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The new sheriff in town

They provide no direct revenue or income for banks.
They have been described as the “killjoys of finance”.
They have put the brakes on some of the most lucrative services banks can offer.

Yet, they are the fastest growing job in the financial services industry.

With so much focus on job growth in the tech world, it would have been easy to miss the significant career evolution of compliance officers in the financial services industry. As banks shrink in size thanks to automation, specialisation, competition and cost cutting, the compliance function has inversely flourished.

Compliance officers are financial institutions’ internal police, providing oversight to ensure regulatory compliance, stymie corruption and wrongdoing, and keep government watchdogs happy.

At the turn of the millennium, compliance officers were often confined to a siloed Risk department, maxing out at 5 percent of the workforce. Since 2008, compliance officers have more than doubled their presence in financial institutions globally and they are far more embedded within the business. They now warrant their own teams and divisions to ensure compliance with local and international regulations.

LinkedIn data revealed that between 2015 and 2017 adverts for financial compliance jobs in London rose 65 percent, which is actually less than increases in other European nations. As early as 2014, Citigroup Inc. reportedly had 30,000 staff in compliance or regulatory roles– enough to fill up the O2 Arena one and a half times.

Reaction to the Rise in Regulation

The need for expanding compliance functions is motivated by the significant increase in regulatory legislation and its stringent enforcement, which is a natural reflex to the Global Financial Crisis. Driven by a combination of public pressure and renewed governmental focus, the aim of enhanced regulation is to reduce risk and risky behaviors in banks to avoid another cataclysmic economic depression.

Global head of Regulatory Intelligence at Thomas Reuters, Scott McClesky, described how the enforcement of regulation used to be seen as a “tsunami” that would “wreak havoc and then go,” but the post-GFC compliance crackdown is “more like global warming, in that the tide just continues to rise.”

The ‘new normal’ for banks is intense scrutiny on how they conduct business and which customers they take on. Ignorance to criminal activity is no longer an accepted defense. As a result, banks have to rescind certain business practices, stop operations in certain countries, exit suspicious customers, and build up strong compliance divisions to oversee the changes.

If you think the regulators are bluffing, you haven’t looked at the tremendous size of the fines being doled out to non-compliers. In the last decade, over US$26 billion has been issued to banks worldwide for failing to comply with Sanctions, Anti-Money Laundering/Counter Terrorism Financing (AML/CTF) or Know Your Customer (KYC) regulations.

Financial institutions are reacting swiftly to the increasing frequency and size of fines for compliance breaches. In Britain last year 1 million individuals were turned away by banks and 375,000 customers exited in order mitigate the risk of exposure to financial crime.

Skills Shortage

Hiring of compliance officers has correlated with the proportion of regulatory fines. Yet, this thirst for compliance professionals has revealed a shortage in the market. Combined with the impending Brexit fallout and the complex legal implications that require compliance specialists, there is growing concern about the supply of adequate skills.

To fill their staffing requirements, larger institutions can afford to scour the market endlessly, offer more lucrative salary packages to poach specialists, or train up their own talent and introduce graduate programs. Smaller companies are more likely to suffer without the excess financial resources, solidifying another buffer to market competition.

However, there is a solution that can fill the skills shortage at a fraction of the price.

The Era of RegTech

The new heralded era of Regulatory Technology (RegTech) is an exciting advancement that should enable firms to reduce many of the manual risk management processes performed across the business today, whilst also augmenting the compliance role significantly.

RegTech vendors offer software that can assist with everything from holistic customer risk profiles (where they review all elements of financial crime to create a single risk assessment), to automated government reporting, to enhanced cybersecurity. Tech can be adopted to automate monotonous processes – such as reviewing payments for sanctions breaches, identify fraud patterns in customer spending, or streamline AML and KYC checks. Automation can alleviate a lot of the monotonous manual review work in the First Line of Defence, which is often a drain on company resources, giving more breathing room for compliance officers to review and oversee the risk management policies and procedures.

For example, PelicanAI’s software Sanctions Self-Learning uses AI/ML to mimic and learn from manual reviewers to accelerate the analysis of sanctions hits, reducing review time by up to 80% and decreasing false positive hit rates by up to 72%. Similarly, for banks with any business beyond its borders, automation platforms such as CUBE offer a way to manage the international regulations over 180 countries and 60 languages. DataVisor uses machine learning to automatically detect malicious activity and detect fraud far quicker than a manual investigator. These examples barely scratch the surface of what is available today. With the abundance of choice, the question is not, “what is RegTech capable of?”, it’s a question of how quickly solutions can be implemented.

The compliance role, therefore, could shift from one that provides guidance to humans that carry out risk management technologies, to one that actually sets the parameters under which the systems will operate. The role will take on a much more technical spin, which may require a new set of skills and experience.

The benefit for the bank is that a system, once set up, can perform a risk management task with a universal, unwavering standard of quality and adherence to established rules. Compliance Officers can focus attention more closely on ensuring the bank’s policies and procedures are as effective as possible, rather than ensuring that fallible humans are adhering to them. Banks will be able to focus on training staff, improving processes and working towards solving more complex financial crime issues, such as vessel tracking or international money laundering. In addition, this will provide a net societal benefit by impeding avenues for malicious actors to commit financial wrongdoing.

With burgeoning international trade, tightening sanctions and new digital avenues to commit financial crime, compliance officers are increasingly integral in all FIs – and they will continue to be so in this era of RegTech. Though they do not provide any direct revenue, the only thing more costly than being compliant is being non-compliant.

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