Thanks to everyone that participated in our inaugural UK compliance survey.
The survey results provide an insight into some of the key issues, concerns and priorities facing UK investment firms, concentrating on three topics:
- Compliance Present – the current regulatory environment
- Compliance Future – Brexit, Covid-19 and regulatory initiatives
- Internal compliance arrangements
Compliance Present
Cybersecurity risk is at the forefront of compliance minds. Almost 40% of respondents consider this to have the most significant impact on compliance arrangements due to Covid-19, and a similar number also see this as the key compliance risk that has emerged over the past 5 years.
One could glean from this that emerging cybersecurity risks have been magnified these past few months, due to the additional ways in which cybercriminals can wreak havoc. An increase in homeworking and usage of technology such as videoconferencing facilities create additional opportunities. Also, the number of cybercriminals has potentially increased, as miscreants find that they are unable to commit more ‘traditional’ crimes (it’s harder to burgle a house if everyone is at home, for example).
Other compliance topics scoring highly include the increase in regulatory reporting obligations which sometimes appear to come at firms from many different angles – FCA GABRIEL returns, MiFID II transparency reporting, EMIR and SFTR disclosures and a whole host of others. The Senior Managers and Certification Regime, at present in its infancy for almost all investment firms, is another hot topic, and it would be remiss of us not to take the opportunity here to point out the wide range of SMCR Compliance e-Learning solutions we have to offer.
On financial crime, one-third of respondents think that market abuse is their highest risk area, closely followed by anti-money laundering (almost 30%). This appears to mirror FCA concerns, with these two types of financial crime occupying the most column inches since the start of Covid-19. Bribery, fraud and tax evasion facilitation are the laggards.
Compliance Future
Marketing funds in Europe remains a key consideration among the buy-side and – no doubt to many – a bugbear. Two in five respondents deem this to be the most important future regulatory initiative, whether due to Brexit or the upcoming legislative changes to the fund marketing framework, including the introduction of the concept of ‘pre-marketing’, which are scheduled to take effect in August 2021.
Marketing issues have not gone unrecognised. Last week the European Commission, in opining on the effectiveness of AIFMD, stated that ‘…the efficacy of the EU AIFM passport is impaired by national gold-plating, divergences in the national marketing rules, varying interpretations of the AIFMD by national supervisors and its limited scope.’ Un-level playing fields due to the application of the national private placement regimes is also noted. It remains to be seen whether there will be any longer term legislative action to tackle these concerns.
Upcoming changes to the regulatory capital framework for investment firms, scheduled for June 2021, and ESG initiatives, are also prominent.
Speaking of Brexit, there are some bullish views regarding the state of play as at 1 January 2021. Almost 80% of respondents think that either the transitional period will be extended (despite the UK government vehemently denying that this will happen) or that the transitional period will be over, but that access to the EU marketplace will broadly remain unchanged.
In addition, almost 60% of respondents are, proactively or reactively, keeping a ‘watching brief’ on Brexit developments; as opposed to taking more pro-active strategic measures e.g. establishing a presence in the EU or recalibrating business activities away from the EU. As we near 31 December 2020, we may well see more pro-active courses of action.
On the topic of regulatory divergence after Brexit, there is a 50/50 split between the UK continuing to mirror the EU framework and the UK furrowing its own path. However, of the latter, a significant majority caveat that such divergence should be permitted only if the respective regimes continue to be ‘equivalent’; the perception being that this would facilitate access to the EU by UK firms.
Regarding Covid-19, over 80% think that there will be some longer-term changes made to the regulatory framework as a consequence of the outbreak, but these will not be substantial.
Compliance Arrangements
We were delighted to learn that 80% of respondents consider their level of compliance resource to be just about right! Just under 40% of firms have a dedicated compliance officer, whilst at just under 30% of firms the compliance oversight role is performed by the Chief Operating Officer.
Finally, firms revealed that they use a variety of techniques to deliver staff training. Most popular choice was e-learning training (22%) followed by classroom training provided by an external provider (20%). Less popular choices include asking staff to read the compliance manual and other relevant documentation, or sending round emails remind staff of their compliance obligations. In our view, the best way of delivering the training is to employ a ‘mix and match’ approach i.e. supplement formal e-learning or classroom training with other, ad-hoc methods, whilst being mindful of the overall training and competency considerations for each staff member.
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