Why Compliance Needs to be Transformed
The landscape of compliance in asset management is undergoing a seismic shift, driven by an array of familiar factors. From innovative platforms and technologies to regulatory pressures and evolving investor demands, the need for transformation is clearer than ever. This change isn’t just about keeping pace—it’s about reimagining how compliance can function amid increasing complexity, particularly in investment management agreements (IMAs), separately managed accounts (SMAs), and the burgeoning world of derivatives.
Drivers of Change in Compliance
The need for automation in investment compliance monitoring is becoming a non-negotiable reality. As investment vehicles grow more complex—replicating strategies and diversifying types—asset managers face mounting expectations. Investors nowadays are clamoring for ultra-customized IMAs, adding layers of complexity that necessitate a robust compliance framework. However, internal operational challenges often impede progress. Manual processes, siloed business units, and outdated policies create barriers that hinder transparency and efficiency.
Historic Hesitance and New Horizons
Traditionally, compliance functions within asset management firms have lagged behind front-office operations when it comes to embracing new technologies. Yet, a paradigm shift is on the horizon. More firms are breaking away from outdated practices, turning to emerging technologies to streamline compliance tasks. Automation of routine responsibilities not only mitigates operational risks but empowers compliance teams to base decisions on data, gaining valuable insights into how to manage compliance effectively.
Harnessing Emerging Technologies
The adoption of advanced technologies is revolutionizing compliance. Asset management firms are increasingly leveraging predictive analytics, artificial intelligence (AI), and cognitive technologies to transform operations. Tasks that once required significant manual intervention are now approached through low-code and intelligent automation frameworks, allowing for rapid deployment and customization. For example, firms are applying natural language processing (NLP) and machine learning (ML) to extract essential investment compliance rules from IMAs, prospectuses, and other governing documents. By categorizing these rules, compliance teams can ensure adherence more effectively.
Additionally, workflow automation tools facilitate streamlined processes for client onboarding. This intelligent orchestration connects various compliance functions, simplifying procedures and promoting better inter-departmental communication. As a result, many firms have reported cost reductions of 30% to 45% in these areas, showcasing the tangible benefits of embracing innovative technologies.
Shifting from Reactive to Proactive Management
Operational risk management has also become a focal point for many asset managers. Instead of merely reacting to compliance breaches after they occur, firms must learn to anticipate potential problems. By utilizing automated tools and leveraging analytics, asset managers can identify and rectify issues before they escalate into significant liabilities.
Cost Efficiency and Greater Effectiveness
Looking ahead, firms that adopt sophisticated analytics, intelligent automation, and emerging technologies will see profound changes in their compliance landscapes. Within the next three to five years, these advancements are expected to not only reduce compliance costs but also enhance accuracy. This evolution will pave the way for simplified processes that meet the evolving demands of investors while minimizing the risk of compliance failures.
As compliance professionals evolve, they will have the capacity to engage in higher-value tasks. With automated processes, they can focus more on investigating potential breaches at earlier stages, transitioning from a reactive to a proactive stance on risk management.
Tools for Transformation: The Example of SARGE
Innovations such as EY’s SARGE, a cloud-based AI solution for asset management firms, exemplify this transformation. Designed with ML and NLP capabilities, SARGE reads and extracts investment guidelines from governing contracts, mapping them to existing compliance rules. This tool can drastically cut down on the time spent in the compliance domain, promising end-to-end savings of up to 75%.
Beyond compliance, the advantages of tools like SARGE extend to client onboarding, billing, and environmental, social, and governance (ESG) verifications, reflecting their potential to drive improvements across various operational aspects.
Asking the Right Questions
As firms contemplate their compliance automation strategies, they must ask pivotal questions tailored to their unique models and resources. These questions help balance long-term compliance outcomes against immediate investments in technology. Key considerations include:
- Which compliance functions are ripe for automation, and how can they be prioritized based on their potential impact?
- Do we have the appropriate operational model to support a more analytics-driven compliance function?
- Are our teams equipped with the necessary skills to implement a technology-centric compliance approach?
- Should we develop these capabilities in-house or seek external solutions?
- How can we stay abreast of regulatory developments and emerging technologies to remain competitive?
Answering these questions will help firms map out their paths toward transforming compliance into a proactive, data-driven endeavor.