Compliance rethink urged as banks face up to Mifid II

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By:
Louise Bowman
Published on:

The demands of post-crisis regulation mean that banks need to take a more flexible approach to the compliance function.

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Eoin O’Shea, CEO of Temple Grange Partners

As the industry faces up to the harsh reality of new Mifid II rules, the challenge for banks of compliance with this and all post-2007 financial regulation has just become that little bit harder.

One person who sees this as an opportunity rather than a problem is Eoin O’Shea, former global chief central compliance officer at Credit Suisse. O’Shea left Credit Suisse in November 2016 after 26 years with the bank to set up his own regulatory and compliance consultancy firm.

He believes that the way in which banks approach compliance has to change, stating that most risk, regulatory and compliance consultancy is still delivered through an “outdated and rigid” resourcing model designed several decades ago.

“All banks are grappling with a huge increase in workload and significant reduction in resources,” he tells Euromoney. “The work is relentless and money for compliance is increasingly difficult to access.

“The banking model hasn’t yet reasserted itself in the decade since the 2007 crisis: and this is complicated by the fact that compliance officers are still paid in the stock of the banks they invigilate.”

O’Shea’s answer to increasing disillusionment and high turnover among compliance staff is to approach the task in a more flexible way. He says that the industry has failed to innovate and needs to evolve in the way that the IT industry has, with experienced professionals working at banks under a managed service model.

His firm, Temple Grange Partners, aims to do this. He says that hiring teams in from the big-four accountancy firms is no longer efficient in an environment of growing regulatory demands.

Need for change

The big-four firms would doubtless disagree, but O’Shea is adamant that his experience at Credit Suisse showed him the need for change.

“Temple Grange Partners was born from frustration,” he says. “My reality was that many of the people in the big-four teams coming in to help me did not have the practitioner qualifications that I needed. The big-four model has many strengths, but it struggles to deliver practitioners.”

O’Shea’s firm provides pre-qualified, verified staff.

“If a bank hires a big-four firm, many of the team that arrives on site typically still need a detailed training programme to get up to speed as they will not have worked in a bank previously,” he says. “These are no doubt bright, smart and keen individuals, but the simple fact is they are not experienced practitioners.

“When banks were more profitable, there was more client tolerance to train these people on site, but in today’s environment client budgets simply can’t keep absorbing this cost. The lost decade is killing that model.”

Temple Grange employs 19 permanent staff, but O’Shea is looking to double that figure during the next 12 months and has been in talks with a number of private equity firms over the last year. Investors in the firm are eligible for Enterprise Investment Scheme tax relief in the UK as the firm is not deemed to be a recruitment consultancy.

One person that seems convinced of O’Shea’s vision is Michael Spencer, founder of Icap and NEX Group, who has taken a sizeable stake. This could be seen as shutting the door after the horse has bolted given Icap’s $87 million fine for Libor fixing in 2013, something that Spencer seemed to acknowledge in announcing his investment.

“While no one needs to be reminded about the importance of compliance, there is a pressing need to deliver it through a cost-effective, high-value, managed service model,” he said.

Three former Icap brokers were put on trial by the Serious Fraud Office and acquitted by a jury in January 2016.

Valuable

O’Shea indicates that Spencer’s experience at the wrong end of a compliance scandal makes his involvement all the more valuable.

“Like all senior financial industry heads in the City, Michael has had to navigate complex compliance challenges – he gets it,” he observes.

The compliance challenge is so far split roughly half and half between regulation and enforcement, but this could change as Mifid II eventually beds in.

“If a single, new regulation wasn’t printed over the next 10 years, there would still be a mountain of enforcement and review work ahead,” says O’Shea. “The rules and regulations published over the last 10 years all need to be audited and tested in practice, and against reinvigorated regulatory expectations that are frankly unforgiving.

“Post-Mifid implementation reviews, for example, represent a very significant book of future work. Ditto GDPR [general data protection regulation] and other significant regulatory initiatives.”