Buying guide: Finance leaders’ guide to compliance software

For finance departments, piecing together the patchwork of reporting and compliance obligations is challenging.

In the UK, company law dictates how financial directors should make decisions – mainly in the interest of the company and to use due care, skill and diligence. For reporting, Companies Act 2006 requires firms to submit financial reports in either UK GAAP or IFRS formats. For those operating in the EU, regulations require listed companies to submit IFRS standard financial reports. More changes are due. To be implemented this December, the Sixth Anti-Money Laundering Directive (6AMLD) means firms will need to refine and build on the existing Fifth Anti-Money Laundering Directive (5AMLD).

The UK’s Senior Managers and Certification Regime (SMCR) has shifted responsibilities to individuals from firms. Financial directors designated as senior managers are now personally responsible and culpable for compliance failures. The Financial Conduct Authority’s Code of Conduct and Handbook make in no uncertain terms the control finance departments have to have. If ever audited, firms need to evidence compliance with financial crime controls and show that adequate training and procedures have been followed.

Compounding the onus on finance teams, the working from home environment has been identified as prime ground for fraudsters. Those working in the compliance and regtech sector expect scammers to take advantage of remote working.

“Individuals are all working from home. It’s a concept of control, and you’ve only got access to limited technologies,” says Carwyn Evans, managing director at CCL Compliance. “Traditional prevention controls of market abuse, front running, and insider dealing – that’s been lost since we’re all working from home.

“Regulators will be tackling and pushing this topic. They know the whole market abuse and conflict of interest management is vulnerable right now. I think we’ll see some potential market abuse cases coming out of the past six months [of lockdown],” he adds.

Software providers tend to agree with Evans’ view.

“In times of economic uncertainty, we tend to see an increase in bad actors doing things they shouldn’t,” says Justin Fitzpatrick, co-founder and CEO at DueDil. “This is particularly true when there is government support available. Technology, both technology infrastructure and methods, can go a long way in combating the damage caused by these bad actors.”

Despite the challenging backdrop, regtech solutions can provide some comfort against the burdens.

Regtech providers turn to AI to make sense of dense legislative changes

Technology has developed far beyond the paper and pencil approach to checking compliance. Developments in artificial intelligence (AI), blockchain, and cybersecurity protocols are helping finance teams manage potential offenders and changes in regulation.

The potential AI to transform processes is making a lot of noise. AI’s digestion of vast amounts of data can make quick work out of new regulations. The combination of rules-based decision-making and AI could also lead to more nuanced, experienced based outputs.

“You might find that the deployment of AI includes bots which goes through specific data on users, customers, and linked parties that work out unusual or suspicious trends. Historically things like market abuse is about market movements – it’s two dimensional. Real market abusers are smarter than that. Whereas a good AI with the right thinking and algorithms could catch behavioural trends,” says Evans.

For finance departments, software offering both AI and machine learning have potential to not only improve accuracy and pinpoint unseen risks, but to erode the time taken to process client data.

Software needs to keep up with market developments

Ensuring the veracity of data is also essential to compliance teams navigating the environment. When buying software, it’s important to bear in mind when users are updated on risks and regulatory changes.

“Coronavirus has put many small businesses under pressure. A recent McKinsey survey cited that up to 40 percent could go out of business before the end of the year if economic conditions don’t improve. In this environment, having accurate and up to date insights on your SME customers is key. But the need to understand them doesn’t stop at the point of onboarding. One of the main requirements we see from our clients is the ability to be proactively notified of any changes to the business as and when they happen, allowing our clients to anticipate their customers’ needs better,” says Fitzpatrick.

For compliance teams to stay ahead, they need to be aware of upcoming changes in the regulatory environment. Many software providers, including Temenos, Standard Fusion and Compliance.ai manage regulation and policies. Temenos’ approach anticipates regulatory changes – modules are readily available for clients. As and when regulation changes, Temenos’ tweaks each module. Run alongside Temenos SaaS, compliance solutions can be deployed immediately.

Standard Fusion and Compliance.ai manage internal compliance policies. For compliance teams, the audit trail of policy review, sign-off, and implementation provides solid evidence in case of an audit. Standard Fusion’s platform includes internal control management, tracking and monitoring, and document management. Compliance.ai is similar, and includes tools for collaboration, resource planning and reporting. Essentially, the platforms create a workflow of compliance processes.

Getting the basics right still matters

“When you create or procure software, whenever we are adding to our platform, we are creating a solution. Compliance needs a lot of functionality – attestation, monitoring, conflicts of interest, policies – there’s a whole host of things. There are not many other providers where you can buy it all in one place – like a compliance Swiss army knife,” says Evans.

“Most firms don’t need AI and they don’t need ten separate solutions to keep them in compliance…there are 60,000 firms under the FCA’s watch and not all of them are FTSE 100 companies. There’s a glaring omission in the market,” he adds.

Instead, for smaller firms procuring software, Evans’ approach is simple.

“What’s the problem to solve? Work out your scope and what you need. Clients need to be really clear what they need in terms of functionality. That’s part of where things fall down. End users haven’t clearly thought through why they are getting regtech.”

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