26 Feb Challenges for Today’s Compliance Officers in Investment Firms & Alternative Investment Funds
Greater reporting requirements, along with the need to collect more data and abide by a rising number of regulations, have made compliance officers hot commodities in the field. At the same time, with these calls for greater transparency in the financial services sector, professionals in the world of compliance have their work cut out for them.
This has particularly been the case for compliance officers plying their trade with investment firms and alternative investment funds (AIFs). For instance, Deloitte’s 2017 Global Risk Management Survey, which looked into 77 international financial service firms with 12 trillion Euros in assets, found that “regulatory/compliance risk was even more critical for investment management (IM) firms, with 81 percent citing regulatory risk as a top challenge faced by investment management firms.”
With this in mind, what are some of the main challenges compliance officers in these sectors face on a daily basis?
1. Keeping Track of All Regulations & Prioritising
Staying abreast of all applicable regulations and those coming online in the near future is paramount for any compliance officer. Compliance officers dealing with AIFs in the European Union, for example, must know the ins and outs of the Alternative Investment Fund Managers Directive (AIFMD), which entered into effect in July 2011 and firms must comply with to be allowed to sell financial services in the EU.
Viri Chauhan, a consultant with Financial Crime Compliance Ltd. in the UK, told Financier Worldwide that “the primary challenge is to really understand what legislation and regulation applies to your firm and how that should be interpreted.”
“Regulation is only likely to continue to increase and get more complex and burdensome,” Chauhan concluded.
At the same time, it can be challenging for compliance officers in this sector to know exactly what to prioritize above all else. In a different interview for Financier Worldwide, Jason E. Brown, a Partner with Ropes & Gray LLP in the US, said that, in the case of private equity firms, compliance officers “need to understand regulators’ enforcement priorities and strategically deploy their compliance resources to address those priorities.”
“Firms can learn about such priorities from their regulatory counsel or through public statements made by regulators,” Brown added. “I have found that focusing on those issues most likely to be the focus of regulatory enforcement is the best use of limited compliance resources.”
2. Dealing with Regulations Across Borders
It might not be enough to solely keep track of local regulations that apply to your investment firm or alternative investment fund. If there are cross-border transactions involved, compliance officers might also need to be well versed in other jurisdictions’ legislations.
As explained in Deloitte’s 2017 Global Risk Management Survey, “Investment managers and distributors with global reach may be finding themselves facing regulatory action across jurisdictions in which they are headquartered and operate, complicating regulatory risk management.” Chauhan concurs, commenting to Financier Worldwide that “one of the biggest challenges is operating across international markets and trying to maintain a corporate, global standard of business practice that complies with the range of international requirements that [firms] have to be aware of.”
3. Building a Culture of Compliance
Compliance does not occur in a vacuum. Company-wide coordination is fundamental to complying with all applicable regulations. Achieving this, of course, will involve employees in upper management, operations, human resources, accounting, risk management and many other company divisions. Only via company-wide coordination will a firm be able to develop a sound and comprehensive culture of compliance.
In a 2016 interview for Financier Worldwide, Tracy Groves, who used to handle compliance and ethics for PwC’s UK forensics division, said that, in this day and age, “compliance professionals will need to be even more integrated and work even more closely with areas beyond just operations, such as internal audit, risk, HR, and strategy and operating effectiveness.”
Likewise, Demetra Kalogerou, who chairs the Cyprus Securities and Exchange Commission (CySEC), told attendees at the 2017 International Compliance Forum held in Cyprus that “it is also important to have a team of compliance and different functions, not just one person in order to assess complaints coming into the company.”
4. Finding Resources as a Smaller Investment Firm
Another huge challenge faced by investment firms, particularly smaller ones, is a lack of resources—be it money or personnel—to tackle these steadily increasing compliance requirements.
This dearth in qualified staff or income makes it harder for an investment firm to manage its risks and properly comply with what is required by the law, something that could potentially result in fines, the loss of clients and a diminished credibility within the market. Case in point, speaking before the media in 2015, CySEC’s Kalogerou said that “inquiries completed in 2014 had shown violations of the law leading to administrative fines of €8.2 million.”
While some of these fines seen in Cyprus might be the result of shady behavior, many could fall into this trap due to a lack of resources. For instance, Optima Partners, one of the largest global financial regulatory compliance firms, highlights the fact that in many small-to-medium-sized investment companies “the role of chief compliance officer is typically assigned to an executive who has multiple responsibilities at the firm, making it extremely difficult to ensure that the firm has complied with a myriad of regulations.”
5. Embracing Available Technology
Technological advancements contributing to the financial services sector have grown by leaps and bounds in recent years. There is plenty of software in the market that has made it easier for investment firms to comply with the vast array of reporting and monitoring requirements and build an effective and reliable compliance framework.
A challenge for today’s compliance officer is to determine which technologies can be brought on board to facilitate their work and, to a certain extent, streamline the compliance function within their investment firm or alternative investment fund.
Are there any other compliance challenges you have faced as someone working for an investment firm or alternative investment fund? Get in touch as we’d love to hear from you!
EIMF offers a variety of learning and development opportunities for compliance officers working for investment firms and AIFMs. For additional details on these offerings, please click here. EIMF’s expert advisers are also at your disposal and can be reached at +357-22274470 or firstname.lastname@example.org.