "confirm the position compliance officers have been telling us about", according to contentious regulatory expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law.com.

"Whilst such changes are arguably necessary to further the FCA's objective of protecting and enhancing the integrity of the UK financial system, the financial and operational pressures arising from these changes put firms and their compliance teams under significant strain," he said. "On top of this, there have also been an increasing number of enforcement actions by the FCA against compliance officers personally, where fines have been levied ranging between £20,000 and £200,000."

"Financial compliance teams may once have been seen, rightly or wrongly, to have been a 'roadblock' to business activity, but their role is now clearly defined as assisting firms in ensuring good customer outcomes, compliance with the regulatory regime and helping firms realise their business goals. Compliance teams and officers take an enormous burden on their shoulders, both from internal and external pressures, and are open to personal liability," he said.

"We do not see the role of compliance officers as getting any easier in the future as the FCA continues to ensure historic failings in the financial market do not repeat themselves, and as technology and financial crime continues to develop and becomes more sophisticated," he said.

The FCA surveyed 22 wholesale banks as part of its compliance research including large global banks, medium-sized firms focused on more specific areas and firms with "less significant" presence in the UK. It found that although banks' compliance functions retained their independence, the "role, strategy and design" of compliance was now commanding higher attention and support at board level, with compliance representatives now being added to boards and governance committees and given direct reporting lines to the banks' management.

Compliance "is moving toward a pure, independent second line of defence risk function with a higher profile within firms", according to the FCA's report on its findings. Firms are now being forced to formally define the responsibilities of their compliance and management functions, particularly in relation to issues such as financial crime, due to the "shifting boundaries" between these functions, it said in its report.

As wholesale banking becomes increasingly digitised and automated, banks' compliance functions must get involved at an early stage to allow them to assess risk, according to the report. Several firms said that advanced data analytics and visualisation presented opportunities to help their compliance functions discharge their mandates, although they noted the risks of data quality, data security and 'cybercrime' more broadly. Of the 22 surveyed firms, 15 put cybercrime in their top three compliance risks.

Firms told the FCA that their compliance headcount and demand for able staff had increased in recent years, in line with the increased importance of the function. This was putting pressure on salaries, turnover and skills, they said. Many respondents mentioned the need for appropriate staffing of compliance functions, in skills and experience as well as numbers, in order to meet current and future challenges. Firms are particularly looking for compliance employees with 'soft' skills, such as influencing skills and credibility, suggesting the growing importance of these skills.