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Each year, as part of its Global Regulatory Outlook, Duff & Phelps conducts an online survey of financial services executives around the world to get their views on issues on the industry agenda. This year’s survey covered anti-money laundering (AML), whistleblowing, technology and budgeting, as well as which city is the current global financial hub and which one is most likely to fill that role in the future—a telling indicator of forces remaking the global financial landscape.
As it did last year, our survey closed by asking respondents to choose the city they believe represents the world’s financial center today and the one they believe will play that role in five years. Comparing this year’s responses to last year’s shows the effects of both short-term and long-term global trends. Last year, Brexit cast a shadow of uncertainty over the United Kingdom’s economy; it has now escalated to a full-blown crisis. Reflecting this, New York and London have switched places as the share of those choosing London as preeminent dropped from slightly more than half to slightly more than one-third.
Looking ahead, however, globalization’s diffusion of influence begins to be apparent: 12% of respondents expect Hong Kong to be the world’s preeminent financial center five years from now, a stark contrast to the 3% who held this opinion just a year ago. It is also worth noting that a handful of other cities were named as the global financial capital of the future, including Shanghai (9%), Dublin (4%), Frankfurt (4%), and Luxembourg (3%). While these numbers individually are not statistically significant, collectively they provide further evidence of the combined effects of globalization and Brexit as the financial industry searches for a new EU financial center.
It is not surprising that answers to this question were greatly influenced by the location of the respondent. In this year’s survey, 96% of U.S. respondents consider New York to be the world’s current financial hub and 76% of UK respondents consider London the hub. But even home-country bias has its limitations:
when asked to look ahead five years, the proportion of U.S. respondents who still name New York dips to 78%—while the proportion of UK respondents who say the same about London drops to 44%.
Governments and institutions around the world devote considerable energy and resources to combat money laundering, yet much remains to be done. When asked what changes would have the most impact on global AML efforts, survey respondents placed less priority on the execution of the elements on the front lines of those efforts, such as better funding, reporting or enforcement. Instead, they see the need to improve coordination and information-sharing among the wide-ranging constituencies of the global financial system.
At the same time, there is still work to be done at the firm level. While most firms rate themselves as being at least “effective” in the various components of an AML program, 30% of respondents rate at least one of their AML components as being either “not at all” or only “somewhat” effective. Furthermore, nearly a quarter of firms gave themselves low marks in their internal audit of AML risk, an essential element of AML risk management.
There is general recognition that whistleblowing programs are an important check on a firm’s compliance. Nearly three-quarters of respondents note that they have whistleblowing programs in place and 86% of them at least somewhat agree that such programs should be mandatory.
When asked to evaluate their own whistleblowing programs, respondents are most confident in their escalation mechanisms (They give similarly high marks to escalation for their AML programs.) If we look across the range of individual components, somewhere between one-quarter and one-third of firms feel they are either “very” or “completely” effective. However, for each element, between roughly one-fifth (19%) and one-quarter (28%) of respondents say their firms are “not at all” or only “somewhat” effective.
Our survey also found that there is a correlation between how firms rate the components of their AML programs and how they rate their whistleblowing programs—effectiveness in one program correlates with effectiveness in the other. In our view, this is both noteworthy and unsurprising. Excellence in compliance begins not with regulation but with a mindset that extends over every aspect of the business. Echoing this, survey responses showed that firms with operations in more than one country—which presumably are more sensitized to compliance concerns due to their multi-jurisdictional reach—are significantly more likely to have whistleblowing programs in place than firms with operations in only one country (84% vs. 54%).
Interestingly, budget is not currently considered a major issue when it comes to implementing technology in regulatory compliance—having an adequate budget was named as a concern by only slightly more than one-quarter of respondents. Instead, three of the four top concerns involve data: developing a holistic data strategy, having accurate and up-to-date data and then having adequate cyber security to protect that data. These results reflect a financial services industry that is still in the early stages of incorporating technology into compliance—and a tech industry that is still working to deliver on its promises.
Given the increasing demands on firm compliance functions, there is a general expectation of a steady upward pressure on compliance budgets, and our survey results underscore this. Last year, our survey asked respondents what percentage of their budgets was spent on regulatory compliance in 2017 and what they expected that budget percentage to be in 2023. The results showed that while the largest percentage of firms expected to continue to spend between 1-5% of their budget on compliance, there would be a notable shift at the margins: significantly fewer firms would be spending less than 1%, and many more would be spending more than 10%. This year’s results show that the shift expected to occur by 2023 has taken place as of 2019. The percentage of firms spending less than 1% on compliance has dropped to 9%, while the percentage spending more than 10% has increased to 12%. This suggests that financial services executives have generally underestimated the extent of future budget increases.
For more information, contact:
Julian Korek, Vice Chairman | +44 (0)20 7089 0800 | [email protected]