Danos Group
05 Jul

Why there has never been a better time to move in house

On October 11 2011 Alternative Business Structures (ABS), commonly known as ‘Tesco Law’ for its ease of purchase, came into effect. This relaxation of the ownership restrictions on law firms has meant that non-lawyers can invest in legal businesses and law firms themselves, for the first time have been able to consider floating on the stock market. The move gave rise to the opportunity to inject some much needed innovation and competition into the market while giving firms access to a new lucrative income stream.

True to form, things have moved slowly but we’re now seeing increasing interest in Initial Public Offerings (IPOs) which could signify the start of significant change in the market and will have a huge impact on law firm employees.

A slow start

The opening up of ownership to outsiders didn’t open up the floodgates as some anticipated. While significant in the history of law, at the end of last year only three firms had opted to float. Many concluded that an IPO would only serve to encourage partners to pocket the money and leave or be relevant for firms with plans for growth so big they demanded funds beyond their existing reach.

Law firms felt there was enough work and money for attractive salaries and investment to not have to seek change – change that brought shareholders who would take a share of the profits and indeed decision making power. Meanwhile, investors were wary of the risks of investing in companies whose key assets are people and relied heavily on the retention of key individuals.

We could be about to see more and more firms become public

In the seven years that ABS have been available we’re seeing a gain in momentum. From just one firm in 2015 with Gately, to two in 2017 with Gordon Dadds and Keystone to two already in 2018 with Knights and Rosenblatt Solicitors. There is widespread speculation that this number will rise with DWF and Fieldfisher already known to be openly meeting investors in the City.

This coincides with a recent survey that found that 20 percent of the top 100 law firms would consider an IPO, up from a meagre four percent four years ago.

Firms who have been cautiously watching how the early adopters have performed before making the leap themselves will have seen Gateley’s share price rise from 95p to a high of 195p in June last year. They may also be tempted by the £800m that Fieldfisher is said to have been valued at. This would indeed allow them to realise their ‘strategic objectives and stay ahead of the competition in (their) dynamic and ever-changing market’ as quoted by their spokesperson.

There are over 10,000 law firms and 134,000 lawyers in the UK and only the top 200 earn over £5m. With strain on chargeable fees and arguably volumes of work at a time costs are rising, the temptation to raise capital for growth and new technology from new sources is very real. Couple this with the draw of investors to a sector that generates £30bn in revenue a year and the potential for more firms to take the route of an IPO becomes very plausible. As more and more firms take the plunge, investors get more choice and their interest will only grow.

Short-term impact on employees

Moving onto the stock market can be very positive for the business but it would be naive to think this automatically translates through to the employees.

Firms looking to attract investors will be working hard on their P&L and in a business model based on services provided by people, the slimming down of staff is an obvious casualty of driving down costs.

Long-term impact on employees

The capital injection will largely be invested in the growth of the firm. Many employees who are currently motivated by becoming partner will find themselves further removed from ever being able to reach that goal.

In-house has always offered many appealing benefits; feeling part of the bigger picture and working with a wider range of people, escaping the pressure of billable hours and business development, job stability, having a wider scope for career progression, a better work-life balance and a greater variety of work. For those hanging on out of loyalty to the partners or in the hope of becoming partner themselves will see this slip away if their firm moves onto the stock market.

The good news is that with ABS allowing non-lawyers to invest, the options for client-side moves are only going to rise. The Co-op is making substantial moves into legal services and companies such as Saga, Halifax and even the AA are evidently testing the market. These are exciting times for lawyers seeking variety.

If you feel that it’s the right time to make the move in-house we would love to help you make this step with our elite client base.

You can reach me on +44 (0) 20 3889 5755 or rdavy@danosassociates.com

08 Jun

The reported case of Roman Abramovich and his UK visa has brought the topic of source of wealth (“SOW”) in to focus.  In this particular case the delays in granting the new UK visa have been attributed to tighter regulations introduced in April 2015.  It has been reported that Mr Abramovich was asked to explain the SOW and the UK government has commented that some wealthy individuals who had successfully applied under the investment visa route before the 2015 changes would no longer be eligible.

Putting the political landscape aside, it is not clear in this case whether the delays were due to the UK government not being satisfied with the answer, or the subject’s decision not to provide sufficient explanation.  It is understood that the application has since been withdrawn having been neither refused nor denied.  Nevertheless the case raises some pertinent questions for financial services firms who are providing banking services to individuals in these cases.

Where there are circumstances leading to a high risk of financial crime (politically exposed persons, high risk jurisdictions etc.) firms are required to establish SOW.  Firms should follow a risk-based approach i.e. apply reasonable measures dependant on the client’s money laundering and terrorist finance risks.   Once the client’s net worth is established, information should be obtained on where it came from and for corporate/legal entities, the firm should ensure SOW is generated from legitimate business and commercial activities.  Depending on the level of risk posed by the client, firms should seek to find some evidence from a reliable, independent source that corroborates the essence of how the wealth was generated.

The immediate question for financial services firms in a case like this is, if, as it would appear, the subject has not been able to satisfy the government in order to successfully apply for a visa, have the firms themselves been able to adequately satisfy the SOW requirements?  It would be prudent, given this type of change in circumstances for firms to revisit and reassess the financial crime risks in accordance with their due diligence policy and procedures.

Establishing and verifying the legitimacy of the source of wealth can be a challenge for firms and one which may rely as much on a firm’s moral compass as its appetite for risk.

The challenge for firms is determining what standards they should apply.  Standards will be driven by a firm’s appetite for risk and whilst this may be a little easier to define for reputational risk, it is less so for financial crime risks.  Firms are under an obligation to reduce the risk that they might be used to further financial crime.  The standards expected are that of prevention rather than the lesser requirement of detection and reporting, and therefore there should be lower tolerance.  As a result of this, a firm’s systems and controls should be appropriately robust.

When assessing the source of wealth information a firm must consider amongst other things how much credence should be given to unsubstantiated rumours and the views of critics or political opponents, such as is the case referred to above where it has been suggested that wealth was generated through the acquisition of state companies below market value as a result of close ties to the Kremlin. Clearly this information needs to be thoroughly investigated as part of the due diligence process, but in the absence of anything more substantive is it enough to refuse services, particularly where it may be enough for government agencies to delay consideration of a visa application?

Of course as the generations pass and wealth is inherited, the source of the wealth is diluted and in certain cases may be considered to have been legitimised through time.  Some commentators will argue that those in the present cannot be responsible for the actions of ancestors and the mechanisms of wealth making in the past.  We do not need to look overseas to identify old money created through activities which would be unlawful today.  Establishing and verifying the legitimacy of the source of wealth can be a challenge for firms and one which may rely as much on a firm’s moral compass as its appetite for risk.

K&E is a boutique regulatory, compliance, governance and risk consultancy with extensive experience of compliance and regulatory issues for banks and investment firms. We can assist clients in their preparation and implementation of regulatory change projects or with remediation exercises or day-to-day compliance solutions.

K&E together with their strategic partner Danos Associates can assist firms with their financial crime prevention arrangements including an independent review on policies, procedures, systems and controls or resourcing AML/CDD remediation projects.

Please get in touch if you would like to discuss anything in this article or if you would like further information on our services. http://www.keconsult.co.uk/

Written by our strategic partners K&E Consultants.

07 Jun

We are seeing a substantial increase in demand for compliance recruitment in the buy-side industry here in Hong Kong. We believe this is due to three main factors:

1.    The growth of the Asset Management Industry

The combination of financial market liberalisation, new fund passports, strong economic growth, fast developing capital markets and ageing populations creating pension opportunities have led to exceptional growth.

The Securities and Futures Commission’s quarterly report at the end of last year showed that the total assets under management of funds registered for sale in Hong Kong grew by 29.4% to $1.66 trn across equity, bond and mixed-asset funds.

2.    Changes in the regulatory environment

While we are still seeing an impact from last year’s introduction of the Manager in Charge regime we must also prepare for the new Fund Manager Code of Conduct coming in November.

This updated regulation addresses disclosure to investors (including investors in offshore funds that are managed by Securities and Futures Commission’s licensees) and will provide greater transparency and global alignment.

3.    Hong Kong is supporting firms’ expansion into China

The Mutual Recognition of Funds between Hong Kong and China established in 2015 and Hong Kong’s strong rule of law make it a very attractive asset management centre for mutual funds sold in China. It gives international companies a secure base to increase their coverage into China and access their assest management industry, valued at more than 100 trillion yuan.

Despite regulation creating a drop in growth last year, China is still the second largest economy in the world and as the bridge that links it with the rest of the world, over 60 of the top 100 global money managers now have a presence in Hong Kong.

China’s ‘opening up’ is only set to increase and although this will mean that it will be easier to go direct, early indicators show that companies will still favour a route through Hong Kong to obtain a wider spectrum of finance at different stages of the overseas investments. It will also give them access to a larger pool of bilingual talent and exemplary legal, accounting and professional support services firms. This will continue to drive growth in the country.

The impact on recruitment

In all areas, the increase in workload addressing new regulation and the greater amount of assets under management calls for a larger, more robust support infrastructure. For big, established Asset Managers, the continuing growth and tightening of different rules has driven the need to look at different areas of compliance. This has resulted in requirements for more specialist roles, often strengthening provisions in financial crime and improving controls and monitoring.

Alternative funds have found that growth and regulatory changes have put more pressure on their compliance requirements. Roles that have previously been satisfied by more junior staff now need more senior and credible Compliance Officers. Both the regulators and investors look to the ‘manager in charge’ wanting reassurance investments are in safe hands and this requires experience.

This level of recruitment needs local market specialists with a network of the best talent in the area with a true understanding of their skills, experience and motivating factors. This is what we have here at Danos Associates and if you are looking to develop your compliance and risk teams we are very well placed to help.

Tel: +(852) 2870 3007

Email: markmoorby@danosassociates.com

31 May

Over the last 14 years of trading we have seen our EMEA and APAC Compliance Practices continually expand geographically to cover more and more of their respective regions. But up until recently, our New York headquartered Americas practice, has been largely focussed on New York based recruitment.

Over the last 12 months, however, we have seen a dramatic surge in demand for compliance talent in other hubs across the US, and the broader Americas region. We must stay on top of hiring trends globally, and as such, it is important to discuss this one in the Americas.

Let’s be honest, the development of hubs outside of New York is not something that has just been happening over the last 12 months, but there are certain big trends in the industry – the ballooning of FinTech on the West Coast, shifts towards consumer banking by historically investment banking focussed firms, and ‘near-shoring’, for example – that draw our attention to this geographical shift away from the New York Financial Services ‘super power’.

Let’s not get carried away though…the New York compliance hiring market remains buoyant, currently very active, and undoubtedly the ‘Centre of the Universe’…well, at least for the US. But there is definitely a theme of ‘decentralisation’ in the air at many firms with focus shifting away from the Big Apple, and resulting in fresh or increased hiring need in other locations.

As New York is undoubtedly the biggest market with the deepest talent pool in compliance, it is an obvious target for hiring managers building out teams in other locations. For the New York compliance community, this means that whilst the local market is booming, there is a call for their skills all over the country.

Where and why is this happening?

Ok, so we are seeing increased demand for talent outside of New York, but where and why is this happening? We think there are three distinct factors at play:

·     First, is the very straightforward factor of the other well-established Financial Services hubs, such as Boston, Chicago, Houston, San Francisco, etc. which quite simply need to be serviced. They all have established compliance communities, but often need to draw from other talent pools. We frequently help clients find talent locally, which is possible in these well-established markets, but there is often a need to ‘refresh’ local talent pools from elsewhere…usually New York.

·     Second, there is the phenomenon of ‘near-shoring’, the bigger brother of ‘off-shoring’ which essentially sees teams and / or functions relocated to lower cost centres outside of expensive metropolitan hubs. Most firms are doing this, and whether it be in Buffalo, Jacksonville, Raleigh, Salt Lake City, Whippany, etc., the theme repeats time and again. The issue with near-shoring locations is that they have either limited or non-existent talent pools to draw from for future hiring. The need for our help with this scenario speaks for itself.

·     The third, and arguably most exciting factor here are the big industry development trends mentioned above. Clearly everyone has been talking about FinTech for a while now, but we are seeing huge demand for compliance talent in this space; largely in the San Francisco Bay Area – for obvious reasons. In addition to the boom in FinTech, we are seeing ‘FinTech adjacent’ trends like traditional bulge bracket firms pushing into the digital arena – particularly within consumer banking. Similarly, some traditional parts of consumer banking are seeing huge growth with bulge brackets pushing into the mortgage space, amongst others. Interestingly with consumer banking, geographically, this sector of the industry knows no bounds, and the talent is scattered across the whole of the US. We have been recruiting in Dallas / Fort Worth, Charlotte, Philadelphia, Wilmington, the Bay Area, and beyond.

So what does this mean for the compliance population?

We all know that the Financial Services Industry is forever morphing and developing, and after just examining the trends discussed above, it seems that the geographical trends in compliance hiring are quite simply a reflection of a phase of development within the industry, layered on top of the BAU hiring in the established hubs.

The crux of this, of course, is how does this phase of development change the landscape of the compliance profession? Will there be an increase in compliance opportunities? How will hiring managers build strong teams in the face of talent being spread across a country or region? And ultimately, what is the outlook for the compliance community moving forward.

Opportunities

We genuinely believe that this is an exciting time to be working within the regulatory arena. After the recent scaremongering around deregulation and retraction of compliance, there are many ways in which the industry is developing that will continue to require strong compliance professionals, and arguably grow the profession. We are seeing new and exciting opportunities out there, but often in different fields to the traditional investment banking heavy industry.

The long and short of it is this: in a changing industry, compliance folk must be open to new locations, new sectors, and changes in direction – albeit within the broader compliance world – in order to grow their compliance careers to full capacity.

Finding the right talent

For hiring managers, the current challenge is finding the best talent in each location. This is a perennial problem wherever you are, of course, but with the added trend of ‘decentralising’ compliance functions away from New York, and the uprising and expansion of non-traditional FS activity, the talent isn’t necessarily where the business need is.

This is where our business model of networking, and genuinely getting to know the market in all locations always brings results. Plus we are specialists in the compliance field.

We don’t just regurgitate the same old resumes of the ‘active market’ but go to great lengths to find the best talent. We travel regularly to other hubs – most recently, Chicago in May – and are frequently meeting new talent in all locations. We use our global perspective to forecast trends and strategize on how to work with them.

The outlook for compliance

We are not financial analysts, regulators, or politicians, and certainly do not have a crystal ball to tell the future, but what we can do is pull together our collective global experience to navigate and advise on hiring in the face of industry changes.

We feel the compliance arena is in an interesting spot, globally, and specifically in the Americas region we see opportunity for exciting growth.

We are always more than happy to have discussions about opportunities, your career, or hiring, depending on what perspective you are coming from. Please feel free to reach out at any time.

+(1) 212 600 4827 gpotter@danosassociates.com

24 May

In the week that Theresa May challenged health services to use Artificial Intelligence (AI) to pool medical data to identify the early stages if cancer, we take a look at how AI is impacting financial services and what it means for the future.

What it looks like now

A perfect storm of increasing cyber-crime and consequent regulatory requirements, competition, customer expectation, technological capability and access to data has seen an exponential rise in the use of AI.

The financial services are leading the way in applying AI in business. It is being used across all functions in areas such as assessing credit quality, analysing market impact for trading, predictive forecasting and automated client interaction.

In our world of Risk and Compliance AI is helping to make huge advances, especially in surveillance, screening, credit decision making and fraud detection. One of the most influential AI technologies is Rapid Machine Learning. This processes huge volumes of data from different sources (whether it be images, text or numerical) and is able to flag both regularities and irregularities that can highlight important opportunities and indeed threats with the capacity and speed way beyond human capability.

What the future holds

The era of AI is still in its infancy and smart companies have to embrace and run with the advancement in order to stay ahead of the curve.

Steve Culp, the Senior Managing Director of Accenture Finance and Risk Services predicts the pairing of Virtual Reality (VR) with AI such as robotics, natural language processing and machine learning to create an Extended Reality (ER) ‘where participants become part of a virtual eco-system and can interact and dissect data within their real-world field of view’.

This could see future Risk and Compliance Managers ‘walking through’ a 3D showcase of reports. Systems currently flag issues but it then falls to the compliance team to look at a range of other sources to fully identify the size and scope of the situation and ultimately solve the problem. ER would be able to pull every piece of information together (traders, locations, history, associates) in one place with easy to visualise graphical representation. Colleagues in other countries could even join the ‘environment’ for a closer level of interaction and discussion. The appropriate course of action still lies with the team but the information they need to make that decision is more thorough, timely and clear.

The pros and cons

While this technology aids innovation, protection and growth, it is in itself vulnerable. The vast layers of interfaces, devices and connections involved provide a greater surface area to be protected from cyber criminals and glitches such as the Flash Crash of 2010. Technological advancement increases the speed at which tasks can be executed but it also increases the speed at which risks can spread too. The constant progression will mean the extent of AI will always be in a kind of experimental phase with the associated risk.

There is also a threat of Big Tech using the knowledge they gain from banks’ use of their platforms and their own technological capabilities entering the market, putting a major strain on the competition. This would open up a whole other risk of the monopolisation of power.

Risk and privacy will always be at the core of the consumer’s needs and with critical data and money at stake the role of cyber risk management is complex. Building resilience to a rapidly evolving host of threats has to be at the core.

What this means for regulation

The rising use of AI challenges traditional risk management thinking. Regulators who have faced criticism in the past for reacting slowly to change, face the challenge of responding quickly to the disruptive nature of technological advances. We can certainly expect technology and cyber risk to take an ever increasing position in future regulation.

Financial services turning to AI to protect themselves from risk find themselves in a position where AI also puts them at risk. The speed of change means that the impact is difficult to measure and control and this unknown creates unease with regulators. A recent paper by Consultancy firm Parker Fitzgerald warns that this could result in regulators forcing banks to hold even more capital as a result.

Transparency is key. AI needs to be able to show regulators how and why they have made decisions. The visibility of the analytical processes and a human’s ability to understand it and participate have to be factored into their development.

Parker Fitzgerald also calls for ‘greater global coordination and standardisation’. The very disposition of technology and transactions know no borders so regulators are going to have to address how to provide a consistent international approach.

How will humans and AI work together and what does this mean for recruitment

AI is going to be part of our future and it will be able to fulfil roles currently undertaken by humans infinitely quicker and more thoroughly. This doesn’t mean we should prepare for mass redundancies making way for an army of robots.

AI’s ability to learn and adapt is impressive but the tools can only be as strong as the direction, data, instruction, checks, maintenance and upgrades they are given. For the foreseeable future at least, It is hard to see a world where humans won’t need to be the ones making decisions (outside of certain parameters) or checking them. They will also be needed to identify and guide what technology needs to be built to address new issues as they arise as well as being the ones who can offer a level of testing and fixing that sits outside of the potentially compromised technology itself.

It will remove more clerical jobs but pave the way for a new set of skills and roles. I recently attended an event where David Craig, President of Thompson Reuters made a prediction that in the next five years, half of all Chief Risk Officers and Chief Compliance Officers will have advanced academic backgrounds in data science and machine learning.

As the differences between what is working and what needs to be done differently become more apparent, firms are adjusting their workforce strategy. This is likely to include training, development, encouraging an innovative culture and partnering as well as new recruitment requirements. We can look outside of the financial services industry into the wider technology space with practical experience of applying machine learning techniques being a key requirement. This will see a new generation of talent and hirers will need to be mindful that there may be a shift in motivating factors that can attract and keep them.

To conclude

AI will only continue to evolve at an increasingly rapid rate and it is for us humans to shape how this technology can work in harmony with a newly skilled workforce to get the right balance of risk and reward for the benefit of society.

If you would like to add skills required for AI development to your team. Please get in touch.

rbh@danosassociates.com +44 (0) 20 3889 5757

14 May

The case of Mr Staley highlights a fundamental flaw in the status quo. The current approach allows firms to investigate and resolve concerns and complaints made against them; what could possibly go wrong?

 

The greatest hurdle to ensuring that complaints or concerns are adequately addressed and poor conduct is exposed is the clear conflict of interest that exists. In the case at hand, the FCA and PRA commented on Mr Staley’s personal conflict, suggesting he should have maintained an “appropriate distance”. The final notice suggested this included not involving himself in the investigation or putting pressure on the complainant. However, there is no clear definition of what constitutes an “appropriate distance” in this context. What distance is appropriate for a CEO who has overall responsibility for the firm and its staff including those who are tasked with the investigation? It is clear that any involvement or influence over proceedings by the subject of a complaint is unlikely to foster a sufficient level of confidence in those taking the difficult step to whistleblow or make a complaint, that their concerns will be adequately and independently addressed.

“He had a conflict of interest …, and should have taken particular care to maintain an appropriate distance from the investigation into it.” – FCA Final Notice – James Edward Staley

The largest firms may establish an “independent” function to investigate or oversee matters. However, how independent can it ultimately be with senior managers, who are responsible for the firm’s conduct, taking a keen interest in the outcome, albeit from an appropriate distance. Furthermore, given they are remunerated by the firm, it is difficult to see that full independence can be achieved, even if the will is there. In the case of smaller firms, they are unlikely to be able to resource an independent function and there, the conflict is even greater.

Whistleblowers or complainants can of course direct their concerns to independent bodies should the firm not address matters to their satisfaction, whether that be the Financial Ombudsman or the regulators themselves. However, the onus is firmly on the whistleblower or complainant to do so, and they may not be inclined to escalate, if they are concerned anonymity will not be maintained, or they just do not have the time or energy.

One possible answer would be to require firms to ensure they establish access to an external independent resource to act as the investigator or to subsequently review cases to ensure that concerns and complaints are investigated fairly and the objective of exposing poor practice and misconduct is achieved.  Disclosure of findings provided to regulators to enhance appropriate exposure.

Aside from the conflicts of interest there is of course another way to possibly tip the balance to ensure whistleblowers are more likely to report and expose poor conduct: financially incentivising whistleblowers as is the current practice in the US. In July 2014, the FCA and PRA determined that financial incentives “would be unlikely to increase the number or quality of the disclosures” they receive. This is despite the fact that in the US the number of whistleblower tips, as well as the US government’s recovery from corporate fraud have increased significantly since the whistleblower reward scheme was implemented. Meanwhile in the UK there has been a decrease of 37 percent in whistleblower tips since 2014.

K&E can help firms with their approach to whistleblowing and complaints handling.

K&E is a boutique regulatory, compliance, governance and risk consultancy with extensive experience of regulatory change for banks and investment firms. We can assist clients in their preparation and implementation of regulatory change projects or with day-to-day compliance solutions.

Please get in touch if you would like to discuss anything in this article or if you would like further information on our services. www.keconsult.co.uk

Written by our strategic partners K&E Consultants.