Our annual report provides insight into how firms are grappling with the constant of regulatory compliance against a backdrop of continual change.
Each year, as part of its Global Regulatory Outlook, Duff & Phelps conducts an online survey of financial services executives around the world to get their views on issues on the industry agenda. This year’s survey questions covered anti-money laundering, whistleblowing, technology, and budgeting, as well as which city is the current global financial hub and which one is most likely to fill that role in the future—a telling indicator of forces remaking the global financial landscape.
Survey respondents by sector (The survey was conducted online in March and April 2019; 183 respondents from a range of countries and financial services sectors participated.)
The Global Financial Hub: Brexit and Globalization
As it did last year, our survey closed by asking respondents to choose the city they believe represents the world’s financial center today and the one they believe will play that role in five years. Comparing this year’s responses to last year’s shows the effects of both short-term and long-term global trends. Last year, Brexit cast a shadow of uncertainty over the United Kingdom’s economy; it has now escalated to a full-blown crisis. Reflecting this, New York and London have switched places as the share of those choosing the City as preeminent dropped from slightly more than half to slightly more than one-third.
Looking ahead, however, globalization’s diffusion of influence begins to be apparent: 12 percent of respondents expect Hong Kong to be the world’s preeminent financial center five years from now, a stark contrast to the 3 percent who held this opinion just a year ago. It is also worth noting that a handful of other cities were named as the global financial capital of the future, including Shanghai (9 percent), Dublin (4 percent), Frankfurt (4 percent), and Luxembourg (3 percent). While these individual numbers do not rise to the level of statistical significance, collectively they give further evidence of the combined effects of globalization and of Brexit, as the financial industry searches for a new EU financial center.
It is perhaps not surprising that answers to this question were greatly influenced by the location of the respondent. In this year’s survey, 96 percent of US respondents consider New York to be the world’s current financial hub; 76 percent of UK respondents consider London the hub. But even home-country bias has its limitations: When asked to look ahead five years, the proportion of US respondents who still name New York dips to 78 percent—while the proportion of UK respondents who say the same thing about London drops to 44 percent.
Top 3 cities to be world's preeminent financial centers today (Left); and predicted to be in five years (Right)
AML: A Call for Stronger Coordination
Considerable energy and resources are devoted by governments and institutions around the world to combat money laundering, yet much remains to be done. When asked what changes would have the most impact on global AML efforts, survey respondents place less priority on the execution of the elements on the front lines of those efforts, such as better funding, reporting, or enforcement. Instead, they see the issue as one of improving coordination and information-sharing among the wide-ranging constituencies of the global financial system. (For more, see “AML is Everybody’s Problem—And Nobody’s. And That’s a Problem”)
At the same time, there is still work to be done at the firm level. While most firms rate themselves as being at least “effective” in the various components of an AML program, 30 percent of respondents rate at least one of their AML components as being either “not at all” or only “somewhat” effective. Furthermore, nearly a quarter of firms gave themselves low marks in their internal audit of AML risk, an essential element of AML risk management. (For more, see “The Seven Hats of the AML Officer”)
Whistle Blowing: A Solid Foundation
There is general recognition that whistleblowing programs are an important check on a firm’s compliance, with nearly three-quarters of respondents noting that they have whistleblowing programs in place and 86 percent of them at least somewhat agreeing that such programs should be mandatory.
When asked to evaluate their own whistleblowing programs, respondents are most confident in their escalation mechanisms. (They give similarly high marks to escalation for their AML programs.) If we look across the range of individual components, somewhere between one-quarter and one-third of firms feel their firms are either “very” or “completely” effective. However, for each element, between roughly one-fifth (19 percent) and one-quarter (28 percent) of respondents say their firms are “not at all” or only “somewhat” effective. (For more, see “Whistleblowing: More than a Shrill Noise”)
Our survey also found that there is a correlation between how firms rate the components of their AML programs and how they rate their whistleblowing programs—effectiveness in one program correlates with effectiveness in the other. In our view, this is both noteworthy and unsurprising. Excellence in compliance begins not with regulation but with a mindset that extends over every aspect of the business. Echoing this, survey responses showed that firms with operations in more than one country—which presumably are more sensitized to compliance concerns due to their multi-jurisdictional reach—are significantly more likely to have whistleblowing programs in place than firms with operations in only one country (84 percent vs. 54 percent).
Technology: Searching for a Strategy
Interestingly, budget is not currently considered a major issue when it comes to implementing technology in regulatory compliance. Having an adequate budget was named as a concern by only slightly more than one-quarter of respondents. Instead, three of the four top concerns involve data: developing a holistic data strategy, having accurate and up-to-date data, and then having adequate cybersecurity to protect that data. These results reflect a financial services industry that is still in the early stages of incorporating technology into compliance—and a tech industry that is still working to deliver on its promises. (For more, see “Regtech on the Rise")
Budgeting: More and Faster
Given the increasing demands on firm compliance functions, there is a general expectation of a steady upward pressure on compliance budgets, and our survey results bear this out. Last year, our survey asked respondents what percentage of their budgets was spent on regulatory compliance in 2017 and what they expected that budget percentage to be in 2023. The results showed that while the largest percentage of firms expected to continue to spend between 1 and 5 percent of their budget on compliance, there would be a notable shift at the margins: Significantly fewer firms would be spending less than 1 percent, and many more would be spending more than 10 percent.
This year’s results show that the shift expected to have taken until 2023 to occur has already, to a great extent, taken place as of 2019. The percentage of firms spending less than 1 percent on compliance has dropped to 9 percent, while the percentage spending more than 10 percent has increased to 12 percent. This suggests that financial services executives have generally underestimated the extent of future budget increases. (For more, see “Avoiding Investor Red Flags: The Role of Compliance in Fundraising”)
AML is Everybody's Problem and Nobody's – And that's a problem
The Six Hats of the AML Officer
Whistleblowing: More Than a Shrill Noise
Regtech on the Rise
Through the Regulator's Eyes
Navigating the Challenges of Regulatory and Enforcement Actions
Avoiding Investor Red Flags – The Role of Compliance in Fundraising
Toward a New Regulatory Physics
Debanking and the Law of Unintended Consequences
Owning the Risk Agenda
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