Asset managers risk losing up to 20% AUM on compliance lapses

Global asset managers risk losing up to 20% of assets under management if faced with a major governance or compliance lapse, according to a new report – Conduct and Compliance: A Collective Approach to Ethics and Accountability Coalition Greenwich.

This translates into upwards of $225 bn in fees going to competitors and does not include the risk of hard dollar fines levied on both firms and individuals or the increasing personal liability placed on senior management.

The report notes that the explicit and implicit costs of failing to build a compliance programme that supports both the firm and employees in meeting regulatory standards can be dire, and awareness of reputational risk has shifted into prominent focus in recent years.

The pandemic has been a catalyst forcing firms to increase their investments in compliance technology. Nearly 70% of buyside compliance officers expect their budgets to grow in the coming year.

In addition, the report says market-wide budgets for surveillance technology were up 17% in 2020 and expected to grow by almost a quarter in 2021 to $1.5 bn.

Many firms upgraded compliance processes and technology since the financial crisis, but quite a few were still operating on a web of disparate legacy systems, which had the potential to lead to avoidable missteps.

The siloed nature of compliance had also made it harder for some firms to upgrade their technology even when the interest was there.

The report suggests firms need to adopt a more proactive approach requiring both modern processes and technology that have access to increasingly large stacks of data.

They also need a unified vision. Managing employee conduct risk, both internally and externally, has presented a key challenge for compliance teams, especially in establishing effective monitoring practices and technology infrastructure.

This is particularly true in this new age of hybrid working, with employees dispersed across many corporate and home offices. Keeping tabs on firm- and employee-level activity presents a challenge that few risk managers could have imagined only a few years ago, the report says.

Moreover, robust compliance will become more critical in the near future as environmental, social and governance (ESG) standards play a bigger role in determining how consumers and investors perceive corporate brands.

“For all financial service firms, promoting ethical behaviour is key, but providing employees with a supportive compliance infrastructure is the crucial step,” says Danielle Tierney, Senior Advisor in the Coalition Greenwich Market Structure &Technology group and co-author of the report. “However, even firms with strong cultures and formal policies can get tripped up by technology as many operate on a web of legacy systems not fully migrated.”

She adds, “The strategic case for modernising compliance platforms is clear. “The good news is that this is no longer a technology problem. The technology to achieve these goals most certainly already exists and it is now up to the market to recognise the value of moving forward.”

Coalition Greenwich conducted in-depth interviews with more than a dozen financial markets professionals to discuss their current attitudes and approaches toward compliance management.

©Markets Media Europe 2021

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