May 20, 2013

Like many things in life, our interpretation of a subject varies based on the experience through which we approach it. If you ask a compliance officer whether compliance is a competitive advantage, he might well respond that keeping his firm's name out of the headlines for compliance failures certainly helps keep business from getting derailed. But does good compliance really give a firm a revenue advantage against their competition?

Rex Gooch, vice president, product strategy, SunGard’s Protegent
Rex Gooch, vice president, product strategy, SunGard’s Protegent

In the world of compliance, a job well done is often a thankless one. After all, when compliance operations are running effectively, no one is the wiser. However, when things don't run well and it all goes bad, everyone shifts into crisis mode and the compliance department gets a lot of unwanted attention.

So how can one say good compliance actually provides a competitive advantage when the sign of a good compliance shop is to operate virtually unnoticed?

Two things are clear.

First, performing compliance is not optional. It's like a tax; any shop wanting to compete in the fast-paced world of financial services must fulfill their obligations to the regulators and demonstrate they are equipped to operate in accordance with the law. Additionally, how does one compete for clients and to increase revenue on a function that for most markets is a minimum expectation? It would be analogous to selling an automobile without brakes. A firm can't get into the business without compliance, and even if it somehow did, customers wouldn't do business with this kind of firm. Some firms may choose to market their compliance culture as an advantage but fulfilling minimum expectations isn't likely to be the source of new or significantly increased revenue streams.

Second, compliance professionals are not only willing, but eager, to share information. To the compliance manager, the competition isn't necessarily the other firm down the street; it's the regulator performing sweeps and audits which affect each firm equally. This perspective causes compliance officers to share information and best practices on how to prepare and mitigate their risks against common challenges. Sharing allows them to operate compliance as effectively and efficiently as possible with the least amount of interruption from auditors and regulatory inquiries. Sharing is a win-win for compliance professionals and results in best practices which ensure firms fulfill their obligations to protect the investing public. Sharing helps firms keep their name out of the headlines so they can avoid public relations and financial crises, and also helps compliance professionals to be more prepared when a regulator gives notice of an impending audit.

The reality is that compliance has been seen as a cost center for financial firms. How then can compliance really be a competitive advantage? The answer lies in the two commodities most valued by all businesses: time and resources.

Under The Radar
The compliance professional's job is to spend their career performing an unassuming duty, which in the best possible scenario means flying under everyone's radar, keeping the firm out of the headlines and the regulator's crosshairs by proactively tracking down and addressing potential risks before they become issues.

As new regulations mount and operational budgets become tighter, the compliance officer (like the rest of us) is expected to do more with less. Automation is the only reprieve. Additional employees aren't always the answer because they are expensive and not as scalable. Smartly architected solutions can position a firm to increase both its compliance efficiency and effectiveness. Done correctly, these investments can yield increased ROI by dramatically increasing the capacity of the compliance department, increasing the transparency compliance has to the firm's business, and removing the need to hire an army of analysts. In most cases, existing resources can be repurposed or expanded to take on new tasks. For example, in the time it takes to manually sample a few random transactions or customer accounts for issues, an automated solution can systematically review every single transaction and account within the firm and flag those items on which the reviewer's time should be spent. Instead of looking for risks, reviewers can more effectively mitigate risk by addressing them.

[Compliance is usually just considered part of the cost of doing business. But executives now have more reasons to get compliance right. Read: Bankers Could Soon Face Jail For Reckless Behavior.]

By now, most firms have some form of compliance automation, but in many cases it is limited. The problem is in reviewing and selecting a point solution to address each compliance task where automation can and should be leveraged. Between the time needed to implement and test the solutions, resources required to revise policies and procedures, and effort spent in training and supporting the compliance users, the commitment in man hours is tremendous and can eat up a significant portion of the proposed ROI.

One must also consider the time it takes to interpret the results of multiple point solutions and determine how the result of one solution affects another. In some cases it means integrating multiple point solutions to paint an overall risk picture of the firm, which is no small task. The result is often vendor consolidation where firms seek strategic partnerships with fewer vendors to maximize their economies of scale for greater benefits.

Good compliance is about identifying trends that can lead to future issues, then taking action to mitigate those risks. It is the unknown issues that keep compliance professionals awake at night. Identifying unknown issues requires greater transparency across a firm's organizational data with an integrated workflow so managers can efficiently document and assign issues then follow their resolution progress.

Holistic automation is the next step for the compliance department. The combination and integration of the applications compliance managers rely on with the necessary reporting and workflow capabilities consists of more than what a point solution can offer and is the crux of the compliance technology platform. Integration for transparency, detection, documentation, and resolution must work seamlessly across multiple solutions. This is not easily found without expensive custom development, and it is usually unsustainable to keep multiple point solutions current with ongoing maintenance and upgrades.

The compliance needs of today's -- and tomorrow's -- sophisticated financial services firms are complex and broad. Compliance solutions specializing in their respective areas are critical, but making sure they work together is the key to success -- and the biggest challenge. Without this, the advantages gained by automating with various point solutions are essentially erased because the mountain of information produced becomes unmanageable.

Platform solutions which incorporate the key components required by today's compliance office are where compliance technology budgets will be -- and must be -- directed. There have been enough regulatory mishaps over the past few years that compliance professionals don't have to work quite as hard nowadays to get the attention of senior management. Corner offices are listening, but what they listen for is how their compliance technology budgets can go further and do more to maximize the limited resources compliance teams have while being more creative about how to proactively uncover and address potential regulatory and compliance risks.

About the Author: Rex Gooch, vice president, product strategy, SunGard's Protegent Rex Gooch is a vice president and head of product strategy for SunGard's Protegent. He is responsible for Protegent's overall product strategy and manages the direction and development of Protegent's solutions. Mr. Gooch was previously the director of product management for Protegent where he helped engineer, design and implement solutions and prior to that he spent 11 years in the brokerage industry as a registered representative, senior trader, technical specialist, and operations manager for Fidelity Investments. His experience includes risk management, tactical and strategic planning, project management, process implementation, and operations management. Rex graduated Magna Cum Laude from Westminster College with a Bachelor of Arts degree in finance.