Author: FundApps – fundapps.co

CONSIDERING PRACTICE

One of the unique features of working in an area of regulatory compliance that is truly global is that it is almost impossible for a lawyer in a given jurisdiction to cover every consideration a firm must face when assessing its obligations, let alone comparing obligations between countries. Remarkable as it may sound, regulators themselves are not always clear in their guidance on how to apply disclosure regulation in specific cases.

This uncertainty is evidenced by the interactions between compliance officers and regulatory authorities, and the unpredictability of regulators’ enforcement actions after the waterfall of regulation in recent years. To be fair to regulators, questions posed by individual industry participants are often laden with undeclared assumptions. These risk the act of giving advice becoming a minefield of misunderstanding. Leaving the interpretive job to legal professionals is usually less burdensome and less risky from their point of view.

However, it’s common that legal professionals sit at some distance from compliance practice, investment teams and from others in operational roles who best understand financial securities data. This gap between practice and regulatory interpretation can be closed by having a common interpretive framework, codified in a single rule set, with an ability for discussion and collaboration to take place. Cloud software and a service that includes access to compliance expertise form the basis for this to be accomplished.

AVOIDING GROUPTHINK

Whilst understanding the virtues of peer communication and collaboration, it is important to consider the potential pitfalls. Although conjecture and discussion contribute strongly to how we gain knowledge in a given domain, research in social psychology has also shown that for group-influenced problem solving, there are potential hazards.

One such hazard is known as ‘groupthink’ – where conformity is rationalised over accuracy.¹ Further research has suggested that this is worse when higher levels of group insulation are present.² This indicates that although it is important to obtain second or third opinions in areas like regulatory interpretation, doing so while limited to colleagues at a particular firm or area of practice may carry with it a greater risk of inaccuracies. Compliance officers, particularly those focused on a narrow slice of financial regulatory compliance, will almost certainly benefit from the perspectives of an external group of experts whose primary task is to ensure that regulatory interpretation and the calculations are accurate. Combining community-based interaction and full-service independent analysis from a compliance SaaS provider, let us call it a CaaS provider, aligns with the goal of mitigating risks from noncompliance.

CAAS VERSUS TRADITIONAL OUTSOURCING

The choice of cloud-based technology allows a CaaS provider to employ a focused group of compliance officers, legal professionals and technologists to create, maintain and deploy a single library of “rules” (algorithms) based on a shared interpretation of the regulation in a particular area — for example, global shareholding disclosure obligations. Compliance officers might wonder how a single set of compliance rules can be successfully used by a diverse set of financial institutions. A few observations shed some light on this question:

1. The application of regulatory requirements to a specific firm can be achieved by first conceptually modelling the properties required. If the calculations require consideration of the interrelation of a firm’s corporate structure, the entities’ relationship to the assets held, legal agreements and other characteristics of the holdings, then those considerations must be modelled at the right level of abstraction. After all, the same body of regulatory text applies to all; it is the  characteristics specific to a given firm and its assets which need to be carefully assessed. Unfortunately the status quo in the industry has been that each firm performs this task in relation to the same body of law, and they do so independently. Such an approach ignores the benefits of cross-firm peer discussion and the benefits of the CaaS provider’s independent analysis, which together allow the industry to co-develop an industry-standard interpretive framework.

2. When asset managers discover that they must file disclosures heavily in a given jurisdiction and might require frequent contact with a regulator, the CaaS model allows them to share insights gleaned from the interaction. For example, specificities related to a particular regulatory exemption or nuances in the calculation of a complex financial derivative could be shared with other compliance officers on the platform. This type of knowledge does not constitute a competitive advantage for financial institutions where insights such as asymmetric information in securities research or an investment strategy might. There is no ‘secret sauce’ in compliance. By allowing (but moderating) debate, discussion and testing of the shared regulatory algorithm in the cloud, the industry can converge on a well-articulated and transparent application of financial regulation.

It is important not to confuse this method with the traditional notion of outsourcing. The latter is driven mainly by cost cutting at the expense of expertise, a compromise in quality in order to boost margins or a desire to remove the undesirable aspects in one’s operations. What we propose envisions employing a centre of expertise, where regulatory interpretation is made transparent to the financial institutions served, where the relationship between a client and a vendor is viewed as a partnership, where collaboration yields higher quality, and where routine tasks are automated by a group of focused engineers.

Sounds like something that you would like to be a part of? Then check out our automated Shareholding Disclosure service and get in touch to see how you can join a community of 100+ firms closing the gap between practice and regulatory interpretation.

This blog is the third in a series of articles focused on compliance as a service (CaaS). In part 1 we discussed the challenges of data sourcing, and in part 2 we explored the power of community.

_{1 Whyte, W. H. Jr. (1952), ‘Groupthink’, Fortune, March, pp. 114–117, 142, 146.}

_{2 McCauley, C. (1989), ‘The nature of social influence in groupthink: Compliance and internalization’, Journal of Personality and Social Psychology, Vol. 57, No. 2, pp. 250–260.}