Bill Mulligan (pictured) makes an eloquent case for a future in which software takes most of the drudgery out of the compliance process, despite the constant bleat about financial regulatory compliance becoming more onerous.

The financial crash of 2008 transformed the regulatory environment in more ways than one. Financial firms now find themselves far more heavily regulated than before, but it isn’t just about the volume of new rules. Enforcement is also changing. Alternative funds are coming under unprecedented scrutiny from an increasingly proactive Securities and Exchange Commission.

The numbers speak for themselves. In 2013 new investigations rose 12% above the previous year's total and formal orders of investigations were up 20%. Fines have reached record highs and it has been estimated that in this new environment a whopping one in 12 firms will face 'action' at some point. As the SEC’s Mary Jo White declared, “We are casting our nets wider, and using nets with smaller spaces.”

This is not a reaction to an upsurge in wrongdoing in the financial services industry. No such trend exists. Rather, it reflects a fundamental shift in the Regulator’s role. Whereas enforcement and investigation used to be last resort measures, they are now increasingly being used as broad regulatory and investigative tools.

How should firms respond? As always, they must go out of their way to understand what is required of them and review their compliance processes regularly. The education of staff at all levels of every firm will remain crucial.

In this new environment, however, it will also benefit firms to start to think about compliance in a new dimension – that of convenience.

Nudge theory

Recent years have seen the rise of ‘nudge theory’. The underlying idea is that, deep down, humans are creatures of habit and convenience: rather than acting out of malice or a conscious intention to do wrong, they sometimes indulge in “anti-social behaviour” because the ‘right’ path is too difficult for them to follow or not obvious to them in the first place. Consequently, the compliance officer must “make the right thing as easy as possible.” This is a crucial ingredient in any culture of compliance, being equal to, if not more important than, the issuance of threats, the proliferation of education, or moralizing.

'Nudge theory' has been embraced by governments on both sides of the Atlantic, in part due to financial constraints. ‘Nudges’ are generally less costly and drastic than more authoritarian alternatives. For instance, the policy of encouraging shops to put fruit at eye-level is a ‘nudge’ as opposed to simply banning junk food. The recent inclusion of ‘donate to charity’ buttons on ATMs is another example: this makes the act of donating to charity very easy and something you have to consciously choose not to do, rather than the reverse.

Theory and practice in compliance

The concept is very applicable to the world of regulatory compliance and provides a new way for firms to think about their culture of compliance. The stereotypical compliance breach is thought to be a sensational thing – intentional fraud, insider-dealing, market manipulation, etc., but in reality the vast majority of compliance breaches are unintentional, the result of a detail missed or something not being filed quite rightly, perhaps. These are precisely the sort of ‘housekeeping’ infractions that the SEC is now going after full-throttle. 'Nudge theory' would suggest that stricter rules, penalties or even endless education are not the most effective ways in which to reduce these mistakes in number. Instead, the key is to make acts of compliance as convenient, simple and easy as possible. Compliance should therefore slot as seamlessly as possible into an individual’s day-to-day work.

The role of technology

Modern technology is one obvious way of achieving this. Even the most well-meaning employee or firm is likely to find it hard to keep up compliance standards if doing so involves a major distraction from his/its day-to-day work and involves substantial additional time and effort (such as having to fill out long and arduous forms). By contrast, if the process can be largely automated behind the scenes (without taking up the time or brainpower of the employee in question) and be made into something unobtrusive that takes two minutes (such as pressing a few buttons on a screen), compliance will improve – it’s just human nature!

For instance, from the perspective of various employees at a firm, compliance will often mean strict adherence to a complex array of deadlines and lead-in times. Traditionally, staying on top of this and ensuring nothing is missed would be a major distraction from day to day work. It involves employees memorizing a lot of additional facts and dates that are peripheral to their day job, and essentially manually creating their own compliance ‘to do’ lists on a rolling basis. By contrast, modern software solutions can remove this need for extra memory and mental effort. Continually updated with the latest deadlines and regulatory requirements, such software will automatically create instructions that are easy to follow and plug them into users’ normal screens and prompt them to take action when needed, providing clear instructions and making the job of following those instructions easy.

A wonderful aide-memoire

Acting as an aide-memoire for compliance tasks and “holding employees' hands” along the way is one thing, but modern software can also take the bulk of effort out of the task itself. People who work for a regulated entity such as a registered investment advisor, especially in today’s environment, have to report personal securities transactions relatively frequently. If they do this manually they may find it a real, arduous hassle to gather data retroactively from a disparate variety of sources, then put it all together in a sensible format. This can suck up a lot of man-hours and even the most well-meaning firm that does it this way will, as a consequence, let something slip occasionally. Modern software, by contrast, can plug itself directly into an employee’s personal accounts (through a variety of links) and automate the creation of these reports while in motion, as transactions happen. This means that at the end of (e.g.) the quarter, the report will have automatically been compiled and be ready to go. This cuts the hassle down from days to minutes, makes it easy, and will therefore substantially reduce the chance of accidental non-compliance.

Educating economically

Another example can be found in personal training. The education of staff is an important part of any culture of compliance, but modern software can make that process far more convenient from the employee’s point of view, thus encouraging take-up. Traditional training involves something like a two hour interpersonal session in a spare meeting room at a time that cannot be convenient for all. This may work if the training is annual, but more and more firms are seeing the value of more frequent training that trainees find easier to digest as a way of strengthening their compliance cultures. Employees can fit online training around their own schedules, allowing them to learn what they need, when it suits (for instance, when watching a 10-minute video at home, once the offspring are in bed).

This is why leading compliance consultancies are investing heavily in technology, and to some extent edging towards new lives as IT companies themselves. When it comes to combating the ‘unintentional’ sort of compliance breaches we have looked at, the convenience and flexibility that IT can bring to compliance is more efficacious than stricter rules, penalties, or constant training.

Recent developments in the world of music illustrate a similar theme. The industry struggled over its transition from physical discs to downloadable music. A failure to adapt caused the emergence of a pirating epidemic, yet innovations such as iTunes and Spotify have gradually reversed this trend. They have made it exquisitely convenient to access a wide range of high-quality music on demand at just the press of a few buttons. Most people do not want to be pirates and are happy to pay for music: the missing ingredient was convenience, made possible by technology.

'Nudge theory' and the rise of smart technology promise a new front on which to fight the good fight, in a world where the dangers of non-compliance have never been greater.

* Bill Mulligan is the CEO of Cordium US and Cordium Software and a member of Cordium Global's operating board. He can be reached on +1 414 547 8324 or at bill@cordium.com