Navigating the regulatory landscape in financial services presents substantial challenges for firms of all sizes. For smaller firms, these challenges are magnified by limited resources and a reliance on manual processes, complicating what is already a demanding task.
According to MCO, while larger firms often headline news with regulatory infractions, smaller firms face equal scrutiny. Recent penalties by FINRA against smaller entities have ranged from the failure to establish proper trading supervision systems to delays in mandatory disclosures and inappropriate use of social media influencers.
Globally, regulators like the FCA mandate that all financial firms, irrespective of size, must implement robust governance and control measures to prevent compliance failures. The FCA has been explicit: “Compliance is your responsibility. If we find inadequate controls in your firm, we may take action against you.”
Adapting quickly to regulatory changes is crucial to mitigate risks effectively. However, smaller firms often struggle with being proactive due to resource constraints. This leads to a reactive approach in managing compliance, which can be inefficient and risky.
At a recent Investment Adviser Association’s Smaller Advisers Committee meeting, MCO Sales Director Jeff Childs discussed these issues with Chief Compliance Officer Rick Oppenheim. Jeff remarked, “Without a deep bench, compliance can be a daunting task.”
Operational risks increase when compliance responsibilities fall on a limited number of staff or are added to the existing workload of employees with multiple roles. This often leads to missed regulatory updates or conflicts of interest, compounded by outdated tools like spreadsheets and emails.
Moreover, the lack of clear ownership for compliance processes can lead to ineffective risk mitigation if policies and controls remain unchanged in response to new regulatory demands.
Smaller firms are particularly vulnerable to the financial repercussions of regulatory fines, lacking the buffer of larger corporations to absorb such financial hits.
Regardless of size, all firms must continuously update their compliance policies in response to new regulatory developments. For small firms, understanding and implementing these changes is a daunting task, often involving extensive review of regulatory documentation to determine relevant changes.
During the discussion, Rick Oppenheim highlighted the importance of prioritising risks through a priority matrix, allowing firms to allocate resources more effectively to high-risk areas. Jeff Childs added that maintaining focus on the bigger picture of compliance is crucial, especially when resources are tight.
Investing in compliance technology can significantly aid small firms by providing a framework for efficient compliance management. This technology replaces manual processes with automated workflows, streamlining compliance activities like managing filing deadlines and creating documentation.
Regulators, management, and potential investors expect firms to demonstrate effective risk and compliance management. Compliance technology facilitates this by providing robust reporting and audit trails, which are crucial for proving compliance.
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