If you have a business that has anything to do with financial services, there are not just 2 but 3 things which are certain in this world – death, taxes and regulation. You can go to bed at night knowing full well that, by the morning, some scandal or mere hiccup has occurred somewhere that will instigate a whole new raft of regulation for your company to comply with.
Up until the 1970s, the regulatory burden on investment and other financial services companies was so much lighter that most of them didn’t even have such a thing as a compliance officer. Self-regulation of the industry was the order of the day and until then it worked pretty well. The apex of this light touch approach culminated in Mrs.Thatcher’s measures to deregulate the City in the 1980s.
Three things then happened to cause a huge acceleration in regulatory activity. First, there were an increasing number of scandals which affected retail investors and institutions alike. These culminated in the much publicised collapse of Barings Bank.
Secondly, the different activities of financial firms started to surge almost exponentially with a whole host of complicated new derivatives being traded. This coincided with the advent of computerisation and algorithms.
Finally, the ascendancy of the European Union as a policy maker introduced an extra substantial source of regulation that needed to be complied with.
To cope with the huge compliance effort needed to cope with this heavy regulatory burden, large firms could afford to build up in-house compliance departments even though they represented a non-revenue earning overhead. Most smaller companies had to make do with a compliance officer with maybe one or two assistants.
As always, the marketplace came up with an answer to the problem and the solution emerged in the form of one or two specialist consultancies who took the burden of regulatory compliance away from financial institutions leaving them free to concentrate on generating revenue and profits.
This development coincided with the onrush of globalisation which saw so many financial firms opening branches overseas where they were faced with yet more regulatory demands.
The economics of outsourcing proved just as convincing in the field of compliance as they did in most other areas. Financial companies of all sizes who set up their own compliance departments are simply replicating work and expense. If one or two independent consultancies do the same work for everybody, this is always going to be the most cost effective option.
This article has been provided by the IMS Group, who are a market leading provider of regulatory compliance, regulatory reporting consulting and integrated business support to the asset management and securities industry.