Risk & Economy » Climate change » New digital transformation, ESG challenges force firms to revaluate resource allocation of compliance function

New regulatory changes, digital transformation business plans and a growing ESG focus are putting pressure on firms’ compliance function.

Panellists speaking at the Association for Financial Markets in Europe’s (AFME) compliance and legal conference on Wednesday urged businesses to upskill compliance teams in preparation for “the next wave of compliance.”

Seung Earm, head of regulatory and territory office at BNP Paribas, said it’s important to be proactive in the compliance space.

“You’ve got to watch what’s going on, not just in the UK, EU, US or APAC,” she said. “There are lots of different [progressions] around the crypto space. […] That’s something we need to be on the watch to look out for.”

As a result, compliance teams need to be upskilled, so they are ready for any new changes.

In anticipation of new regulations and greater scrutiny from regulators, firms are turning their focus to create efficiency through the adoption of technology.

Valerio Cencig, head of compliance digital transformation at Intesa Sanpaolo, said “digital transformation is gradually but inexorably transforming business models – but also [the] way of doing compliance, especially in the more data-driven areas”.

However, as firms look to transform the way they manage compliance, it’s necessary to invest in digital skills that complement the traditional legal and functional expertise held by compliance teams, he added.

“In short, it’s time for the next wave of compliance”

However, resource allocation is typically scarce for compliance teams. As such, the compliance function is still viewed as reactive, warned Earm.

“Whenever there is a fine or remediation, it is time to invest in compliance and do the remediation project.

“When that is done, there is a cost cutting, there’s a downsize because we are a non-revenue-generating division. This will always be a sticking point with compliance and business,” she said.

Instead, businesses should look at the bigger picture, which deals with protecting longer-term investments, the market and the clients, she urged.

Meanwhile, Bernadine Reese, managing director at Protiviti, argued that the growing focus from business and regulators around ESG is increasingly likely to shape the compliance agenda.

“The ESG topic presents a number of opportunities [and] risks for many parts of a financial services firm. Regulatory risk is clearly a growing part of this.”

Some of the commitments organisations have made in relation to climate change and the environment are “fairly high standards that are very absolute, very aspirational, and certainly very measurable,” she said. “That set a high bar in terms of transition risk.”

“Regulators [have] indicated that they are looking for more data, more metrics” in what is going to be a growing area of supervisory focus, Reese said.

Therefore, “being able to make that transition to a new framework for ESG quickly, in a way that will not result in reputational risk in the market, but also [in] regulatory risk” will be critical, she said.