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As 2023 comes to a close and we look ahead to the new year, a concern that may be top of mind for compliance professionals is whether they are adequately prepared for the regulatory changes that will inevitably come in the new year.
Challenged by Regulatory Change
According to Nasdaq’s 2023 Global Compliance Survey, which recorded responses from 190 compliance professionals at organizations within the capital markets ecosystem, 27% of respondents – an increase of 7% from 20% in 2021 – revealed they do not feel adequately prepared to meet regulatory requirements. Based on the survey’s findings, this is especially true for those in North America who feel this disproportionately more than their global counterparts.
Some reasons for this are that trade surveillance compliance in North America can be highly complex due to challenges that include a diverse regulatory environment comprising multiple regulators as well as more frequent technological innovation such as new trading strategies, platforms, and communication channels, resulting in some institutions taking a more cautious approach. Additionally, regulators in the United States and Canada tend to take more strict action for compliance failings, including levying heavy penalties and fines, enforcing operational controls on the firm’s trading activity, and personal penalties against senior officials including, in rare instances, issuing jail time or loss of licensure.
Due to their greater maturity, we also know that firms in the Americas have more legacy processes and infrastructure, which can be challenging to navigate in and of themselves. When coupled with what one-third of respondents agreed was their most significant compliance challenge – “new reporting and administrative requirements detailed by regulation,” which 33% of respondents cited as their number one compliance challenge in the coming year, it’s no surprise practitioners feel unprepared for the ever-evolving regulatory landscape.
Breaking this down by organization we found that this was a large focus amongst buy-side firms for 2024 at 39%. A key reason for this is the tightening regulatory focus generally, as well as updates to key regulations such as MiFiD II, Securities and Exchange Act, AIFMD 2, UCITS, ELTIF and CSDR.
Mandating strong compliance
The report also showed that practices that were once mainstays of how firms exemplified the existence of their culture of compliance, such as communicating actions, compliance-based thought leadership, and promoting senior leadership as compliance thought leaders became less mandatory, falling consistently since 2020. This was attributed to greater trust between regulators and other stakeholders of compliance controls in more tactical areas. All of this comes at a time when new technologies are being utilized at an ever-accelerating rate and respondents listed understanding and implementing new technologies as second largest challenge for the coming year.
One avenue that firms are exploring is leveraging these same technologies (Generative AI, Large Language Models, and Natural Language Processing) to automate manual tasks so their analysts can focus on higher-value investigative activity. The survey highlights that while the overall spread of planned spend hasn’t returned to pre-Covid levels, the proportion of organizations that are planning to spend on core and new technology has grown. The findings also reveal a shift in investment from core technology to advanced technology with the biggest deltas between current and future spending in NLP and AI capabilities.
A Proactive and Comprehensive Approach
What is most needed now in the industry is a more collaborative approach between the regulatory community and the firms they monitor to help ensure controls that are operationally feasible and focused on the newest, most pervasive risks. By moving away from a reactive approach and adopting a proactive and comprehensive approach to regulatory change, organizations can help ensure greater compliance and better position themselves to pass regulatory scrutiny and avoid the accompanying financial and reputational risks.
To access all the data and insights from Nasdaq’s 2023 Global Compliance Survey, visit us here.
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