Financial firms are increasingly using third-party vendors to carry out their business and regulatory oversight functions, FINRA said in its notice. Even if these activities are outsourced, FINRA said, firms have a duty to ensure that they have systems in place to supervise the outsourced work and that those systems are sufficient and compliant with FINRA rules and regulations.

FINRA encouraged firms to review their supervisory obligations for outsourced activities, look at whether vendors meet FINRA registration requirements, and ensure that vendors’ cybersecurity programs are compliant with SEC regulations.

To ensure the efficacy of the third-party vendors, FINRA also encouraged firms to review the following about their relationship with the vendors:

• the rationale behind the decision to outsource certain activities
• the due diligence approach, conflicts of interest, and cybersecurity measures in place for the third-party vendor
• vendor contracts and the default settings of vendor tools
• the maintenance of written procedures to supervise the types of business in which it engages and the activities of its associated persons

FINRA also emphasized various disciplinary violations from vendors that have resulted in regulatory action, including system malfunctions, data purges after the relationship with firms end, vendors failing to provide non-rewriteable and non-erasable storage, and others.

The notice doesn’t create new legal or regulatory requirements, nor does it bring new interpretations of existing requirements into play, according to FINRA. The information in the notice simply reflects what firms have previously told FINRA they find useful in their vendor management practices. 

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The study, 2021 Report on the Cost of Compliance, published by Thomson Reuters in late May, also details the effects of the COVID-19 pandemic on the work culture within the compliance profession and recent cost and staffing trends.

According to the report, less than half of respondents expect the cost of senior compliance staff to increase this year, the lowest percentage in the 12-year history of the survey. The potential reasons given for such a drop were due to budget cuts and remote work due to COVID-19. Moreover, 68 percent of respondents expected the turnover of senior compliance officers to remain at the same level in the next 12 months.

Just over one-third—34 percent—of firms outsource all or part of their compliance functionality, which, Thomson Reuters notes, is at its highest rate since the question was introduced in the report. According to the study, the increase stems from a need for new assurance on compliance processes as well as a lack of internal compliance know-how and access to “third-party know-your-customer functionality.”

While some companies are outsourcing compliance and others aren’t increasing their budgets as much as they have in the past or even cutting them, the pace of regulation isn’t expected to slow at all. Indeed, 78 percent of all respondents say they expect the amount of information published by global regulators to increase in 2021.

“The underlying drivers for changes made within a firm during the pandemic are important,” Susannah Hammond, senior regulatory intelligence expert at Thomson Reuters and a co-author of the report, said in a statement. “Compliance officers must now consider the future of those changes and assess directionally what should be maintained and which are due for revision post-pandemic. Part of this analysis is understanding the limitations of what can, and cannot be, changed.” 

Keeping Up With the Regulators
In a similar vein, financial services boards identified their biggest challenges as keeping pace with the volume of regulatory change and meeting regulatory requirements. Firms citing the challenge of keeping up with regulatory change and the increasing demands. Compliance leaders also identified the difficulty presented by a lack of skilled resources available to fill open compliance jobs.

The cultivating and maintenance of a risk-aware culture, the study notes, is one of the single most valuable assets that a firm can develop, especially in shifting work environments. The survey found that installing a culture of compliance remained high on the list of challenges that boards foresaw in 2021. Asked for the biggest challenge to fostering such a culture, respondents cited the top two reasons as balancing competitive pressures and managing a remote team.

The 12th annual report tallied responses from more than 720 practitioners worldwide, including banks, insurers, asset and wealth managers, broker-dealers, and payment services providers.  

Danny Flynn is assistant editor at Compliance Chief 360°.

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