How Will the Economic Downturn Impact Compliance Teams?

2022 saw the world experience rapidly rising inflation, interest rates, and general cost of living. When teamed with a post-COVID recovery and a war in Europe, this has found many analysts and economists reporting that at least a third of the world will be going into, or are in, a recession.

This economic downturn will have a substantial impact on compliance teams, especially as many are already struggling under the pressure of meeting their firms’ regulatory obligations with a reduced level of people and capabilities. This is because the last few years have seen the development of a very challenging market for hiring and retaining compliance talent – and these issues are likely to continue.

If tackled correctly, the changing market conditions present firms with an opportunity to embrace effective ways to adapt, respond, create new efficiencies, and even achieve greater economies of scale.  

Challenging times ahead 

According to KPMG’s recent CEO Outlook Report, 86% of CEOs believe a recession over the next 12 months will happen, but 58% feel it will be mild and short, and 76% have plans in place to deal with it. For example, 75% have implemented, or plan to implement, a hiring freeze in the next six months and 80% have considered or will consider downsizing their employee base in the next six months.

For compliance teams that are already stretched very far, the economic downturn presents an additional challenge. There is an ongoing compliance talent shortage as a result of a rise in early retirements and an increase in individuals changing roles or moving out of compliance entirely. This has pushed up compliance talent salaries, and increased training and retention costs.

As a result, in 2023 many compliance teams may have roles that they will no longer be permitted to fill and capability deficits they will not be able to address once hiring freezes and downsizing plans are announced.

For firms caught with under-populated or under-skilled compliance teams, the risks can be significant. For example, when people are not in place to perform compliance tasks, or are not adequately trained, compliance risk can escalate very quickly. Processes may not be completed or may be completed incorrectly – opening the firm up to potential reprimands and fines from the regulator. This, in turn, can morph into reputational risk, resulting in damage to the firm’s perception by customers, investors, and other regulators.

A thinly-stretched compliance team can also result in an impact on its operational resilience – it may find it difficult to respond to a sudden, unexpected event, such as a regulatory exam, a cyberattack, or a rogue trading incident.

Consider managed services 

However, there is a practical and flexible option for compliance teams caught in this quandary – outsourcing certain compliance processes via a managed service arrangement.

Firms are embracing outsourcing for compliance and performance. The Thomson Reuters 2022 Cost of Compliance report said 30% of firms outsource all or part of their compliance functionality – rising to 36% for global systemically important banks (G-SIBs). Driving this outsourcing for firms overall was the need for additional assurance on compliance processes (45%), cost (38%), lack of in-house compliance skills (32%), and compliance activities associated with business function outsourcing (32%).

Managed services have evolved considerably over the past few years to offer support for a wide range of compliance tasks, in an operationally resilient way. A move to managed services helps firms strategically shift cumbersome tasks and optimize team focus on level-appropriate work. It also builds in agility and flexibility to handle unexpected and cyclical staffing needs. Solutions include:

• Marketing and advertising review – For example, reviews for new jurisdictions, or support for regulatory change, such as the SEC’s new Marketing Rule
• Regulatory filings – Supporting small and large firms to ensure regulatory filings are done correctly and on time
• Annex IV (for firms marketing in the UK or European Union) – This complex filing can require expertise that many firms do not have
• Expert network consultation chaperoning – Delivering chaperoning for material non-public information meetings, and evaluation of those meetings
• Electronic communications and online presence reviews – Helping firms manage the monitoring of employees' communications and online activity
• Trade surveillance – For example, to review data, help to process false positives, identify potential insider trading, market abuse, and other misconduct
• AML – KYC/CIP support – Supporting firms who are struggling with fluctuating volumes of new sanctions, due diligence checks, data screening, ongoing monitoring, and other tasks
• SEC composite management and calculations – Enabling firms to complete composite returns under the new SEC marketing rules
• GIPS^® compliance and verification support – Hiring GIPS expertise can be particularly challenging, so this service supports firms’ GIPS compliance
• The chief compliance officer role – There can be many reasons to outsource the CCO role – outsourcing this role can help firms in transition, for example.

When considering adopting a managed services approach, compliance teams should ensure they engage with the right organization to support them. Qualities to look for in a managed services provider include advisory expertise, execution excellence, market leading technology and deep industry and sector insight. The managed services provider should also have a proven track record of working with similar firms.

Download our white paper to discover how some firms are solving these back office and human resources challenges – by engaging managed services, a form of flexible and strategic outsourcing. The paper:

• investigates the challenges facing firms today, and the risks that these can create; 
• looks at some more helpful trends, and areas where firms today are deploying a managed services approach; 
• discusses the benefits of outsourcing certain compliance and performance related tasks; and 
• explores how managed services can, with the right partner, enable financial firms to both embed more efficient processes and free up talent for more value-generating activities.  

How we help 

ACA Group is trusted by top international banks and hedge funds – as well as smaller and local firms. Our dedicated team of 120+ people has helped 1,400+ compliance and risk teams address the resource challenges that they face. To learn more about how ACA Managed Services can help your firm, learn more about Managed Services or reach out for a conversation.

Related resources

• The Compliance Talent Supply and Demand Challenge
• Surviving the Macro-Economic Superstorm