Solutions to the Rising Cost of Compliance

By Roger Woolman Chief Revenue Officer
July 7th 2022

Complex, fast-evolving regulatory and operational requirements are driving up the cost of compliance, with 88% of financial services firms hit by increased compliance expenses over the past five years. One in ten firms in the SteelEye 2022 State of Financial Compliance Report said their compliance costs have doubled.

And there is no let-up in sight. To cope with the growing pressure on their compliance function, 44% of firms said they plan to invest more in RegTech solutions in the next 12 months. A further 41% expect to invest the same amount.

Technology investments may be going up, but evidently, more is needed. Administrative and repetitive tasks continue to dominate compliance professionals’ work, noted the report, with 50% of respondents saying at least half of their compliance staff are engaged in such activities. Much greater automation and digitalisation will be key to improving operational efficiencies within the sector, while freeing the compliance function to adopt a more proactive approach to compliance and risk management.

Regulatory reporting focus

Regulatory reporting emerged as respondents’ top investment priority for the year ahead. Little wonder, given the myriad reports firms need to submit, the complexity involved in compiling and reporting the data, and the financial and reputational penalties for non-compliance. And with reporting requirements continuing to adapt and tighten – keeping abreast of regulatory change was cited as the biggest challenge firms face in meeting their regulatory responsibilities – the burdens are only becoming more pronounced.

Take firms’ Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) duties. Luxembourg enacted a law last year introducing new obligations for Luxembourg Reporting Financial Institutions (RFIs) to set up policies, controls, procedures and IT systems to ensure they fulfil their CRS and FATCA reporting and due diligence responsibilities. The law increased the fines for non-compliance too.

The Inland Revenue Authority of Singapore has also upped the penalties for FATCA non-filing offences. Meanwhile, the Canada Revenue Agency (CRA) issued another updated XML schema in November 2021 that financial institutions will need to use for filing FATCA and CRS information returns in 2022.

The systematic solution

These kinds of updates are common and widespread. Which makes relying on manual-heavy processes to stay current with the different jurisdictional requirements – and avoid the penalties that reporting failings can bring – unsustainable.

By using a system able to generate reports in Automatic Exchange of Information (AEOI) filing-ready state, firms can alleviate the risk of FATCA and CRS non-compliance. Electronic collection and validation of self-certifications and tax forms in line with local tax laws similarly enable financial institutions to move away from manual processing methods.

Anti-money laundering (AML) and know your customer (KYC) rules are another area being revamped. In Europe, the European Commission is moving forward with an extensive package of legislative proposals aimed at strengthening the EU’s AML and counter-terrorism financing (CFT) framework. The United States introduced sweeping reform of its AML/CFT laws last year.

Given the hefty fines and reputational risk that can stem from any violations, a robust AML infrastructure able to automate each stage of the client lifecycle, from onboarding to ongoing monitoring and offboarding, has never been more important.

Add in the array of other complex regulatory rules institutions must adhere to in multiple jurisdictions and at each stage of the client and transaction lifecycle, and it is clear that compliance can only realistically be achieved by adopting a systematic approach.

Digital portals, end-to-end platform integration and rich reporting functionality, underpinned by workflow-based intelligent business process management, will help firms get to where they need to be.

ABOUT DEEP POOL
Deep Pool is the #1 investor servicing and compliance solutions supplier, providing cutting-edge software and consulting services to the world’s leading fund administrators and asset managers. Our flexible solution suite, developed by an experienced team of accountants, business analysts and software engineers, supports offshore and onshore hedge funds, partnerships, private equity vehicles, retail funds and regulated financial firms. Deep Pool is a global organisation with offices in Dublin, Ireland, the United States, the Cayman Islands and Slovakia. For more information, visit: www.deep-pool.com.

Roger Woolman
Roger has over 25 years of experience as a finance & technology exec. He co-founded Deep Pool/HWM Group in 2006 & rejoined in 2021 following his role as Director of Funds & Alternatives at SS&C Advent where he oversaw business development activities for their international fund management business.