Across most of the financial sector, compliance has been the only department growing in the years since the financial crisis of 2008. That's no surprise, given banks have since paid about $321 billion in fines over failures to identify and address money laundering, market manipulation and terrorist financing, among others, according to Boston Consulting Group.
But the surge in the number of compliance officers has also added to the pressure on the bottom line of financial institutions. A McKinsey study put the cost of navigating the regulatory minefield at more than 10% of all operational spending of major banks: around $270 billion per year between them.
And although the world’s major banks, including JP Morgan and HSBC, have cut headcount by an average of more than 10% over the last five years, the number of compliance and regulatory employees doubled, according to Citigroup’s Digital Disruption report in January.
“We see regtech as a huge cost take-out opportunity for financial institutions,” the US bank noted in the report, referring to the emergence of so-called regulatory technology – innovations that help deal with regulatory challenges. Many jobs at banks, created to verify customer data and monitor transactions, will disappear in the wave of automation as institutions continue cutting costs.
RBS, for example, has about 2,000 staff running know-your-customer processes, CFO Ewen Stevenson told analysts earlier this year, Bloomberg reported. But the UK bank would eventually keep only a few employees to handle the issues, with the help of process automation.
Nevertheless, regtech, will not kill compliance jobs, but spark evolution in the compliance officer's role, experts told a FinanceAsia conference on Wednesday.
“The rise of regtech solutions will help compliance officers to do a better job…It’s so painful to use a manual process to put the data together,” Jenny Fung, chief compliance officer of Greater China at ABN AMRO Bank, told an audience of about 250 at FinanceAsia’s 6th Compliance Summit in Hong Kong.
An example is transaction monitoring. It is extremely burdensome to check every risk alert, but with a regtech solution which can identify the risk priorities, compliance officers can take more of an advisory role, Fung said.
“We need these tools, but we also need skills,” said Brian Tang, managing director at the Asia Capital Markets Institute, who also co-chairs the regtech committee of the Hong Kong Fintech Association.
For one, compliance professionals need to understand data analytics and how algorithms work, he said. “But that’s not really how a lot of compliance officers have been trained in the past,” Tang said.
However according to Russell Reynolds Associates, an executive search consultancy, banking, insurance and asset management groups are more willing to hire from law firms and regulators for compliance roles, rather than seeking technical specialists.
“If your front office wants to introduce more AI into your back office systems, how do you understand the black box of AI, what parameters should you put around it, and what interventions should you incorporate,” Tang said, throwing the question to the audience.
Paul Costers, country manager for Hong Kong at data analytics provider Bureau van Dijk, echoed his view. “What we often see is: there are compliance professionals using technologies as a tool, but there’s no integration and no real understanding of the technicalities of the platforms,” he said.
Coming next is a new generation of tools based on artificial intelligence technologies, which are going to be much more sophisticated. That means a “superficial” level of understanding of technologies will not be enough for long, according to Costers.
“A lot of senior management, once they hear the term innovation, or technology, they get very excited: ‘yes, we need to get that system’. However I found people often overlooked the journey to get there,” said Mary Wong, a partner in the financial crime advisory practice at PwC, who sat on the same panel. “You need to clean your data and simplify your work process” first in order to know what systems are needed to help compliance work, Wong said. And that requires the right people.
On top of that, applying a particular technological innovation is not a simple plug-in process. “The risks associated with the application of technologies, and the nature and scope of risks are so different,” Fung said. Customer data privacy and cybersecurity, for example, are among the top issues compliance officers need to assess before applying a new regtech solution.
As Tang summarised: “You need to be able to understand the technicalities and assess them with a compliance mind and a regulatory background…that’s the challenge we are facing.”
That brings an intriguing question to the banking industry today – are banks spending enough money and resources to upgrade their compliance officers, giving them the technological know-how they need?
When FinanceAsia put that question to the panelists, they responded with smiles.
“You need more people, more resources, more money,” Wong said.
FinanceAsia's sister brand Corporate Treasurer will partner with TMF Group for a webinar discussing how Asia will be affected by the OECD's recent focus on information transparency and AML regulations. Click here to register now for the webinar, which takes place on Thursday, November 23,
