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Compliance spending approaches its peak

After years of steady growth, spending on regulatory compliance could level off or even contract this year as financial service firms globally look to rein in costs by outsourcing expertise.

Compliance budgets among banks, broker-dealers and other market participants have been increasing since 2015, but over the past two years, a growing number of firms have made attempts to arrest that growth and tighten budgets. That trend accelerated in 2019 and seems poised to put the brakes on compliance spending growth in 2020. 

For many firms, the first means of cutting spending is to shift to external resources for specialised compliance expertise, as opposed to maintaining a standing expert knowledge base. According to data from Greenwich Associates, approximately 63% of firms plan to invest in external compliance counsel in 2020, while only 44% intend to continue investing internally.

“This impending wave of knowledge outsourcing will likely be seen across both sell-side and buy-side firms and should be even more prevalent among small institutions, along with many retail banking operations,” said Danielle Tierney, senior advisor for Greenwich Associates Market Structure and Technology and author of the report ‘Winter is Coming: Navigating the Regtech Budget Paradox’.

Continued growth in regtech spending

Despite compliance budget tightening overall, Greenwich Associates expects regtech spending - particularly in the area of surveillance technology - to continue to grow this year.

Trade and market surveillance technology is one of the most important compliance functions for market participants. Spending on third-party surveillance technology solutions is currently estimated at nearly US$1.2bn globally and is expected to continue to grow at a double-digit rate through 2022. In 2019, 70% of firms globally reported recent investment in surveillance technology.

Since the financial crisis, regtech implementation has followed a reactive approach to new regulations. As firms look to update their systems and existing applications start reaching the end of their useful lives, the industry will experience a wave of technology stack reviews and overhauls.

“The most cost-effective option for firms is to allocate future technology investments with a much more proactive and strategic focus on lasting efficacy, since most of these compliance solutions cannot simply be eliminated,” concluded Tierney.


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