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Compliance: should smaller firms ask the question, 'why bother?'

In the wake of another whopping FCA fine of £34.3m to Goldman Sachs last week, following the £27.6m UBS fine, are the bigger players ignoring the regulations?

MiFID and MiFID II introduced more regulatory overheads to firms in the UK, as well as the rest of Europe. Major projects have been set up and delivered on with overall costs amounting to billions - and some firms have been lost along the way, unable to make ends meet as a result. So far, the British regulator (FCA) has "fined 14 firms for similar breaches. This number includes UBS AG, Goldman Sachs, Merrill Lynch International (MLI), Deutsche Bank AG, Plus500UK, Credit Suisse and Barclays Capital Securities Limited, Barclays Bank Plc, among others.

Experience suggests that the smaller firms in tier 2 / tier 3 Wealth Management space have made compliance a non-negotiable, yet one could argue that the evidence of these fines suggests the bigger players see non-compliance as an easier option and take the financial penalty if and when it comes. If these firms have been failing to report millions of transactions correctly for ten years, then the fines amount to little more than 15 pence per transaction; a transaction that perhaps they are applying a compliance charge for, hence still making a profit on, despite the fine. Without wishing to make this a Brexit article you can also factor in the alleged late or non-compliance of many firms across Europe subject to the strictness, or lack of it, of their own local regulators.

It is not for us to debate the next enforcement by the FCA, but it is important that, for investor protection, Compliance with their regulations is as simple as possible. A lot of the cost of MiFID II can be put down to analysis, interpretation and internal education but a reasonable proportion should have been spent on automation in systems and reconciliation solutions and processes. Many IT teams and vendors would have ‘bolted’ on a solution to their existing legacy systems giving added risk, cost and complexity especially when reporting of Corporate Actions came late to the party. The smarter design would have been to strip the reporting process out of the existing order lifecycle and allow it to be stand alone in both decision making but also in the reporting process, allowing it to be flexible for any transaction that comes it's way. Many software vendors to the smaller tier2 / tier 3 market will have followed this design but this is unlikely to have been followed by the bigger players who usually exist on legacy back office systems.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight said: "We expect all firms will take this opportunity to ensure they can fully detail their activity and are regularly checking their systems so any problems are detected and remedied promptly, unlike in this case."

 

So, if the title of this piece suggests non-compliance as an option, is the answer to ensure that those responsible for your IT systems are designing smarter, modern and flexible compliance solutions for you? You have to believe that the FCA will take further action against those firms that continue to fail to comply so why take the risk?

 

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