The consultancy firm of Duff & Phelps has published its Global Regulatory Outlook survey of 181 executives and compliance people at banks and asset management firms for 2017. Almost nine out of ten (89%) say that regulations are increasing costs; compliance spending at a typical firm is expected to double in the next five years.

Today, the most common expenditure on compliance among asset managers, brokers, banks and others is up to 4% of revenue. By 2022, the consultancy firm (which absorbed Kinetic Partners, the compliance consultancy, two years ago) expects it to rise to 10%. It expects the proportion who put their compliance spending at less than 1% to halve.

Technology trials

Spending on cybersecurity will account for at least some of this hike, and this has been a major theme of the past year. After attacks on the Swift payment system, the 'unprecedented' theft from a British retail bank's (Tesco’s) online accounts and a huge increase in reported attacks on financial service groups in general, regulators are widely expected to focus on firms’ cyber defences and – and perhaps most crucially – their detection and response plans.

Regulators such as the US Securities and Exchange Commission (SEC) have not issued precise orders on the subject of cybersecurity so far, but about two-thirds of professionals in the survey expect it to be among the regulators’ top three priorities in 2017. Only anti-money laundering (AML) controls and 'know your customer' (KYC) controls are higher.
 
Among the respondents to the survey, 86% say that their company intends to put more resources and time into cybersecurity in the coming year. Other areas likely to see attention are MiFID II, where more than half (54%) of those to whom it applies say they are still unsure if they are on track to comply by 3 January 2018; and the SEC’s proposal to insist on investment advisors giving it more information in 2017, which is going to affect 62% of regulated firms in the survey.

Most respondents (61%) concede that regulations will improve internal controls. More than half (54%) also say that the act of making executives and senior managers responsible for the actions of employees at their firms has had a positive effect on the industry.

All for nothing?

More widely, however, scepticism persists about the worth of financial regulation. More than half say that the regulation of financial services has either had little effect (35%) or has actually made markets less stable (17%) – presumably reducing liquidity in some markets – against only 43% who say that it has made them more stable. Similarly, half (51%) say that it has done little to improve confidence among investors and 7% say that it has eroded it. Only one in ten respondents believe that regulatory changes over recent years have created enough safeguards to prevent a future crash.

Funds with attitude

The fortunes of British funds after the UK's departure from the European Union is discussed in the report. The prevailing attitude seems to be that UK-registered alternative investment fund managers will lose their passporting rights and will then be in the same position as American managers. If they wish to market funds to investors in the EU, they will have to make fresh arrangement, possibly by opening offices in Luxembourg or Dublin. The requirements for adequate 'substance' to prove genuine domicile are not light, however. British managers might balk at the expense of locating essential functions and skilled abroad, to say nothing of the requisite minimum capital outlay. The fact that the report is still using highly speculative language when it reflects on this subject is a token of the continuing uncertainty that surrounds the Brexit process.
 
One likelihood is that some funds will seek the support of third-party management companies – as US managers have done – rather than set up (or before they set up) their own operations in EU jurisdictions.

Brexit woes, Brexit opportunities

When asked about the preparations they are making for the British departure from the European Union, 6.4% of respondents say that they are already making changes (the characteristically schlerotic phrase that the report uses is "changes have already begun to be implemented"), a further 6.4% say that 'Brexit' will affect their compliance arrangements within six months, 22.4% say that it will do so between 7 and 18 months from now, 26.3% say that it will do so after 18 months, and 38.5% say that it will not have an effect on their compliance arrangements at all.

Respondents to the survey were far from sanguine about the City of London's future as one of the two major neck-and-neck financial hubs of the world after 'Brexit'. Although 36% of them think of London as the greater hub, compared with 58% who awarded that honour to New York, only 16% think that London will be dominant in five years’ time. The disparity between the figures for the present day may or many not be attributable to the geographical locations of the respondents.

Illiquid assets

Another point that the report makes is that valuations of illiquid assets are continuing to trouble regulators. Half a decade on from the Dodd-Frank Act in the US (which President Trump wants to 'dismantle') and the EU’s Alternative Investment Fund Managers Directive (AIFMD), regulators – and the fund managers they oversee – are still finding their way.

Personal accountability for top managers

Meanwhile, the personal accountability of managers for non-compliance at their firms is finally becoming a reality. Monique Melis, Duff & Phelps' global head of regulatory consulting who set up an insider-dealing early-warning system known as Sabre at the UK's old Financial Services Authority, comments that the UK’s Senior Management and Certification Regime (introduced last March for banks, building societies and credit unions and to be extended to investment firms and asset managers next year) has undoubtedly made certain jobs less appealing because of the personal risk. Individuals will now think twice about taking on roles that may ultimately cost their career. She adds: "This will undoubtedly extend to the compliance officer, money-laundering reporting officer and head of risk. Those already in these roles will be harder to retain and will be worried if they feel that they don’t have the support they need to do the job. We have arguably already seen examples of this."

Monique Melis also anticipates a rapid rise in salaries for occupants of highly-paid jobs that do not fall under regulatory scrutiny, purely because of a migration of skilled staff who want to avoid personal regulatory risk. The only response, she thinks, is to bump up the salaries of regulated jobs. She adds: "clearly it must be a consequence."

She also mentions Hong Kong's new manager-in-charge regime (covered on Compliance Matters here) as another example of a global drive towards senior management accountability. Other examples from the US include the Yates Memorandum (covered here) and part 504 of the New York Department of Financial Services' regulations (covered here). It is the new British regime, however, that she hails as 'the game-changer.'