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Interim Market Report 2011 - Compliance Market Commentary

As we reported earlier this year the reforming zeal that was evident in the aftermath of the financial crisis has dissipated. Reforming the governance and regulation of the banks and wider financial services industry is no longer a coordinated global crusade and does not enjoy the political focus it did. It has increasingly settled into regional and national initiatives. The crisis in this respect may ultimately have been a terrible waste. In both the UK and EU however, regulators are acting against a backdrop of a simmering sovereign debt crisis and a banking system that remains fragile. The financial services industry is a significant part of the UK economy and, as in most other countries, in spite of the need to reduce the threat posed by their banks, there is little appetite to undermine their competitiveness.

At a national level, the Independent Commission on Banking, led by Sir John Vickers, delivered its interim public report in April. It baulked at the formal separation of retail and investment banking. This was in spite of recognising that a state guarantee for retail banking provides cheap funding for the universal bank’s investment or ‘casino’ banking activities. In essence the plan is to impose a 10% tier one capital ratio on systematically important lenders and to ring-fence retail banking away from investment banking. The government has seemingly accepted these interim proposals and the attempt to gain greater financial stability without fully separating retail and investment banking. Given the banks are in the process of rebuilding their capital bases, this should not be too draconian or undermine London as a global financial centre. As with Basel III and so much regulation, the devil is in the detail. There are so many grey areas including what might be regarded as capital and what is a retail or investment banking activity.

Whilst a universal regulatory environment is out of reach, the pressure on effective governance remains. In the UK this pressure is manifest both in the volume of regulatory initiatives and the intensity of regulatory oversight. The FSA’s tougher stance has become evident. The FSA has increased the number of supervisors and enforcement staff and its approach is more interventionist. ARROW visits now focus on governance mechanisms and the roles played by both executive and non executive directors, board committees and risk management frameworks. Clearly the FSA has a renewed focus on enforcement, having almost tripled the value of fines handed down in 2010.

The new regulatory structure for the UK is emerging. In April, the FSA announced an internal reorganisation to help it evolve into its new structure. The Supervision and Risk business units have been replaced with a Prudential Business Unit that will, as the Prudential Regulatory Authority (PRA), become a subsidiary of the Bank of England. It will be responsible for ensuring that individual banks comply with capital adequacy requirements, have sufficient liquidity and spread their risks. The Conduct of Business Unit will become the FSA’s renamed Financial Conduct Authority which will focus on consumer protection and market regulation. The Financial Policy Committee has also recently had its first meeting. As part of the Bank of England it will sit alongside the Monetary Policy Committee and is tasked with advising on the actions needed to keep the whole banking system safe. It is planned to have the power to control the supply of credit and to stop asset bubbles developing.

The banks have already been warned that they will be scrutinised more intensely following the introduction of the PRA. This is a move away from simply regulating structures, activities and compliance with procedures. Its incoming head, Hector Sants, has stated that its judgements will no longer be taken on trust and the PRA is far more likely to challenge decisions. The regulator will take its own view formed from its own analysis of the issues which affect the safety and soundness of a bank. The regulator will have the power to modify business plans. The FSA is already searching for excessive risk taking with the introduction of Business Model Assessments (BMAs).

The wider financial services industry in the UK is also under intense regulatory scrutiny with much new regulation coming into effect in 2012. It is therefore not surprising that 2011 is likely to be the year when the heaviest investment in compliance is made. The cost is considerable and just how much is boiler plate might remain to be seen.

Demand for compliance staff has reached record levels as the number employed in the financial services industry continues to rise. Candidate shortages are now endemic and are being exacerbated by the way compliance professionals, as in other areas of corporate governance, are increasingly perceived as specialists in particular areas. As we have previously reported, many candidates, not unreasonably, believe that the core elements of compliance are the same across different sectors. Employers generally disagree and prefer to recruit the exact skills they are looking for. This does make it difficult for compliance professionals, certainly via the recruitment market, to move between sectors and specialisms and is a major contributing factor in the number of vacancies going unfilled.

One response is for companies to fall back on external consultants to provide the necessary expertise. All of the Big 4 and other consultancies have seen the demand for their services rise. They are also in the recruitment market as they seek to recruit the resources necessary to meet this demand.

During 2011 demand emerged for what appears to be a new type of role. This is no doubt in response to the enhanced regulatory oversight and pressure from the FSA for companies to actively promote best practice. These new roles are seemingly designed to influence the regulatory environment within businesses. The larger banks and financial services companies have played a key part in creating such roles. These new positions are hands on roles that sit within the business rather than in compliance departments. Job titles have included “Governance Manager” or “Head of Governance & Controls”. The function of these roles is to promote a wider understanding of the regulatory requirements and provide guidance on the necessary control processes. Candidates for these positions are being drawn from both compliance and risk management backgrounds. Key skills include the ability to influence the business, enhance systems and procedures and help effect change.

At the start of the year, in the 2011 Market Report, we provided details on the key market drivers. Not surprisingly the majority were regulatory initiatives.

By way of an update the Bribery Act has now come into force and many companies have recruited to ensure that their financial crime teams are sufficiently staffed to deal with the new requirements. Companies in the lead up to 1st July have undertaken risk analyses, reviewed their controls and ensured they were properly documented in accordance with the new legislation.

During 2011 there have been a number of proposed and planned EU regulatory initiatives that have driven the demand from compliance professionals to focus on regulatory affairs/liaison issues. Larger financial institutions have always employed such people but the demand in 2011 has become noticeably higher.

The final version of the long awaited and much discussed Alternative Investment fund Managers ( AIFM) Directive was agreed at the end of 2010. The AIFM Directive aims to introduce a single market framework for the alternative investments sector. The Directive is currently being reviewed under the Lamfalussy process and the European Securities and Markets Authority (ESMA) is also considering the Directive. It is likely to become a driving force behind compliance recruitment for the alternative investment sector.

Other directives that are under review include the 
Capital Requirements Directive and MiFID and directives that are being actively implemented include Undertakings for Collective Investment in Transferable Securities (UCITS) and the Credit for Consumers Directive.

Some planned directives include those covering the OTC derivatives market and the portability of supplementary pension rights.

Analysis by Sector

Investment Banking

Demand from the investment banking sector strengthened during the first half of 2011 in spite of lower trading volumes and depressed revenues streams in some business areas. There have been redundancies amongst trading staff. This rather ironically became more likely as a result of their higher cost base caused by increased regulation and higher fixed cost compensation costs.

As we have previously reported, large investment banks require compliance managers with specialist skills for their departments whereas the smaller banks seek candidates with more generic skills.

Monitoring and surveillance, control room, regulatory affairs and capital market advisory skills have been in particular demand. Product specialists with equities, fixed income currency and commodities [FICC] experience have also regularly featured. The number of operations compliance roles has been increasing and in particular, candidates for these roles need to be able to demonstrate experience of client money rules.

Demand from investment banks has centred at VP level and above and have invariably required candidates to have strong technical and business facing skills.

Investment banks want relationship-oriented individuals who know how to serve as liaison points for regulators and front office staff. Compliance managers with intellectual capital who can interface with a regulator then report back to the business are in significant demand and finding them remains a challenge.

Retail banking

The retail banks have continued to recruit extensively during 2011. This has included both the nationalised and non-nationalised UK banks together with the retail operations of overseas banks.

Of particular note is the number of senior roles with policy and regulatory liaison responsibilities, this reflects the volume of regulatory developments emerging from both the UK and EU. These roles are designed to assist the business in maintaining up to date knowledge, to influence regulators and help shape the direction of any proposals. Candidates with relevant experience are currently highly sought after and are in a strong bargaining position.

The ongoing requirement to meet and maintain treating Customers Fairly (TCF) standards is also driving recruitment trends. A number of banks have created roles focusing purely on TCF and have placed it at the very centre of the product and policy development process so that compliance is considered early on.

The Bribery Act is having an impact; some larger retail banks have doubled their financial crime teams to deal with the additional workload.

Salaries in retail banking, whilst still materially lower than in investment banking, are reflecting the general shortage of candidates and the requirement for them to show higher specialist skill sets. More recently retail banks have been prepared to make offers towards the top end of their salary bands to secure the right candidates.

Asset/Wealth Management

This sector covers traditional asset and wealth managers, private banking, alternative investment industry (hedge funds, private equity, real estate) and custodian services.

Demand from this sector gathered pace in the second half of 2010 and has grown significantly during 2011. Particularly active were traditional asset and wealth managers and the hedge fund industry. Private client and institutional asset management compliance professionals were in demand and opportunities arose at all levels. Roles covered a range of responsibilities including advisory, policy, monitoring and surveillance. The alternative investment industry is closely following developments with the AIFMD and this has prompted demand for compliance specialists who can undertake regulatory driven project roles as well as Business as Usual (BAU) compliance positions.

UCITS knowledge remains in demand reflecting UCITS IV regulatory developments and cross border funds experience is another skill set that is highly prized.

Product development and technical specialists are in demand with several asset managers creating new roles to support their product development teams. This reflects the FSA’s aim of ensuring that compliance is involved in the entire development process and not simply at the point of sale.

Private equity has become a strong source of demand with both boutique and global groups currently looking to recruit. Demand has been wide ranging and includes roles that require specific monitoring skills (usually as part of a larger team) through to stand alone positions that encompass all regulatory compliance responsibilities.

Salaries in this sector have risen with hedge funds and some of the private equity houses offering remuneration packages rivalling those offered by investment banks. A number of Head of Compliance positions have recently emerged with firms seeking stand alone roles and others requiring significant people management. Salaries have been competitive and many sought after compliance managers often being able to attract multiple offers.


2011 is proving to be the second year where the insurance sector has experienced particularly strong demand. The volume of recruitment in the Lloyds market is up 20% on 2010 levels and demand has remained consistent in the general, life and pensions sectors.

In the general insurance sector requirements covered first and second line defence positions; the former working closely with the business and the latter taking more responsibility for regulatory projects, urgent and strategic issues. There are acute shortages of appropriately experienced candidates for both first and second line positions. Many vacancies have been left open for extended periods despite companies taking a more flexible approach to their recruitment.

Regulatory developments are currently driving much of the demand for compliance specialists in the insurance sector. Regulatory affairs and policy development positions are in demand with companies looking to recruit experienced and credible individuals. Companies have also become more sensitive to the need to handle complaints, TCF and policy issues effectively, resulting in strong demand for these skills.

The response from companies in the insurance sector to the chronic shortage of experienced candidates has been to introduce a degree of flexibility to their recruitment requirements. This has become manifest in the level of experience they are prepared to accept. Companies have also responded by increasing their budgets.

Whilst the base salaries offered in the insurance sector frequently lag other sectors, once the overall benefits packages are taken into account, the insurance sector’s total remuneration packages are genuinely able to compete with other sectors.


The commodities sector is emerging as a specialist area in its own right and one where compliance professionals are increasingly in demand. In addition to global businesses looking for compliance specialists in this market, there were a number of start ups during the first half of 2011. Candidates with experience of energy trading have been in particular demand.


We have not covered the consultancy sector specifically before. This sector includes the Big 4 and many smaller independent consultancies. Consultancies have recently become a significant source of demand for compliance specialists. This is not surprising given the number of financial services groups that have turned to external consultants to provide the resources for compliance orientated regulatory project and remediation work. The trend, of consultancies hiring so strongly, usually occurs when the volume of new legislation and directives is increasing.

Previously the sector tended only to recruit those with consultancy experience. Candidate shortages are now making them open to recruiting candidates directly from the financial services industry. Consultancies generally tend to have big expectations from the people they recruit: whilst candidates with the technical expertise they require are frequently available, those with the additional man management, client facing and sales orientated skills are not.

It is perhaps ironic that the consultancy sector is looking to recruit in the same candidate pool as the rest of the financial services industry. In so doing they are contributing to the candidate shortages that are encouraging the industry to use consultancies. The salaries and bonuses that are available to professionals in the consultancy sector are generally lower. Compliance candidates will not usually join a consultancy on the basis of the financial rewards but because they wish to work as a consultant with the view to broadening their experience.

The Contract Market

The contract market started 2011 where it left off in 2010; with significant demand. Rather surprisingly, given the increase in demand in the permanent market, the number of vacancies generated during the second quarter of 2011 fell back.

Outside of the introduction of the Bribery Act, which continues to drive demand for AML focused contractors, there is currently no obvious trend in the market other than contractors with direct front office experience being more favoured. This reflects the fact that compliance and regulation are becoming more embedded within businesses.

Candidate availability remains low and this is not helped by companies still wanting as close a match as possible to their exact requirements. On many occasions their expectations from the contract market are unrealistically high. This is resulting in vacancies being put on hold whilst other options are explored.

Contractors with solid and consistent experience are currently able to secure work relatively easily. Contractors who are realistic about their experience and who position themselves appropriately in the market can secure multiple offers. As a career contractor, however, it is still prudent to approach contracts with a degree of flexibility. In the current market contracts are likely to be extended. Contractors with fewer but longer term contracts are more favoured by hiring managers.

In spite of the fall back in demand during the second quarter we expect demand from the contract market to remain robust into the second half of 2011. Contract rates remain firm and are following permanent rates upwards.


Demand for compliance staff is currently standing at record highs. This should not necessarily be considered a vote of confidence in either the financial sector or wider economy. Record low interest rates are not the product of a healthy economy. Even for those with the most optimistic outlook the simmering sovereign debt crisis in Europe will sooner or later need to be resolved. It will most certainly involve pain for the financial sectors beyond the borders of those countries directly involved.

In the meantime it is clear that the political and regulatory agenda is to ensure that the banks are allowed to rebuild their balance sheets and return to profitability. It is also to ensure that the financial sector is subject to sufficient regulatory oversight to minimise the risk of it of it being the cause of another financial crisis. The huge investment in compliance is part of this agenda. It is not without significant costs which must ultimately be met by the consumers of these services.

Given that the most likely outcome of our current economic travails is that we will somehow muddle through and, given that a substantial raft of proposed regulation will not be in place until 2012 and possibly beyond, the current demand for compliance specialists has some way to run. The total number of compliance specialists employed by the financial sector will continue to rise

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