Compliance is an increasingly important function in investment banking, with complex regulation both in Europe and America posing new challenges in light of the financial crises since 2007/2008. Basel III regulations will be implemented across the globe from 2013 to 2018; the European Commission is currently discussing a revision of the Markets in Financial Instruments Directive, MiFID II, which would come into effect in 2015 if adopted; in the UK the Financial Services Bill introduces two new bodies, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), expected to be tougher on banks than the Financial Services Authority (FSA), to oversee financial regulation from 2013; while in the US the Dodd-Frank Act of 2010 imposes financial regulatory reform at a scale not seen since the 1930s. Other obligations arise through Sarbanes-Oxley (Section 404), the UK Bribery Act (2011) the Foreign Account Tax Compliance Act (FACTA) and new accounting rules, let alone voluntarily-incurred compliance with standards such as SAS 70 (auditing) or ISO 9001 (quality management).
Costs are significant, not least because ongoing costs of increased regulation are preceded by costs in preparing to be able to meet new regulatory requirements in the first place. For example, infrastructure improvements will be required for many so-called ‘heritage’ systems to comply with new regulation that requires vast amounts of data disclosure. Compliance needs to be managed and the two most promising avenues are ‘measurement’ and ‘automation’.
Several clients have asked whether Z/Yen could coordinate a global survey measuring compliance costs among Tier 1 & Tier 2 investment banks. While the task is complicated, it breaks naturally into two parts:
In common with other Z/Yen surveys, in return for sharing data and sponsoring the study participants would receive confidential feedback comparing their compliance readiness and costs with their peer groups. The survey results should help participants to:
In addition, we believe that an authoritative external publication presenting some of the highlights of the survey would help emphasise issues of over-regulation and benefit all participants in their discussions with regulators. To that end, we believe that the survey should seek to issue an additional overview publication for public consumption, perhaps in association with an authoritative ‘co-sponsor’.
Investment banks have a variety of different compliance units and compliance structures. Compliance can report to a global head or be combined with other functions or allocated to product lines. Based on earlier work in Product Control benchmarking over the past decade, Z/Yen believes that a global benchmarking report might contain:
Comparative Compliance Costs
The survey would first create a management accounting manual specifying compliance costs both inside and outside the scope, e.g. how do we allocate systems development costs or where do we position internal audit staff time. Having agreed the basis of the survey costings, participants would complete a questionnaire with quantitative details such as a rough breakdown of headcount, compliance percentages by product, etc. Z/Yen’s approach to conducting the survey would be in line with our Z/EALOUS methodology:
One of the key initial steps in Establish Endeavour will be to delineate an appropriate scope of regulation from, among others:
The next step is to conduct a no-cost workshop for potential participants to see whether we can establish agreement on a method for comparing compliance costs. If this workshop is successful, then we would issue a short paper outlining the methods, e.g. a management accounting manual. If participants wished to continue to a full survey, then Z/Yen would be very interested in undertaking it, and estimate about four elapsed months to reporting back.
Please contact Michael Mainelli, a Director of Z/Yen, if you would like to discuss potential participation – tel: +44 207-562-9562 or firstname.lastname@example.org
Z/Yen is the UK’s leading risk/reward management firm. Within Financial Services Z/Yen performs benchmarking and performance analysis, market surveys, strategic planning (outsourcing, re-engineering, relocation) and market intelligence. Z/Yen’s benchmarking work encompasses global securities, global derivatives processing, global foreign exchange and money markets, clearance and settlement and operational performance.