Compliance systems were tested last year by elevations in conduct risk and oversight blind spots amid the sudden switch to work from home. This represented a serious challenge for buy-side firms as nearly 80% employ three or fewer full-time compliance personnel.

While the majority of buy-side firms participating in a new study by Greenwich Associates said their organizations were “well prepared” for the transition in terms of remote system accessibility and communications, only 44% are confident that they were able to maintain “normal” compliance standards during the crisis.
Study participants cite unmonitored device usage as one of the most problematic compliance challenges issues during the crisis. While regulators generally overlooked lapses in monitoring with no-action issuances and extensions, many compliance soft spots remain unaddressed.

“After the weaknesses exposed in 2020, buy-side firms are exploring strategies to patch holes and strengthen compliance infrastructures,” says Danielle Tierney, Senior Advisor for Greenwich Associates Market Structure and Technology and author of Regtech Evolution in Buy-Side Compliance. “The clock is ticking on this endeavor, as regulators are already highlighting compliance failures and calling for firms to address heightened risk factors under virtual working conditions.”

Compliance Spending Plans
Buy-side firms have historically been proactive in promoting compliance culture and policies, but more reluctant when it comes to expanding compliance budgets. With the COVID-19 crisis triggering budget increases, institutions are now prioritizing expenditures on communications channel coverage, surveillance infrastructure and other key areas.

Although study participants agree that communications monitoring is crucial to detecting corruption, insider trading, market abuse, and policy breaches, communications monitoring infrastructure is still rudimentary. This has proven to be a point of serious concern in light of the industry’s forced transition to a virtual working world. Of the study participants familiar with their firm’s monitoring infrastructure, 41% noted a lack of any systematic monitoring of audio communications.

“The events of 2020 have made it clear that regtech investment in areas related to key buy-side compliance risk factors is necessary, and likely overdue,” says Danielle Tierney. “This is evidenced by the massive uptick in new implementations of automation tools supporting workflow, and monitoring infrastructure and compliance processes seen across the buy side in response to the remote working transition.”