With blockchain technology, it is possible to streamline the cumbersome procedures associated with the compliance function. In this respect, relations between independent managers and custodian banks will be easier to formalise.
Compliance, historically a complex issue in the financial ecosystem, has taken a new turn in recent years. Regulations are getting tougher, and players are under increasing pressure from regulators around the world.
In the United States, the Risk Management Association conducted a survey of US banks on this subject. Half of them reported spending between 6 and 10% of their revenues on compliance costs, while 20% spent nearly 5%. These high costs have a direct impact: less flexibility in product design (25% of respondents) and higher costs for certain services (22%).
More generally, again in the US, the National Association of Manufacturers (NAM) estimates compliance costs at around USD 10,000 per employee. Global custodian banks and brokers with several thousand or even tens of thousands of employees could spend more than 200 million per year on compliance.
With the LSFin and LEFin laws coming into force on 1 January 2020, it goes without saying that Switzerland will not be spared the regulatory burden. Banks, like independent asset managers, have to adapt to a more extensive and complex legal framework.
Almost two years have elapsed since the entry into force of the FINMA, i.e. just over half of the three years allotted to asset managers and trustees to obtain the authorisation required by the Finma. Unsurprisingly, the 2,403 asset managers and trustees who have registered with the Swiss financial market regulator have progressed at different rates. Only 284 managers, or 12%, targeted 2020 for authorisation. 684, or almost a third, were targeting 2021, and 1,434, or almost two-thirds, were targeting 2022.
Applying for membership of a supervisory body or for Finma authorisation is a cumbersome administrative task. The preliminary work involved is even more so.
Compliance is therefore a subject that has gained considerable momentum over the last few years. It is often seen as a burden, but it is also time-consuming, taking time away from the core business of IFMs and the day-to-day running of their businesses. The entire sector is now calling for solutions that can be implemented quickly.
“But beyond the technology, the real issue here is the harmonisation of market standards.”
Digital technologies offer a maturity and a degree of security that perfectly meet the requirements of compliance. But beyond the technology, the real challenge lies in the harmonisation of market standards. This is only possible by aligning the various financial players around a common governance and around common tools.
Governance is a key element here, as it is the basis for the choice of technology. A standard cannot depend on a single entity.
If there is harmonisation, it must be able to be decentralised. For a standard to have credibility, it must be the result of genuine collaborative work, and its authorship must not come from a single entity, but from a group of leading structures representing the entire financial sector. In this sense, the work done by the Blockchain Association for Finance in close cooperation with the Wecan group illustrates the logic of this approach. The need for decentralisation therefore highlights the importance of technical choices. The implementation of traditional, centralised databases would counteract this process of governance and harmonisation. As decentralisation is now technically possible thanks to technologies such as blockchain, the definition of a standard and its implementation through decentralised databases become possible. The essential coordination between actors is therefore no longer a wish, but a reality.
The aim is to harmonise standards which, together with highly secure technologies such as blockchain, will ease the burden of the compliance function. Switzerland, which is used to innovating in the financial sector, has the opportunity to be a pioneer in this field.