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Ivy Schmerken
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Stressed Out by Compliance, Reputational Damage & Fines?

Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.



Financial executives feel the stress
More than half of financial services executives expect to feelmoderate stress in two years.
More than half of financial services executives expect to feel
moderate stress in two years.

Five years after the financial crisis, banks and other firms are still grappling with a growing list of regulatory reforms. Five international reforms currently weigh on the financial sector: Basel III, Dodd-Frank, the Foreign Account Tax Compliance Act (FATCA), the Alternative Investment Managers Directive (AIMD), and Globally Systemically Important Insurers.

A SunGard Financial Systems report (registration required) examines how financial services firms are living with uncertainty over which regulations will come out next. The report is based on a global survey of 400 senior financial executives; 86% said they are stressed by regulatory change. Further qualifying these results, 46% of respondents feel highly stressed, while 40% are moderately stressed.

And there is little hope for improvement; 28% expect to be highly stressed in two years, while 51% expect to be moderately stressed. What's more, firms must deal with an endlessly "multiplying panoply of regulatory authorities," since domestic regulators vie with international agencies for jurisdiction over both national markets and cross-border transactions, the report said.

Five more international reforms are still to come: Basel III, Markets in Financial Instruments Directive (MiFID II), the Solvency II Directive, G20 Financial Transactions Tax (Tobin Tax), and global derivatives regulations.



The deepest fear is reputational damage
Failure to comply can result in steep fines, but firms are more worried about their reputations and clients.
Failure to comply can result in steep fines, but firms are more worried about their reputations and clients.

The stakes are "terrifyingly" high, because failure to comply with regulations can bring steep fines. Nevertheless, the industry's deepest worries are not about the fines. Rather, 52% of the SunGard survey respondents said they fear reputation damage the most, and 39% said the loss of clients is their worst nightmare.



Ready or not, here they come
There's a lack of agreement on whether technology, skills, staffing, or internal resources are in a high state of readiness for what lies ahead.
There's a lack of agreement on whether technology, skills, staffing, or internal resources are in a high state of readiness for what lies ahead.

Though 52% of respondents said they were in a high state of readiness for what lies ahead over the next two years, they could not agree on which regulatory element was ready.

For example, 43% said that organizational and structural processes were ready, but only 36% said that technology was in a state of high readiness. One-third said that skills were up for regulatory change, while 26% cited staffing and internal resources as most ready.



Stress takes its toll
CEOs are feeling the most stress, but the entire C-suite is under pressure from the mounting compliance demands and costs.
CEOs are feeling the most stress, but the entire C-suite is under pressure from the mounting compliance demands and costs.

Compliance executives will obviously feel the brunt of the stress, but it turns out that stress has spread to executives throughout the C-suite.

In the SunGard survey, 39% of chief compliance officers, along with 34% chief risk officers, report high levels of stress. These executives are responsible for the day-to-day compliance responsibility. The fact that 38% of chief information/technology officers admit to stress may reflect than an overhaul of IT systems is required to cope with regulatory mandates. CFOs are stressed out because they have to make changes to processes and procedures to comply with the new regulations, while CFOs are zapped by the cost of the change programs.

Half the CEO respondents indicated they are experiencing high levels of stress, as well. That is not surprising, since the buck stops here. Some of the reasons for this include the fear of damage to the firm if a failure occurs, the fear of personal damage and liability, and the frustration with having to engage more directly with regulatory issues -- along with the possibility of missing business opportunities.



Driven to distraction
Business leaders find the intense focus on compliance is distracting them from their core businesses and preventing them from investing in new markets or products.
Business leaders find the intense focus on compliance is distracting them from their core businesses and preventing them from investing in new markets or products.

One of the fears is that the multitude of regulatory reforms will interfere with business priorities. Fifty percent of firms said they are distracted from their core business activities. Time spent dealing with regulatory compliance is taken away from other areas. This is limiting 28% of firms from investing in new growth. As a consequence, 25% of survey respondents said they are moving out of certain businesses.

According to one survey participant, regulation is also putting a damper on risk appetite and deterring firms from entering new markets or product lines, because of uncertainty about how the regulatory environment might read those efforts.



Loosening purse strings
Compliance budgets have been increased by an average of 12%.
Compliance budgets have been increased by an average of 12%.

Many financial services companies have made significant investments in technology, staffing levels, and process change. Yet almost two-thirds planned to increase staffing in compliance and related areas between 2013 and 2015. In the survey, 62% said they would increase their compliance budgets (by an average of 12%), while 10% of companies plan to reduce their budgets over the two-year period (by an average of 9%).

Aside from the money spent, 35% of companies say the cost of adapting to change is their biggest challenge. Some businesses expect to further rethink the way they work.



Spending on technology and staffing
Over the next two years, a majority of firms responding to the SunGard survey will spend more on technology and increase staffing but will rely more on external specialists and advisers.
Over the next two years, a majority of firms responding to the SunGard survey will spend more on technology and increase staffing but will rely more on external specialists and advisers.

Though 65% of the firms will spend more on technology through 2015, and 63% will spend to expand their leadership, staffing is still a major focus of their compliance efforts. More than half the survey respondents will rely on external advice by hiring specialists, while 55% plan to increase internal staffing to cope with regulatory pressure.


Building a New Culture

Building a culture of compliance
Regulators want to see a different culture take root in financial services firms.
Regulators want to see a different culture take root in financial services firms.

Regulators are seeking deep-rooted change across the financial sector, but this is hard to deliver, particularly for firms that are operating with the same staffing level.

More than a third (37%) of respondents said delivering cultural change throughout an organization remains a major challenge. Meanwhile, 41% said they are struggling to move beyond a "check-the-box" approach to compliance. Rather than simply adhering to new rules and regulations, 36% have created internal, cross-department task forces. But as the report points out, changing the culture of an organization, such as developing a positive attitude toward treating customers more fairly, is likely to take longer than developing new systems or processes.

 

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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