2017 Nasdaq Global Compliance Survey. Inside the Mind of the Compliance Officer

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1 Nasdaq Global Compliance Survey Inside the Mind of the Compliance Officer

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3 MARKET TECHNOLOGY In the Global Compliance Survey, Nasdaq continues to gather intelligence on the most pressing developments in surveillance and compliance, while also building on three years of rich data. The accrual of results from the past three surveys provides a comprehensive profile of year-over-year trends dating back to 2015, while data collected in the survey provides insight into the most current and pressing topics in the eyes of compliance officers over the past and coming 12 months. This year s survey responses include 123 responses spanning over 90 firms throughout the financial services sector across 24 countries. Data used throughout the report is collected through an extensive quantitative survey, spanning key focus areas for the compliance function. These include: general segmentation, organizational structure, budgets and spending, challenges, automation and technology, and policies and regulation. General Segmentation The Nasdaq Global Compliance Survey respondent demographics are reflective of the types of firms that traditionally use sophisticated surveillance systems and practices with a make-up that is prominently sellside, with healthy representation from other segments, including the buy-side and market infrastructure providers. Interestingly, there was significant growth in the number of market infrastructure providers present in this year s survey, with of all responses coming from market infrastructure providers, compared to 9% in. This increase in market infrastructure providers could be seen as a direct result of the MiFID II regime, forcing more firms to place a heavier focus on their compliance programs. Aside from this increase in market infrastructure providers, respondent demographics remained largely the same as in the results. Regionally, the survey data reflected a global respondent base, with the highest participation from U.S. firms, followed by Canada, Denmark, India, Singapore and the U.K. For the third year in a row, the survey data collected is able to provide a comprehensive view of compliance practices, due to respondents high levels of experience in a compliance role. The majority of respondents reported to have at least 6+ years of experience in a compliance role, with the most common experience level reported to be 10+ years. Along with a high level of experience, most respondents also maintain high-level positions at their respective firms, with most reporting that they are at the VP or Director level. Furthermore, the responses showed an increase in CEO/CCO respondents. The most senior respondents yielded from market infrastructure providers, with the most junior responses from corporates and retail banks. When evaluating roles and job functions, most respondents reported to work in a general compliance or a trade surveillance role allowing for a comprehensive surveillance-specialized viewpoint. Data trends over the past three years show that the percentage of respondents in a trade surveillance role has been increasing steadily, reflecting solid representation of this demographic. The consistent trends in demographics illustrate a rich and conclusive compliance profile over time. BUSINESS.NASDAQ.COM 1

4 NASDAQ GLOBAL COMPLIANCE SURVEY FIRM TYPE YEAR-OVER-YEAR Malaysia 2% Mexico 2% REGIONAL BREAKDOWN Other 1 44% Australia 3% Hong Kong 5% United States 43% 22% 46% 23% 9% United Kingdom 6% Singapore 6% Buy-side Sell-side Corporate or Retail Bank Market Infrastructure Provider India Denmark Canada 8% EXPERIENCE IN COMPLIANCE ROLE 2% 14% 23% 38% 4% 18% 26% 32% 2015 (N=158) 6% 8% 23% 2 3 Less than 1 year 1 to 2 years 3 to 5 years 6 to 10 years More than 10 years ROLE 40% 41% 3% 5% 2% 2% 43% 3 4% 2% 2% 6% 2015 (N=158) 46% 6% 6% 5% 0% 9% General compliance Trade surveillance AML compliance Front-office business Compliance IT or tech Electronic communications Other or monitoring (ecomms) surveillance 2 BUSINESS.NASDAQ.COM

5 Organizational Structure The organizational structure of responding firms proved largely similar to previous years, indicating continued compliance collaboration with other departments. Overall, compliance teams reported the most collaboration with the front-office, followed by the legal and risk management departments. When looking at interdepartmental collaboration by firm type, buy-side firms were shown to collaborate similarly with most departments, while the sellside appeared more focused on front-office collaboration. Market infrastructure providers noted the most collaboration with legal, front-office and risk management departments. Interestingly, collaboration with IT departments has grown in importance. This, amongst other survey data, reflects the increased focus on technology across this year s survey responses. Market infrastructure providers were also noted to collaborate with Information Security and Internal Controls. The progression of data over the past three years shows a growing focus on horizontal collaboration structure. The data reflects that collaboration now takes place approximately equally in a vertical and horizontal way, demonstrating the gradual shift toward horizontal collaboration, which can be seen in the survey results as well. These small, but stable shifts are meaningful and further reflect the growing influence of compliance within firms globally. As noted in previous years, the influence of compliance continues to grow within firms with compliance standards considered highly important by 92% of respondents. In fact, the percentage of respondents who agree that compliance is part of the conversations about their firm s strategic direction moving forward significantly increased between and, from 75% to 85%. THE INFUENCE OF COMPLIANCE CONTINUES TO GROW WITHIN FIRMS WITH COMPLIANCE STANDARDS CONSIDERED HIGHLY IMPORTANT BY 92% OF RESPONDENTS. Furthermore, relationships between compliance and the front-office have improved over the last year, with continued compliance involvement in front-office monitoring functions. In addition to this involvement, firms are seeing additional focus being placed on the front-office carrying out its own trade monitoring function as a part of its trade supervision responsibility. This further reiterates the need for a first and a second line of defense within firms. COMPLIANCE STANDARDS Respondent's organization considers compliance standards highly important COMPLIANCE VISIBILITY Respondent's compliance organization has a seat at the table in executive conversations about the firm s strategic direction 51% 41% 1% 38% 4 10% 5% 5 31% 6% 6% 39% 36% 13% Strongly agree Agree Strongly agree Agree Neither agree nor disagree Disagree Neither agree nor disagree Disagree Directional arrows indicate that percentages are statistically different from other percentages with similarly colored arrows. BUSINESS.NASDAQ.COM 3

6 NASDAQ GLOBAL COMPLIANCE SURVEY COLLABORATION BY DEPARTMENT SEGMENTED BY FIRM-TYPE Buy-side Sell-side Corporate or retail bank Market infrastructure entity (n=21) (n=25) (n=54) (n=53) (n=25) (n=26) (n=23) (n=10) 5% 16% 43% 44% 35% 32% 26% 43% 4 34% 38% 40% 44% 31% 31% 23% 35% 40% 5 68% 60% 64% 64% 54% 61% 65% 5 60% 60% 73% 78% 81% Front-office or business office Legal Risk management Executive management Audit COLLABORATION BY TYPE (HORIZONAL VS. VERTICAL) Only in a reporting capacity (vertically) 3% 4% Only in a collaborative capacity (horizontally) 26% 33% Mostly vertically 4% 8% Mostly horizontally 22% Approximately equal parts vertically and horizontally 3 43% Directional arrows indicate that percentages are statistically different from other percentages with similarly colored arrows. 4 BUSINESS.NASDAQ.COM

7 Compliance Drivers & Regulation Based on results, top compliance challenges have not changed significantly. There is more focus on understanding and implementing technology; however, new reporting and administrative requirements detailed by regulation continue to be the top concern. The increased focus on technology is largely driven by sellside and buy-side firms most notably, the sell-side, which had a statistically significant increase in the number of respondents who reported understanding and implementing technology capabilities as the top compliance challenge over the coming months. While sell-side and buy-side firms are shifting toward a heavier technology focus, market infrastructure providers are most concerned with reporting and administrative requirements detailed by regulation (N=157) Uphold and protect your firm s reputation COMPLIANCE DEPARTMENT'S MOST IMPORTANT FUNCTION IN RESPONDENT'S OPINION 71% 68% 64% Avoid regulatory fines 12% Attract new customers wanting to work with a compliant, respectable organization 9% 6% 4% 10% Other For the third year in a row, protecting firms reputation was reported to be the key function of compliance, with reputational risk trending at an even higher importance level throughout the past year. When breaking this down further by firm type, it is evident that the buy-side places significant focus on reputational risk, with a significantly higher concern for reputation over regulatory fines, when comparing to. This year s survey data reflected an increase from 64% of buy-side respondents to 81% of buy-side respondents that noted upholding and protecting their firm s reputation as the most important compliance function. This further demonstrates the convergence of the buy-side toward sell-side levels. Greater compliance interest on the buy-side can be largely attributed to the increasingly competitive investment environment and growing need for buy-side firms to demonstrate transparency to maintain their client base. On the sell-side, responses remained largely the same, highlighting that reputation remains the top priority. The most notable difference in the data is the rise of RegTech, which is overtaking RegEd as the top compliance concern. Between and there was an 18% increase in the number of respondents who noted technical inability or lack of technology capabilities to meet requirements as their top concern over the next 12 months. Furthermore, the overall industry focus on RegTech solutions has yielded marketplace results, as firms are scrambling to keep up with available technology (n=157) Full understanding of regulation and how it impacts your firm TOP REGULATORY CONCERN 48% 55% 50% Lack of staff resources to meet regulatory requirements NEXT 12 MONTHS 29% Technical inability or lack of technology capabilities to meet requirements 22% 13% 10% 14% 9% Inadequate financial resources to address requirements REGTECH 'Regulatory Technology' technology designed to address regulatory challenges facing the financial services sector REGED 'Regulatory Education' educational material surrounding regulatory requirements within the financial services sector Directional arrows indicate that percentages are statistically different from other percentages with similarly colored arrows. BUSINESS.NASDAQ.COM 5

8 NASDAQ GLOBAL COMPLIANCE SURVEY 2015 (n=156) 1 16% 12% REGULATORY PREPAREDNESS 56% Completely prepared: We understand the impacts and have the resources and processes planned to meet new requirements Somewhat prepared: We are analyzing various requirements to understand impacts and fine-tune processes and technology capabilities to meet our needs 5 58% FREQUENCY OF POLICY UPDATES 31% Adequately prepared: We understand the impacts and are working to implement controls to meet the new requirements Not prepared 2% 3% 2% The increased focus on technology is largely due to the stable regulatory climate over the past year. With the expectancy of MiFID II, many firms spent 2015 and building up their regulatory knowledge. Now, with much of their regulatory education under control, firms are delving into the next level of a successful compliance program the technology and more specifically, where their own technology deficiencies lie. The focus on RegTech has caused the lack of technological capability to grow significantly as a concern, in comparison to past years. Interestingly, the buyside lag holds true, with the sell-side firms leading the way in terms of technology focus and implementation. Despite growing technology concerns, firms seem to be more confident in their overall regulatory preparation. While financial institutions are, in fact, more comfortable with the breadth of regulatory requirements, respondents have not significantly shifted their habits of preparing for incoming regulations in terms of hours spent maintaining their current knowledge of laws and regulations. The outliers across firm segments in terms of regulatory preparedness are buy-side firms. Buy-side firms are the clear exception, with an increase in the amount of hours spent on regulatory preparation. FIRMS ARE DELVING INTO THE NEXT LEVEL OF A 21% 8% 6% 23% 16% 22% 4% 14% 16% 9% 8% 8% 6% 22% 26% 10% 25% 13% 10% SUCCESSFUL COMPLIANCE PROGRAM THE TECHNOLOGY AND MORE SPECIFCALLY, WHERE THEIR OWN TECHNOLOGY DEFCIENCIES LIE. Coinciding with increased confidence in regulatory preparation, firms are also updating policies at a lower rate than in previous years. The majority of firms have moved from monthly updates toward semi-annual updates. The decrease in the rate of internal policy updates might be explained by increased comfort levels with the breadth of regulatory requirements (n=157) Other I dont know Every 1 to 2 years Annually Semiannually Quarterly Monthly Directional arrows indicate that percentages are statistically different from other percentages with similarly colored arrows. 6 BUSINESS.NASDAQ.COM

9 REGULATORY CONCERN BY REGULATION Markets in Financial Instruments Directive (MiFID II) 25% 61% 66% Market Abuse Regulation (MAR) 25% 53% Dodd-Frank Act 3 45% Market Abuse Directive 32% Foreign Account Tax Compliance Act (FATCA) 23% 21% Basel III 1 Global FATCA (GATCA) 2% 18% U.K. Bribery Act 13% Other national/regional regulation 0% 12% 2015 (n=151) When looking at regulatory changes and implementations set to come into effect over the next 12 months, levels of firm preparation are increasing, but are still markedly low in terms of complete preparedness. MiFID II continues to be the main concern for many firms, with respondents generally believing their firms are adequately, but not completely prepared for new regulatory challenges over the next 12 months. Following the implementation of MiFID II in January of 2018, preparedness levels are expected to increase. When breaking down preparedness levels into specific firm types, market infrastructure providers report the highest levels of preparation, while buy-side firms continue to report the lowest. BUSINESS.NASDAQ.COM 7

10 NASDAQ GLOBAL COMPLIANCE SURVEY REGULATORY CONCERN GEOGRAPHICALLY % 53% I m only concerned with the regulations within my national jurisdiction I m concerned with regulations within my national and regional jurisdiction I m concerned with financial regulation globally and how it will impact my firm Geographically, cross-jurisdictional regulations and their impact remain the top concern for the majority of survey respondents, ranking higher than regulations within national and regional jurisdictions. However, when analyzing responses by firm type, corporate and retail banks were the outlier, with a higher focus on national jurisdictions. MIFID II TAKES THE LEAD AS THE MOST CHALLENGING REGULATION TO ADDRESS OVER THE COMING 12 MONTHS Delving deeper into specific global and regional regulations, MiFID II takes the lead as the most challenging to address over the coming 12 months, as in the results. This reflects the true globalization and impact of regulatory regimes. MiFID II ranks as the top concern for most firms; however, even more notably so for both sell-sides and buysides highlighting a large increase in buy-side concern over the last year. Furthermore, there was a large decrease in the concern around both MAR and Dodd-Frank, making the focus on MiFID II much more significant. 8 BUSINESS.NASDAQ.COM

11 Compliance Budgets When looking at year-over-year comparisons, compliance spending remains extremely healthy perhaps even more so than anticipated. While many firms have already spent significant sums on their compliance programs, they are expected to continue to invest in the coming 12 months. Between and, 56% of survey respondents reported spending increases almost on par with the increases predicted in the survey. In fact, large spending increases actually surpassed expectations, echoing the trend seen from 2015 to. Furthering this year s responses, nearly 60% of respondents expect spending to increase again in 2018.Interestingly, many budget increases over the past year have come from tier 2 and tier 3 firms, in part, as a direct result of heavy vendor promotion throughout the past few as well as availability of scalable solutions. In regard to where these budget increases are being allocated, surveillance technology will continue to be the major category. Surveillance technology has consistently been reported as the most popular budget allocation area for the past three years. In addition to being the number one allocation overall, surveillance technology is consistently the main spending allocation across individual firm types. Other allocation areas have remained steady, with staff spending ranking second in 2015 and and third in. The downward trend in staff budget allocation, is most likely due to the increased technology focus from compliance teams. With the shift toward a more technology heavy strategy, staff increases amongst compliance organization have become more minimal indicating that firms are seeking to employ quality over quantity in terms of staffing decisions and are looking for candidates with experience in a compliance role. Over the next year, respondents expect staffing changes to continue to be minimal. COMPLIANCE SPENDING CHANGES OVER PAST 12 MONTHS 25% 13% 14% 23% 18% 1 21% Increase of more than 25% Increase of 11-25% Increase of 1-10% No change Decreased I don't know COMPLIANCE SPENDING EXPECTED CHANGES OVER COMING 12 MONTHS 16% 32% 12% 13% 26% 1 16% Increase of more than 25% Increase of 11-25% Increase of 1-10% No change Decreased I don't know Colored boxes indicate spending predictions for (based on data) versus actual spend. BUSINESS.NASDAQ.COM 9

12 NASDAQ GLOBAL COMPLIANCE SURVEY COMPLIANCE BUDGET AREAS OF INVESTMENT 0% 10% 40% 50% 60% 70% 2015 (n=157) 1% 3% 1 18% 29% 35% 34% 42% 46% 44% 44% 49% 53% 59% 62% Surveillance technology Additional support staff Governance, risk, and compliance (GRC) technology Maintaining knowledge of industry regulations Regulatory probes Other COMPLIANCE BUDGET AREAS OF INVESTMENT (BY FIRM TYPE) 0% 10% 40% 50% 60% 70% 80% 90% Buy-side Sell-side Corporate or retail bank Market infrastructure entity (n=21) (n=25) (n=54) (n=53) (n=25) (n=26) (n=23) (n=10) 2% 2% 4% 4% 0% 10% 10% 12% 12% 8% 10% 1 33% 34% 32% 48% 48% 40% 43% 53% 45% 45% 50% 50% 39% 39% 5 60% 58% 60% 64% 64% 70% 80% Surveillance technology Additional support staff Governance, risk, and compliance (GRC) technology Maintaining knowledge of industry regulations Regulatory probes Other Directional arrows indicate that percentages are statistically different from other percentages with similarly colored arrows. 10 BUSINESS.NASDAQ.COM

13 Automation and Technology As budgets continue to increase and remain somewhat loose, trade surveillance and compliance spending is stronger than initially anticipated. Furthermore, the spending trajectory is also stronger than expected, based on the reported rate of budget increases. While buy-side spending is increasing, sell-side firms still form a large portion of RegTech customers. This is due to the initial adoption of compliance technology by sell-side firms as well as the increase of lower sell-side tiers adopting vendor surveillance due to new scalable offerings. PROJECTED SPENDING MARKET SURVEILLANCE AND TRADE COMPLIANCE CAGR 14% $609 $542 $460 $422 $375 $257 $279 $300 $664 Technology is increasingly expanding as the key driver of compliance process change. While, traditionally, regulation has been the major driver of compliance process evolution, it continues to decrease as technology considerations are now maturing. Moving forward, the influx of new data sources and technologies will have a greater impact on process changes. Trade surveillance continues to be the most automated compliance process and continues to gain further traction proving predictions from previous years correct. While the sell-side is most mature in the realization of trade surveillance technology, the buy-side is catching up, with 62% of buy-side respondents reporting automated processes are in place for trade surveillance monitoring. TECHNOLOGY IS INCREASINGLY EXPANDING AS THE KEY DRIVER OF COMPLIANCE PROCESS CHANGE. It is also important to note the shift toward holistic surveillance programs. Most firms are moving away from a multiple-vendor surveillance approach, as the utilization of multiple trade surveillance systems has decreased significantly. Notably, there was a significant decrease this year, from to 12%, in the number of respondents who noted that utilization of 3 or more systems to investigate a potentially abusive incident was extremely challenging. This can be directly correlated to the reduction in vendor utilization e e2018 BIGGEST DRIVERS OF COMPLIANCE PROCESS CHANGES The past 2 years The past year In the next year Globalization (OVER FOLLOWING TIME FRAMES) 18% 8% % Increase in regulatory scrutiny and new initiatives 72% 68% 73% 53% 8% 14% 12% The influx of new data sources and digital technologies to examine Directional arrows indicate that percentages are statistically different from other percentages with similarly colored arrows. BUSINESS.NASDAQ.COM 11

14 NASDAQ GLOBAL COMPLIANCE SURVEY AUTOMATED PROCESSES/TECHNOLOGY AREAS WHERE USED AUTOMATED PROCESSES/TECHNOLOGY AREAS WHERE USED (BY FIRM TYPE) Trade surveillance Employee or personal trade compliance Trade supervision Anti-money laundering (AML) Know Your Customer (KYC) requirements Regulatory alerts (changes to regulations) E-comms surveillance Financial reporting compliance (e.g., Sarbanes-Oxley Act) Policy management and policy attestation Case management E-communications Noncompliance issue tracking U.S. Foreign Corrupt Practices Act (FCPA), U.K. Bribery Act, or similar 0% 26% 22% 22% 18% 18% 14% 23% 32% 32% 26% 25% 22% 33% 2 39% 36% 45% 50% 4 45% 4 50% 46% 42% 49% 50% (n=154) 75% 73% 80% Buy-side Sell-side Corporate or retail bank Market infrastructure entity (n=21) (n=25) 8% (n=54) (n=53) (n=25) (n=26) (n=23) (n=10) Trade surveillance 33% 29% 29% 29% 33% 36% Employee or personal trade compliance Trade supervision Anti-money laundering (AML) Know Your Customer (KYC) requirements Regulatory alerts (changes to regulations) E-comms surveillance 62% 72% 44% 48% 91% 59% 5 48% 6 72% 49% 49% 34% 36% 53% 76% 64% 36% 56% 40% 81% 54% 35% 42% 2 78% 39% 48% 44% 22% 80% 70% 50% 50% 60% 12 BUSINESS.NASDAQ.COM

15 Conclusion The past three years of data collected through Nasdaq s Global Compliance Survey reflect largely stable respondent demographics, which are representative of the real-life compliance market providing further validation that the base provides a comprehensive compliance profile. Compliance focus across firms continues to grow and often plays a key role in a firm s strategy, with 92% of respondents noting that their organizations consider compliance standards highly important. Furthermore, visibility continues to grow as compliance teams have increased involvement in executive conversations. COMPLIANCE HAS COME TO PLAY AN ESSENTIAL ROLE IN MOST FIRMS' OVERALL STRATEGIC VISION. THE ONUS IS ON COMPLIANCE TEAMS TO LEAD PROACTIVE EFFORTS TO ENSURE THEIR FIRMS ARE COMPLIANT BOTH NOW AND INTO THE FUTURE. As compliance steadily becomes more prominent within firms in the financial services sector, they continue to allocate significant funds to associated functions. In fact, compliance budgets were reported to be quite generous in, so much so, that they surpassed the increase estimates derived from the data. This trend is expected to continue, as firms continue to invest in their compliance programs and technology. Surveillance technology, which was reported to be the top investment area for the third year in a row, is projected to be a continued focus. There was a notable underlying focus on technology throughout many of the data points analyzed in the survey responses. Whereas, traditionally firms have prioritized regulatory education as a top concern, there has been a shift toward a focus on regulatory technology. This technology focus can be attributed to the largely stable regulatory climate over the past year, which has allowed firms to become more comfortable with associated requirements and spend more time on implementation. While the regulatory climate has been stable with the expectancy of MiFID II for quite some time, MiFID II is still noted as a major concern, with 66% of respondents citing the regulation as the most challenging to address over the next 12 months. Furthermore, respondents generally believe their firms are adequately, but not completely prepared for new regulatory challenges over the next 12 months. Regulatory preparedness levels are expected to shift dramatically in 2018 data, following the implementation of MiFID II. The role of compliance has continued to steadily grow in importance and visibility throughout the past three years due, largely in part, to the increase in regulatory pressure and the need to effectively manage firms reputational risk. As a result, compliance has come to play an essential role in most firms overall strategic vision. The onus is on compliance teams to lead proactive efforts to ensure their firms are compliant both now and into the future. Copyright. All rights reserved. Nasdaq is a registered trademark of Nasdaq, Inc Q17 BUSINESS.NASDAQ.COM 13

16 Copyright. All rights reserved. Nasdaq is a registered trademark of Nasdaq, Inc Q17