How the Chief Compliance Officer Role Is Transforming Across Financial Services

A Function in Transition How the Chief Compliance Officer role is transforming across Financial Services

R604008-rr0063- CCO in FS v15.indd 1 14/04/2016 10:34:02 2

Contents

The New Face of Compliance: Changing Talent Requirements in Financial Services 3

A new wave of Chief Compliance Officers have entered financial services 4

While CCOs are often drawn from law firms and the regulatory realm, cross-pollination between financial services sectors remains a rarity 5

Banking CCOs: Rise of the broad-minded business partner 6

Asset Management CCOs: Compliance begins to come of age 7

Insurance CCOs: still early days 8

Priorities are changing… with strong implications for talent 9

What’s next for financial Services CCOs? 10

Methodology 11

R604008-rr0063- CCO in FS v15.indd 2 14/04/2016 10:34:02 3

The New Face of Compliance: Changing Talent Requirements in Financial Services

As regulatory pressures intensify around the world, By sector: the financial services sector is seizing the initiative by Banking: Rise of the broad-minded business boosting investment in its compliance functions. The partner. Banking CCOs are increasingly focused impact of increased regulation on the sector is well on driving cultural change, rather than simply documented. Less clear, though, are the implications managing their institutions’ approach to for compliance roles and talent requirements. regulation. To better discuss the changing role of compliance, Asset management: Compliance begins to Russell Reynolds Associates has analyzed the profiles come of age. We are witnessing an interesting of more than 72 Chief Compliance Officers (CCOs) in trend at a number of large to mid-sized asset banking, insurance and asset management. managers, wherein the compliance function Our research shows increased investment in is being separated from Legal (where it had compliance functions across each of these sectors. It historically resided). also reveals a major shift in the composition of these Insurance: Still early days. Compliance in the functions, with a surge of external appointments to key insurance sector is still in its infancy, with roles over the last two years. relatively few dedicated CCOs.

CHIEF COMPLIANCE OFFICERS IN FINANCIAL SERVICES: MATURITY CURVE

Banking CCOs: Broad scope and business focus

Asset Management CCOs: Closely tied to legal, traditional compliance Insurance CCOs: Few dedicated CCOs

New Improving Mature Aging

R604008-rr0063- CCO in FS v15.indd 3 14/04/2016 10:34:02 4

A new wave of Chief Compliance Officers have entered financial services

Seven years post-financial crisis, the compliance These findings point us in two key directions. First, function in financial services remains under heavy financial services companies are deeply interested in scrutiny. For all of the attention that has been paid overhauling the compliance function; second, they are to optimizing compliance, we believe this much- dissatisfied with their own compliance talent pools. examined function has yet to reach full maturity. We see a collective search for a more change-oriented, Nowhere is this more evident than in the startling risk-savvy compliance function, with companies turnover of Chief Compliance Officers in the last two clearly signaling the need for a visible shift by bringing years. 35% of the companies we examined appointed in outside executives. This trend is as fascinating as a new CCO after 2013, and 43% of these hires were it is unsustainable – organizations will be eventually external. challenged to develop richer compliance talent internally.

Share of current CCOs appointed in and after 2013

Financial services CCOs are disproportionately Banking 60% recent appointees...

Global Asset 40% Management Firms

Insurance 25%

Share of internal vs. external appointments of current CCOs

…and to a striking degree, Global Asset are external hires Banking Management Firms Insurance

35% 46% 44% 54% 56% 65%

Internal External

R604008-rr0063- CCO in FS v15.indd 4 14/04/2016 10:34:02 5

While CCOs are often drawn from law firms and the regulatory realm, cross-pollination between financial services sectors remains a rarity

Our research shows that banking, insurance and converge combined with the increased maturity of the asset management CCOs tend to have backgrounds talent pool for senior compliance leaders, we expect to dominated by their current sector, with very limited see more movement between the three sectors. movement between these sectors. Oddly, all three groups of firms are more willing to hire from law firms and regulators, reflecting a relatively rigid view of “feeder” roles into the CCO role. However, as regulation for banks, asset managers and insurance companies

Industry experience of CCOs in banking and asset management

0% Asset Management 82% 10%

72% Banking (Investment or Commercial) 15% 25%

0% Insurance 3% 80%

29% Law ﬁrm 24% 30%

28% Regulator/ Government 38% 20%

14% Banking Consulting / Accounting 9% Asset Management Firm 20% Insurance

R604008-rr0063- CCO in FS v15.indd 5 14/04/2016 10:34:03 6

Banking CCOs: Rise of the broad-minded business partner

The compliance function in banking is, compared to Gone are the days of principally legal and compliance other financial services sectors, further along the executives nabbing the top job in the compliance lifecycle curve. In practical terms, this means that function – For instance, before 2013, 55% of appointees banking CCOs are increasingly focused on driving had legal experience and 45% had compliance cultural change, rather than simply managing their experience. Since 2013 just 29% of appointees had institutions’ approach to regulation. Historically, the legal experience and 24% had compliance experience. compliance function was a world where the least Filling the gap were broader-focused appointees charismatic sat, the ones who knew process but did from consulting, risk and audit. This new breed of not have to interface on a regular basis with business appointees would be well-positioned to contextualize leaders or regulators. However, changes in banking compliance (and the associated cultural change) in regulation has thrust three crucial needs upon banks the wider picture of the organization. We see the ability all at once – the need for leadership, the need for an to think broadly in the overall functional profiles of advanced understanding of transactions within the current banking CCOs –fully 42% of recent appointees digital realm, and the ability to manage regulators on a came from “middle office” roles such as operational day to day basis. All these means a cry for a new type risk, internal audit, as well as external consulting firms, of compliance officer. where competencies such as defining compliance As a result of these changes, we see this shift strategy, financial discipline, change management and manifested in the functional leadership backgrounds building credibility with regulators, were integral parts of CCOs appointed before 2013 versus those in the last of the role. few years.

Notable changes in most recently Functional leadership roles held held role prior to appointment for across the entire career by current CCO banking CCOs

55% Before 2013 and Legal 2013 a erwards 29% Compliance 45% Compliance 45% 18% 24% Regulator/ 36% Before 2013 and Government 18% 2013 Internal a erwards 36% Audit Sales/Trading 9% 18% 12% CEO/Business 27% Leadership Before 2013 and 18% Consulting/ 2013 a erwards 18% Big 4 Internal Audit Accounting 18% 0% 12% 18% Risk 18% Before 2013 and Consulting/Big 4 9% 2013 a erwards Operational Accounting 18% Risk 0% 12% Appointed Appointed in before 2013 2013 or later

R604008-rr0063- CCO in FS v15.indd 6 14/04/2016 10:34:03 7

Asset Management CCOs: Compliance begins to come of age

Historically, despite the close connection between Fully 71% have only worked in one or two functions. investment risk and operational risk in the asset Nowhere do we see the multifaceted “business side” management sector, investment-related risk has focus that is so common among banking CCOs – remained the responsibility of investment teams in asset management CCOs have traveled a clearly these businesses. CCOs (and their Chief Risk Officer circumscribed path to their roles. colleagues) have accordingly remained very closely That being said, we are witnessing an interesting trend aligned with Legal, and somewhat siloed as well as at a number of large to mid-sized asset managers, a result. We see this in the backgrounds of asset wherein the compliance function is being separated management CCOs: 68% have held compliance roles from Legal. We believe as this trend picks up in asset management, 41% have held legal roles in momentum, we will see CCOs in asset management asset management, 38% have worked for a regulator, whose backgrounds are more varied/more business- and 24% have worked for a law firm. focused.

Number of different functional Functional roles held by current roles held by current CCOs at Global CCOs at global asset management asset management firms during their firms during their careers careers Compliance (Asset Management) 3 or more functions 68% throughout career 24% Legal (Asset Management) 41%

Regulator 38%

Legal (Law Firm) 1-2 functions 24% throughout career 76% Consulting/Big 4 Accounting 9%

Challenges specific to boutique asset Audit managers: 6% ɳɳ Small internal pipeline - 60% of CCOs at boutique asset management firms and 44% of Compliance (Commercial Banking) CCOs at global asset management firms were 6% externally appointed. Compliance (Investment Banking) ɳɳ Escalating compensation demands – some fund 6% managers are offering CCOs the opportunity to join the partnership in order to lure them from Risk larger competitors. 6%

R604008-rr0063- CCO in FS v15.indd 7 14/04/2016 10:34:03 8

Insurance CCOs: still early days

The compliance function in insurance companies is Insurers with a standalone compliance function tend still in its infancy. Indeed, less than half of insurance to appoint safe-choice candidates to the CCO role. In companies have dedicated CCOs. fact, eight out of the ten of the insurance company CCOs we profiled have previously held a compliance For the majority of insurance companies without a role at a bank, insurer or other financial institution. dedicated compliance function, responsibility for compliance sits with the legal department – 78% of Insurers face many of the same compliance challenges such firms have a General Counsel overseeing the as banks and asset managers, including operational compliance function, with the remainder placing risk, cyber-security, anti-money laundering, regulatory compliance under the Chief Risk Officer. risk, asset liability management and digital. We expect insurers to demand increased capabilities in these areas in their compliance functions in the future.

Insurance companies with dedicated For insurance companies with no CCO dedicated CCO role, role in which the compliance function resides Chief Risk Oﬃcer 22% Yes 55%

No 45%

General Counsel 78%

R604008-rr0063- CCO in FS v15.indd 8 14/04/2016 10:34:03 9

Priorities are changing… with strong implications for talent

Our conversations with current CCOs highlight The key compliance priorities and resulting talent the growing importance of anti-money laundering, implications identified by our research are set out operational risk and cyber security on the compliance below, reflecting the different levels of compliance agenda. Current CCOs rarely have significant maturity within the respective financial services experience in these areas, and we are starting to see sectors. increased hiring to address these capability gaps. In particular, we expect cyber security to become a separate center of competence within the compliance function.

New priorities for the compliance function Talent implications Banking ɳɳ Operational and conduct ɳɳ Critical requirement for cross-functional experience risk and a track record in delivering change ɳɳ Cyber security ɳɳ Further specialization within the compliance ɳɳ Anti-money laundering function and a need for additional expertise in digital, ɳɳ Technology and data operations, AML, cyber security and anti-money integrity laundering ɳɳ Culture change ɳɳ Greater emphasis on finding efficiencies with horizontal integration of corporate functions; nearshoring and offshoring of transactional activity

Asset ɳɳ Education within firms about ɳɳ CCO roles to become independent from legal Management compliance and its role ɳɳ CCOs to gradually assume wider responsibility for ɳɳ Establishing compliance as operational risk and compliance functions a dedicated function ɳɳ Combining operational risk and compliance

Insurance ɳɳ Creating a meaningful CCO ɳɳ Increasing demand for experienced executives who model can set up the function and become the face to the business

R604008-rr0063- CCO in FS v15.indd 9 14/04/2016 10:34:03 10

What’s next for financial Services CCOs?

Increased cross-pollination between sectors

Look for asset managers and insurance companies to draw from the talent pool of bank CCOs, in order to leverage that sector’s deeper understanding of the role

A greater seat at the table for CCOs

More banking CCOs will join their organizations’ Execu- tive Commiees, and more asset management CCOs will be enticed into their roles through oﬀers of partnership

Continuing role evolution as institutions “learn by doing”

With regulatory and stakeholder actions continuing apace, the CCO role is by no means static or progressing on a ﬁxed track as ﬁnancial services organizations move up the maturity curve. Look for a few more twists and turns in the coming years…

R604008-rr0063- CCO in FS v15.indd 10 14/04/2016 10:34:03 11

Methodology

This report is based on Russell Reynolds Associates’ analysis of the profiles and backgrounds of Chief Compliance Officers working for the largest banks, asset management firms and insurance companies in North America, Europe and Australia – areas where regulatory pressures are greatest.

Banking

Asset management Firms Global

Insurance

R604008-rr0063- CCO in FS v15.indd 11 14/04/2016 10:34:05 12

Authors Cynthia Dow leads the Legal Officers Practice at Jason Lim is based in Hong Kong, Jason is responsible Russell Reynolds Associates, and is also a member of the for handling senior executive assignments in global Consumer and Board & CEO Sectors. Cynthia focuses on banking, asset & wealth management, insurance and general counsel, chief legal officer, chief compliance officer private equity sectors. and other Board and corporate governance assignments Prior to joining Russell Reynolds Associates, Jason was across a broad range of industries. Her clients range a research analyst at Hamilton Lane advisors, a private from Fortune 500 organizations to portfolio companies of markets investing company. He has extensive experience leading private equity firms. She is based in New York. serving multinational clients in Asia Pacific.

Russell Reynolds Associates is a global leader in assessment, recruitment and succession planning for boards of directors, chief executive officers and key roles within the C-suite. With more than 370 consultants in 46 offices around the world, we work closely with public, private and nonprofit organizations across all industries and regions. We help our clients build teams of transformational leaders who can meet today’s challenges and anticipate the digital, economic, environmental and political trends that are reshaping the global business environment. Find out more at www.russellreynolds.com. Follow us on Twitter:@RRAonLeadership

Global Offices

Americas EMEA Asia /Pacific ɳɳ Atlanta ɳɳ Minneapolis/ ɳɳ Amsterdam ɳɳ Madrid ɳɳ Beijing ɳɳ Boston St. Paul ɳɳ Barcelona ɳɳ Milan ɳɳ Hong Kong ɳɳ Buenos Aires ɳɳ Montréal ɳɳ Brussels ɳɳ Munich ɳɳ Melbourne ɳɳ Calgary ɳɳ New York ɳɳ Copenhagen ɳɳ Oslo ɳɳ Mumbai ɳɳ Chicago ɳɳ Palo Alto ɳɳ Dubai ɳɳ Paris ɳɳ New Delhi ɳɳ Dallas ɳɳ San Francisco ɳɳ Frankfurt ɳɳ Stockholm ɳɳ Seoul ɳɳ Houston ɳɳ São Paulo ɳɳ Hamburg ɳɳ Warsaw ɳɳ Shanghai ɳɳ Los Angeles ɳɳ Stamford ɳɳ Helsinki ɳɳ Zürich ɳɳ Singapore ɳɳ Mexico City ɳɳ Toronto ɳɳ Istanbul ɳɳ Sydney ɳɳ Washington, D.C. ɳɳ London ɳɳ Tokyo

R604008-rr0063- CCO in FS v15.indd 12 14/04/2016 10:34:06