​4 Keys to Focusing on Regulatory Compliance and Value

David Wagner  |


Working in financial services is challenging, but who expected it to be exhausting? A recent survey showed that financial services professionals face 25 percent higher stress levels than the national average. The survey went deeper to explore what is causing that stress, and one factor rose to the top of the list: compliance.

Almost 30 percent of those surveyed reported that compliance and regulatory issues are their top challenge. Tellingly, that ranked higher than the challenge of engineering growth, suggesting that staying legal is even harder than staying competitive.

Every industry deals with regulation, but the burden on financial services is unique. Advisors must navigate rules from the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Department of Labor, and state governments or face potentially serious sanctions for noncompliance. Even those that make compliance a priority now face a wave of uncertainty due to the rapid digitization of information. The best-intentioned firms can drift accidentally into regulatory hot water.

Managing compliance may be hard now, but it’s about to get more difficult. The FINRA releases new rules in January or February. In 2018, it put in place sweeping new rules around anti-money laundering and investment suitability, with another set of new rules coming in just a few months. If you work in financial services, your stress levels might soon spike.

Thankfully, the challenge is far from insurmountable.

Unpacking the True Cost of Compliance

It’s tempting to conclude that perfect compliance will never be possible and that penalties are unavoidable. However, treating fines and fees as a foregone conclusion underestimates how damaging noncompliance truly is.

First off, complying with regulations as written is a substantial cost and growing fast. The average firm now spends $5 million annually, which is a 43 percent increase since 2011. Those numbers would give anyone pause, but unfortunately, this is only the cost when things go perfectly as planned.

When they don’t, noncompliance leads to regulatory penalties, business interruptions, productivity losses, and settlement costs. And when those are combined, firms actually spend $14.28 million annually on noncompliance, which is 2.71 times higher than the price of keeping compliant.

By all indications, those upward trends will continue. FINRA fines totaled $173.8 million in 2017, up 85 percent over the year before. Plus, as companies have begun to consider compliance an unavoidable business cost, regulators have had to raise fines to preserve their punitive potential.

This is all difficult for the industry to swallow. Compliance is obviously preferable to noncompliance, but both options costs millions annually. And with digital data becoming increasingly regulated, the risk of accidental noncompliance is greater than ever. That leaves firms with a simple choice: invest a little more to improve compliance or invest a lot more to recover from noncompliance.

Staying on the Right Side of the Law

The ultimate goal is to make compliance easier to manage, more consistent, and less expensive. Use these strategies to achieve all three:

• Keep your written supervisory procedures updated: A WSP outlines your data management strategy, detailing what data is collected, how it’s analyzed, and where it’s stored. With regulatory changes coming down the pipeline, WSPs should be reviewed and updated at least quarterly. A supervision interface provides a top-down perspective on all your WSPs, making it easier to preserve compliance across client groups and make enterprisewide updates.

• Collaborate with peers: A number of groups, including the FINRA, organize groups of peers to help collectively resolve compliance issues. When new regulations hit the books, these groups do the important work of developing best practices and policy guidelines. Rather than waiting for these recommendations to be released, join a group and put yourself on the front lines of compliance. Participation does not exempt you from penalties, but it does put you ahead of the pack.

• Hire a consultant: Compliance and finance are both detail-oriented, but otherwise they are fundamentally different disciplines. Expecting the skills of one to apply to the other is unrealistic, which is why many firms bring in a compliance consultant. Outsiders offer experience and expertise, along with manpower you may not have in-house. Acknowledging the limits of your firm’s abilities keeps preventable problems from becoming actual obstacles.

• Lean on the vendor: Managing compliance requires a raft of technology. Most of the vendors in this space understand the regulations on the books, the pain points firms face, and the solutions that exist. Good vendors are eager and able to provide you with tech products, as well as customized support and in-depth consultations. Don’t hesitate to lean on this often-overlooked resource.

There is a big silver lining to all of this. As companies get better at securing data and complying with regulators, they also become more appealing to clients. That means one fix solves the top two pain points in financial services: managing compliance and engineering growth. The future will not be stress-free, but it doesn’t have to be punishing, either.

David Wagner has more than 25 years of experience in the IT security industry. He serves as the president and chief executive officer of Zix, a leader in email security, and previously held leadership roles at Entrust for 20 years. With his IT security and leadership background, David offers a business perspective that enables company leaders to better understand evolving cyberattacks and prepare for future threats.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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