Category: Compliance, Creating Future Value, Industry Trends, Smart Sourcing

To Do or Not To Do: Making the Decision to Outsource Compliance Operations

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This blog post is the first in a three-part series about outsourcing compliance operations in today’s complicated financial services environment. This post was adapted from a discussion presented at DST’s 2017 ADVANCE conference.

Is your firm outsourcing any part of your regulatory compliance operations?

If you are, you’re in good company. Thomson Reuters’ 2016 survey on the cost of compliance revealed that 25% of surveyed firms outsource some or all of their compliance functionality. With other flavors of business process outsourcing on the rise within the financial services industry, it’s expected that the percentage of asset managers outsourcing compliance functions will continue to increase over time. In fact, just within the last year at Boston Financial, we’ve seen a 20% jump in the number of clients who have added full-service 22c-2 trade monitoring, Blue Sky Administration, and/or Tax Administration to their service models.

Drivers of Change

What is driving this increase? According to Thomson Reuters, the primary factors compelling the decision to outsource were the need for additional confidence that compliance operations were being managed expertly, and, in parallel, a lack of in-house compliance skills. When we talk with compliance professionals, they say the increase in regulatory pressures is leading to increased risk and cost. For every new regulation, they also need:

  • Staffing expertise to analyze changes and manage operational improvements to help ensure compliance
  • Required technology improvements to accommodate new requirements (e.g., new tools to automate the monitoring of compliance with the DOL fiduciary rule, changes to the recordkeeping system to accommodate money market reform )
  • Staff training and on-going operational delivery

Making the Decision to Outsource

While no one wants to be an outlier in the field of regulatory compliance, outsourcing compliance operations simply because ‘everyone else is doing it’ doesn’t make good business sense.

If I were in the position to analyze my compliance program to determine if/how my firm might want to approach outsourcing, I’d likely ask:

  1. Which regulatory compliance operations are we managing in-house?
  2. How do we know if we are performing these functions well?
  3. Which of these functions is a core business differentiator?
  4. Which of these functions is aligned with my firm’s strategic priorities?
  5. Do any of the following factors negatively influence the cost of my compliance program?
  • Adapting to regulatory reform, including technology development and legal/regulatory analysis
  • Operational quality improvement
  • Maintenance of risk management infrastructure, including disaster recovery capabilities
  • Staffing (e.g., the ability to maintain and evolve the necessary intellectual capital? Depth at skill positions)
  • Training

 Executing the Decision to Outsource

By the time a firm approaches me to talk about their compliance outsourcing options, they’ve already done some sort of risk/reward analysis that has led them to believe that outsourcing all or a portion of their compliance functions may allow them to be more focused on their core business objectives, and/or less distracted by day-to-day noise associated with running compliance operations. When they come to us, they are exploring how to execute their decision to outsource. This stage in the process may involve:

  • Making the case for outsourcing within your firm
  • Deciding who you will work with to deliver your compliance functions
  • Laying the groundwork to facilitate the transition

In the next post in this three-part series, I will share what lessons I’ve learned from my more than 30 years of experience in the field of compliance outsourcing – as both a vendor and the client perspective. In the meantime, if you have questions, please share them in the comments section below, or send me a personal message via my email below.

Craig Hollis

Craig Hollis

Craig joined Boston Financial in July of 2004. Craig has 32 years of mutual fund transfer agency experience in which time he has been responsible for managing numerous operational and support groups including: financial control, transfer agent and blue sky compliance, tax reporting and withholding, intermediary compensation, transaction processing and offshore distribution and servicing. Craig is currently responsible for the regulatory oversight of Boston Financial’s Transfer Agent activities as well as all operational aspects of Boston Financial’s compliance program including a 22c-2 full service solution and Blue Sky administrative services. Additionally, Craig represents Boston Financial in periodic Regulatory Compliance Advisory Group Sessions (RCAG) and is active in the industry, serving on the ICI Transfer Agent Advisory Committee, ICI Abandoned Property Task Force, ICI State Related Issues Working Group, ICI subcommittee on Money Market Reform (Institutional vs. Retail), NICSA Compliance Risk Committee, the Securities Transfer Association and has been a speaker at numerous industry events.

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