Slide 1

Background
Compliance is an increasingly important function in investment banking, with complex regulation both in Europe and America posing new challenges in light of the financial crises since 2007/2008. Basel III regulations will be implemented across the globe from 2013 to 2018; the European Commission is currently discussing a revision of the Markets in Financial Instruments Directive, MiFID II, which would come into effect in 2015 if adopted; in the UK the Financial Services Bill introduces two new bodies, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), expected to be tougher on banks than the Financial Services Authority (FSA), to oversee financial regulation from 2013; while in the US the Dodd-Frank Act of 2010 imposes financial regulatory reform at a scale not seen since the 1930s. Other obligations arise through Sarbanes-Oxley (Section 404), the UK Bribery Act (2011) the Foreign Account Tax Compliance Act (FACTA) and new accounting rules, let alone voluntarily-incurred compliance with standards such as SAS 70 (auditing) or ISO 9001 (quality management).

Costs are significant, not least because ongoing costs of increased regulation are preceded by costs in preparing to be able to meet new regulatory requirements in the first place. For example, infrastructure improvements will be required for many so-called ‘heritage’ systems to comply with new regulation that requires vast amounts of data disclosure. Compliance needs to be managed and the two most promising avenues are ‘measurement’ and ‘automation’.

Several clients have asked whether Z/Yen could coordinate a global survey measuring compliance costs among Tier 1 & Tier 2 investment banks. While the task is complicated, it breaks naturally into two parts:

  • agreeing a method for measuring the regulatory burden;
  • surveying participants and reporting back.

Objective
In common with other Z/Yen surveys, in return for sharing data and sponsoring the study participants would receive confidential feedback comparing their compliance readiness and costs with their peer groups. The survey results should help participants to:

  • benchmark current compliance best practice and identify areas for improvement;
  • benchmark current compliance costs and identify areas for improvement;
  • negotiate with regulators on obligations based on the comparative costs they impose;
  • establish a baseline for future work on balancing the costs of compliance with ‘doing the business’.

In addition, we believe that an authoritative external publication presenting some of the highlights of the survey would help emphasise issues of over-regulation and benefit all participants in their discussions with regulators. To that end, we believe that the survey should seek to issue an additional overview publication for public consumption, perhaps in association with an authoritative ‘co-sponsor’.

Output
Investment banks have a variety of different compliance units and compliance structures. Compliance can report to a global head or be combined with other functions or allocated to product lines. Based on earlier work in Product Control benchmarking over the past decade, Z/Yen believes that a global benchmarking report might contain:

Management Overview

  • general overview of compliance in investment banking;
  • definition of compliance and driving regulations and regulators;
  • organisation of compliance among investment banks;
  • compliance activities;
  • compliance functions;
  • compliance technology;
  • measuring and managing compliance, including external standards certification;
  • compliance readiness for future regulations;

Comparative Compliance Costs

  • cost and headcount per book;
  • cost and headcount per P&L;
  • cost and headcount per trader;
  • cost and headcount per unit revenue and per transaction;
  • cost and headcount per legal entity;
  • cost and headcount per regulatory jurisdiction.;
  • cost and headcount allocated to initiative, e.g., AML, KYC, …

Approach
The survey would first create a management accounting manual specifying compliance costs both inside and outside the scope, e.g. how do we allocate systems development costs or where do we position internal audit staff time. Having agreed the basis of the survey costings, participants would complete a questionnaire with quantitative details such as a rough breakdown of headcount, compliance percentages by product, etc. Z/Yen’s approach to conducting the survey would be in line with our Z/EALOUS methodology:

  • Establish Endeavour - identify requirements, outline survey content and format, agree survey sponsorship;
  • Assess & Appraise - establish need: identify potential participants and contacts, define survey content and format, plan and agree project timescales, contractual engagement with participants, agree confidentiality;
  • Lookaheads & Likelihoods - engage participants: participant workshops, finalise scope-definitions-data model, first cut data collection;
  • Options & Outcomes- collect and QA data: final data submission via interviews and spreadsheets;
  • Understanding & Undertaking - report results: analyse survey results, quality assurance reviews, produce participant reports, draft individual analyses;
  • Securing & Scoring - realise benefits: presentations to senior management groups, identify potential areas for improvement, agree next steps, review progress.

One of the key initial steps in Establish Endeavour will be to delineate an appropriate scope of regulation from, among others:

  • Corporate Governance: 1992 Cadbury Report, 1995 Greenbury Report, 1998 Hampel Report, 1999 Turnbull Report and 2003 Higgs report; German KonTraG corporate governance reforms; Sarbanes-Oxley Act 2002; and the OECD Principles of Corporate Governance;
  • General Compliance: Basel 2, Sarbanes-Oxley (Section 404), the Patriot Act, Anti-Money Laundering, the Financial Services Modernisation Act, the Insurance Mediation Directive, Privacy and Electronic Communications (EC Directive) Regulations, the Freedom of Information Act 2000, substantially different International Accounting Standards (e.g. IAS 39), Data Protection Act 1998 and the Financial Groups Directive;
  • Regulators’ Rules: from the FSA, SEC, OCC, BAFIN, etc., SAS 70 or ISO 9000 as voluntarily-incurred compliance, or industry trade association voluntary compliance codes;
  • General Business Regulation: Health & Safety, COSHH, taxation, equal rights, etc.;
  • Future Planned Regulation: Markets in Financial Instruments Directive (MiFID), Equal Treatment Directive, Market Abuse Directive, Occupational Pension Fund Directive, Pension Directive, Capital Requirements Directive, Credit for Consumers Directive, Sales Promotion Regulation and the Unfair Commercial Practices Directive.

Next Step
The next step is to conduct a no-cost workshop for potential participants to see whether we can establish agreement on a method for comparing compliance costs. If this workshop is successful, then we would issue a short paper outlining the methods, e.g. a management accounting manual. If participants wished to continue to a full survey, then Z/Yen would be very interested in undertaking it, and estimate about four elapsed months to reporting back.

Please contact Michael Mainelli, a Director of Z/Yen, if you would like to discuss potential participation – tel: +44 207-562-9562 or michael_mainelli@zyen.com

About Z/Yen
Z/Yen is the UK’s leading risk/reward management firm. Within Financial Services Z/Yen performs benchmarking and performance analysis, market surveys, strategic planning (outsourcing, re-engineering, relocation) and market intelligence. Z/Yen’s benchmarking work encompasses global securities, global derivatives processing, global foreign exchange and money markets, clearance and settlement and operational performance.

 

More information:

Benchmarking