BusinessEdge Solutions Inc. Financial Services Compliance Survey Shows That Many Companies Overlook Most Critical Areas

The study shows that the very foundation of compliance management -- logging and archiving, auditing, and reporting -- is the "weakest link."

(PRWEB) September 30, 2005 -- Headlines list the fines: "Mutual fund companies have agreed to pay the SEC over $1.3 billion in fines due to market timing"; "NASD collects $102 million in disciplinary fines in 2004." All told, since 2003, investment firms have paid fines and restitution of approximately $2.3 billion as a result of late trading and market timing alone.

Industry experts predict that the financial services industry will spend $80 Billion in various compliance efforts over the next five years. A new BusinessEdge Solutions Inc. study documents what financial services companies are actually doing in terms of answering the demands of new and existing regulations.

The study was conducted as a self-assessment survey that covers several of the processes required by compliance departments to conduct due diligence in their regulatory responsibilities, assesses the adequacy of their adherence to regulatory mandates, and captures and assesses the level of automation the organizations surveyed use to execute their compliance processes.

BusinessEdge Solutions conducted the survey in July 2005 with the guidance of Dr. Howard Rubin, Professor Emeritus of the City University of New York. The participants comprised 27 financial services organizations with revenue of more than $2 billion. While this is a small sampling of the landscape of self regulated organizations, it represents a large number of those whose size, portfolio diversity and volume of business cover the spectrum of organizations with the highest risk exposure.

As an adjunct to the survey, BusinessEdge Solutions developed a unique Compliance Alignment Model, and a related Compliance Alignment Benchmark that enables companies to assess their compliance initiatives relative to the efforts of their industry peers. The model is based on two dimensions of compliance alignment: a process maturity dimension consisting of 145 data points and a process automation dimension consisting of 22 data points.

The study shows that the very foundation of compliance management -- logging and archiving, auditing, and reporting -- is the "weakest link": These critical data areas ranked at the bottom, yet this is clearly where the greatest risk of exposure is occurring. The survey mapped the ever more critical compliance landscape through the development of a two-dimensional compliance capability maturity model, which focuses on compliance processes and levels of automation.

Survey results were tabulated based on the scales provided for each of the process and automation questions. Results were grouped in two categories, process and automation.

Adequacy and adherence go hand-in-hand when it comes to understanding the value and strength of a process. Survey results indicate that the automation "story" mirrors the process results, underscoring the linkage between effective process and effective automation.

The #1 ranked process area is surveillance and monitoring, which is no surprise given the high degree of organizational focus on compliance with the U.S. Patriot Act regulations. The act identifies both customer due diligence or Know Your Customer (KYC) as well as the monitoring of all business activity associated with any customer or account. This behavior monitoring is looking for activity that might be considered suspicious and includes processes for investigation, documentation and reporting on the results of exceptions.

Forty-nine percent of those surveyed did not have systematic processes in place "across the board," and were not collecting appropriate data to improve their processes. With regulatory scrutiny increasing, budgets are being developed and prepared to accommodate the increases in spend that will enable firms to implement solutions to manage their risk to regulatory exposure. However, this increased scrutiny has organizations scrambling to keep up with the policies and procedures required to effectively implement supervision and surveillance procedures -- never mind their deployment of automated solutions. This is one of the major reasons why the plans to improve automation are being carefully examined before being implemented. The same triage that risk managers apply to operational and financial risk exposures is being applied to compliance point solution implementations: What is the risk of exposure? Where is the risk occurring? What is the probability of the exposure occurring? And what are the consequences of not covering that exposure?

The findings around documentation, archiving, information backup and reporting functions also merit consideration. Although these are deemed to have a lack of focus, there is considerable effort to satisfy the ever-increasing regulatory inquiries and litigation requests. With increased numbers of these requests, providing access to relevant information is a major research effort that is made considerably easier with increased automation. Yet many of these organizations lack the appetite for further automation. The paradox is that, on the business side, there is a greater need to have a view of compliance areas across the enterprise, and even in some cases, globally. Indeed, organizations are struggling to find new ways to justify their IT spending to accomplish this goal.

Areas of automation ranked by "automation maturity" from highest to lowest are as follows:
*   Policies and Procedures
*   Role and Responsibilities
*   Surveillance and Monitoring
*   Supervision of the Compliance Function
*   Reporting
*   Logging and Archiving
*   Auditing

More comprehensive reviews are being developed as corporate auditors turn to regulators and consulting organizations for guidance. This will better prepare organizations not only to pass regulatory scrutiny, but also to increase the due diligence around potential business risk associated with a lack of compliance. Organizations are taking a more comprehensive view of business risk, one that is being viewed as combining regulatory, financial, operational, credit, liquidity and, as important, reputational risk. But organizations are also finding it hard to take that enterprise-wide view without more automated integrated solutions -- however, there is a cost associated with that, and organizations are hard-pressed to justify it.

Eighty-five percent of those surveyed were either doing things totally manually, or with only partial automation. Of this group, 4% had only manual systems in place with no plans to improve, 33% had only manual systems in place and wanted to improve, and 48% had partial automation with no plans to go further.

The largest concentration of those surveyed can be typified by having partial automation, with defined processes in place. Few have leveraged the full potential of automation but are more focused on having a fully mature process backbone in place with a view to continuous process improvement.

It seems that even with the ever-increasing awareness regarding the importance of compliance, most firms have taken a "minimalist" view in terms of investment in enterprise process with appropriate automation support. Implementing point solutions for compliance issues may cover a myriad of regulations. But without a holistic enterprise-wide compliance framework, sooner or later, a terrorist or other suspect activity may well fall through the cracks, wreaking havoc on corporate credibility and reputations.

Benchmark your firm's compliance progress and compare it to your financial services peers. Use BusinessEdge Solutions complimentary Compliance Alignment Benchmark to evaluate your compliance spending levels and validate the focus of your firm's compliance initiatives. Visit www.businessedge.com or email info@businessedge.com for more information.

BusinessEdge Solutions Inc. is an industry-focused business and technology consulting firm offering operational strategy, business process and systems integration solutions to Fortune- listed clients in the financial services, insurance, communications and life sciences industries. The company drives competitive advantage for its clients by leveraging innovative Velocity Platforms, visualizations of breakthrough business solutions; Reusable Solution Accelerators (RSAs) to reduce the time, cost and risk of client engagements; and EdgeWare, pre-engineered solution frameworks. BusinessEdge is distinctive among consulting firms in that its multidisciplinary consultants have an average of 12 years of industry experience and expertise. The Compliance Workbench and Solution is one of many BusinessEdge Solution offerings. See www.businessedge.com for a complete listing of all solutions and service offerings.

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