The pace of regulatory change is pushing up both cost and complexity for financial services firms. UK Finance, a London-based financial services industry body, says that one of its members received on average 41 regulatory publications per week during 2019. That same also firm estimated that their investment in regulatory change in the first eight months of 2019 represented 33-40% of its forecast annual business-as-usual investment budget.
Generally speaking, some of this spending is focused on updating legacy systems. For example, another firm told UK Finance that it makes about 25,000 IT changes each month, of which roughly half are driven by the need to implement government or regulatory requirements.
The spending is also on people. Oliver Wyman estimates that between 10% and 15% of financial services employees are now dedicated to compliance and risk management. A shortage of financial services compliance talent across the industry means that remuneration costs are rising too, even as firms continue to struggle to fill essential roles.
Compliance costs are escalating at a disturbing rate. Meanwhile, the pace of regulatory change continues to increase.
While many firms are still working hard to comply with existing regulations, there is even more regulatory change in store. Potential new rules that are on the horizon for 2021, 2022 and beyond include Operational Resilience and later phases of the SFTR regulation.
In addition to new sets of rules, firms are also facing the possibility of significantly increased enforcement. In 2019, one asset management firm was fined £409,000 for market abuse, while two investment banking operations were fined a total of £61.9 million for transaction reporting failures. A broker was recently fined £15.4 million for market abuse as well.
The FCA knows this is just the tip of the iceberg. For example, a freedom of information (FOI) request sent by consultancy firm Duff & Phelps revealed that, between January 2018 and November 2019, 15% of the 3,724 UK investment firms which must report transactions under MiFID II notified the FCA of errors or omissions in their data. Another 223 firms were contacted by the FCA regarding potential reporting errors.
Regulators have been hinting for some time that a significantly larger enforcement crackdown is to come. The FCA knows that poor quality transaction data will impact the ability of firms to monitor their own employees for market abuse and other financial crimes. The regulator is also keen to have better quality data because it needs this information for its own market monitoring programmes.
In the US, the Securities and Exchange Commission (SEC) is already using its National Exam Analytics Tool (NEAT) to collect and analyse large datasets of trading records to identify potentially problematic activity, and its ATLAS tool to bring together multiple streams of data, including blue sheets, pricing, and public announcements, to search for market abuse. The US SEC uses these and other tools to often spot market abuse before firms do. It is likely the FCA is seeking to perform these kinds of analytics soon, too.