Staying on top of the latest regulatory developments in the financial services industry to maintain compliance and stay ahead of potential risk poses significant challenges for firms of all sizes. However, it can be particularly complex for smaller firms, where factors like limited resources and reliance on manual processes can make an already complicated endeavor even more difficult to manage.
Regulatory actions against large firms certainly grab the headlines, but smaller firms are equally under the microscope. Recent disciplinary actions by FINRA against small firms include failure to establish and maintain a supervisory system to detect improper trading, failure to submit required disclosures in a timely manner and improper use of social media influencers to promote firm business.
It's a regulatory concern across the globe. The FCA Handbook states that all firms must have adequate and effective governance, procedures, and controls in place to detect and mitigate any risk of failure to meet compliance obligations. The FCA clearly states that the responsibility for compliance ultimately begins and ends with a firm, regardless of size. As a recent FCA statement on Compliance Support pointed out, the regulator's approach is that “Compliance is your responsibility. If we find inadequate controls in your firm, we may take action against you.”
Manual processes are a drag on time and resources
Agility is crucial for identifying and responding to regulatory change and understanding the impact of potential risk. But smaller firms can find it challenging to swiftly adapt to new requirements, especially if the lack of resources means that the firm continually takes a reactive rather than a proactive approach to managing and monitoring compliance obligations.
Without a deep bench, compliance can be a daunting task.
Limited resources can mean more risk. Small firms operate with a single compliance staff resource, or with employees covering compliance who are shouldering many other responsibilities. In both scenarios, employees can be stretched too thin to keep up with an influx of regulatory change or the range of potential conflicts of interest that can lead to risk across the firm. Manual processes that rely on tools like spreadsheets and emails increase the likelihood that a possible area of risk or a regulatory update will be missed. It’s also problematic if an identified scenario lacks defined ownership and steps to mitigate risk or if a regulatory development is noted but policies, procedures, and controls are not updated to respond effectively.
And a regulatory penalty can have an outsized impact on a smaller firm that lacks the financial cushion to absorb a hefty fine.
Read a case study on regulatory change management
Evolving regulations increase compliance risk
All firms, large or small, have myriad compliance policies and procedures that they need to stay on top of. Any new development in the regulations that a firm is beholden to, depending on where they do business, has the potential to require policies and controls to be updated accordingly.
Even if a small firm has someone on staff with the compliance or law background to review regulatory output, it’s a daunting task to sort through the volumes of documentation to parse out what’s truly relevant to the company’s operations.
Identifying relevant updates is only the beginning. An effective response to regulatory change also involves evaluating the impact on firm policies, procedures, and controls and implementing updates to processes, systems, and documentation to stay compliant with the latest requirements.
A centralized library can provide a single source of truth and help firms keep a handle on policies and procedures and the impact of regulatory change.
How Technology Enables Best Practices in Policy & Procedure Management
Not all risks are created equal
Not every issue a firm identifies will pose the same level of potential risk. And in a smaller firm where resources and staff might already be stretched thin, the ability to focus on the most important areas of risk is critical.
When people are busy it's easy to lose sight of the big picture of compliance. Firms can create a priority matrix to rank the totality of risk across the organization. Compliance can then allocate time and resources based on the matrix - tackling the greatest areas of risk exposure, giving more attention to underserved areas and starting with the areas that are the most expedient to resolve.
It's also helpful to find the potential for ripple effects and identify the areas where help would be most impactful across the compliance program.
A risk register helps clarify and organize the process of identifying and prioritizing potential risk scenarios by categorizing risks and storing them in a central location. By listing risks, prioritizing them, and defining mitigation strategies, a risk register ensures a shared understanding across the firm of how to respond appropriately when issues arise.
Investment in compliance technology pays off
Technology can help fill the gaps that a small firm might face, providing a best practices framework, increasing efficiency and enabling a shared understanding of compliance obligations across the firm. The right compliance technology provides a framework for efficient and effective compliance, enabling firms to focus on the strategic priorities that support sustained business growth.
Compliance technology creates and amplifies those 'ripple effects'. Technology drives efficiency, replacing manual and repetitive tasks like emails with automated workflows, tasks and alerts. Other processes that can be streamlined include managing filing dates and deadlines and creating testing plans and documentation.
Compliance is not one size fits all. Compliance technology should be tailored to meet the needs of every company, large or small. Read a tale of just right compliance technology.
Regulators expect defensible proof of compliance
Stakeholders, including regulators, firm management and potential investors will expect demonstrable proof that a firm is effectively managing risk and regulatory change. Technology allows firms to quickly and easily produce that proof by providing reporting and an audit trail as evidence of compliance.
A Lack of Compliance Evidence Means It Didn’t Really Happen
MCO helps small firms manage regulatory change and compliance risk with tools including horizon scanning, risk registers, compliance libraries and more. The integrated MyComplianceOffice platform features a single data source for a holistic view of compliance across the organisation plus automated workflows, alerts, tasks and attestations.
Ready to learn more? Contact us for a demo today!
