New market conditions, new expectations for compliance in 2023
A more caution is predicted in 2023. Unrest in the financial markets, re-evaluations of assets and calls for more robust risk assessment. With tougher application of regulatory requirements in both Europe and the US and potentially more litigations as a consequence, expectations on the function may grow as the pressure increases.
The compliance area is incredibly fast-moving. What worked only five to ten years ago is not effective today. New and updated regulatory requirements and market expectations translate into different demands on the compliance function. This all also means that the compliance function is much more prioritized today.Tone Bergfelt, Head of Financial Law at FCG
Correct understanding of risk
According to the Financial Times, increased regulatory requirements on many levels and stricter enforcement are among the biggest business risks in 2023. Understand how to prioritize risks in the compliance area can be a substantial challenge, taking into account several regulatory areas such as GDPR, anti-money laundering, consumer protection, corporate sustainability due diligence etc.
It is important to be able to work with an effective risk-based approach and have the ability to weigh risks. At the heart of the matter lies the challenge to prioritize among a large number of risks. As a result, it is not uncommon for compliance to try to focus on everything. Meanwhile, skilled resources are often limited, which may affect the capabilities of the organization to evaluate and make difficult decisions.
Key to effective compliance management is to work closely with business operations, for example by getting more involved in risk assessments on a regular basis as well as technical systems development and actively support the first line of defence. It is a balancing act between running the business and managing risks.
Although most businesses today have increased their resources for compliance, it is the risk-based approach that determines the capacity to prioritize and focus on the management of significant risks, where deficiencies and consequences are most significant.
The next aspect which needs to be considered is the quality and assurance of report to the board level. Similarly to financial crime prevention, there is still a need to build competence and understanding for compliance management issues. The compliance function has 15 minutes to present it all to the board, why what is reported, how risks have been identified and what measures that need to be taken including follow up.
How well this goes falls back on the ability to prioritize and appropriately involve compliance on all levels, will also have the courage to make the right decisions. The option to making well-informed decisions, can frequently be costly overcompensation.
Compliance as a competitive advantage
There is a huge difference between reactive and proactive compliance management. On the one hand, companies need to assure their ability to prepare for and integrate updated regulatory requirements into operational business processes. On the other hand, it is also clear that innovation in products and services happens before regulation has been adapted. In both scenarios, the compliance function needs to support first line operations and be involved early in the development of new services and products. It is a balance between running a business and managing risks, between expertise in compliance and technology. It must be constantly evaluated and further developed to create competitive advantages.
The compliance function is moving from being perceived as a controlling role only, to working more closely with the business and creating value. It is a development that we see in our work with over 450 consultants in Northern Europe. Compliance has so far rarely been seen as a competitive factor, but we are approaching a turning point now.Tone Bergfelt
Read the article in Dagens Industri here (Swedish): Nytt marknadsläge och nya förväntningar på compliance 2023