Following the unprecedented market upheaval and operational crises triggered by Covid-19, nearly 70% of buyside firms plan to increase compliance budgets in 2021 compared to 42% in 2020 and 54% in 2019, according to a new report – Regtech Evolution in Buyside Compliance, by Greenwich Associates.
The report said that compliance systems were tested last year by higher conduct risk and oversight blind spots amid the sudden move to remote working. This represented a serious challenge for buyside firms as nearly 80% employ three or fewer full-time compliance personnel.
The study conducted 93 online interviews with representatives from asset managers, financial advisors, hedge funds, proprietary trading firms, private equity investment firms, and banks/broker-dealers in the US, Europe and Asia.
While the majority of respondents said their organisations were “well prepared” for the transition in terms of remote system accessibility and communications, only 44% were confident they were able to maintain “normal” compliance standards during the crisis.
One of the biggest compliance challenges cited by respondents was unmonitored device usage. While regulators generally overlooked lapses in monitoring with no-action issuances and extensions, many compliance soft spots remain unaddressed.
In so called normal conditions, code of conduct violations are considered the greatest risk, while broker front-running and insider trading are not far behind.
“After the weaknesses exposed in 2020, buyside firms are exploring strategies to patch holes and strengthen compliance infrastructures,” says Danielle Tierney, senior advisor for Greenwich Associates Market Structure and Technology and author of the report. “The clock is ticking on this endeavour, as regulators are already highlighting compliance failures and calling for firms to address heightened risk factors under virtual working conditions.”
Historically buyside firms have been proactive in promoting compliance culture and policies, but more reluctant when it comes to expanding compliance budgets. With the pandemic triggering budget increases, institutions are now prioritising expenditures on communications channel coverage, surveillance infrastructure and other key areas.
Although study participants agree that communications monitoring is crucial to detecting corruption, insider trading, market abuse, and policy breaches, the infrastructure is still rudimentary. This has proven to be a point of serious concern during the switch to remote working.
Of those respondents familiar with their firm’s monitoring infrastructure, 41% noted a lack of any systematic monitoring of audio communications.
“The events of 2020 have made it clear that regtech investment in areas related to key buyside compliance risk factors are necessary, and likely overdue,” says Tierney. “This is evidenced by the massive uptick in new implementations of automation tools supporting workflow and monitoring infrastructure and compliance processes seen across the buyside in response to the remote working transition.”
©BestExecution 2021
