Data and Insights from the 2023 Nasdaq Global Compliance Survey

Compliance roles and functions have become broader and more complex over time. Developments in data management, processing and analytics have broken down silos, allowing compliance to obtain a more overarching view across risk typologies. The compliance culture has evolved, new challenges and technology solutions have emerged, and budgets have fluctuated.

This year’s Nasdaq Global Compliance Survey, which was conducted from May to July 2023, sheds light on the most pressing developments in trade surveillance, communications monitoring and fraud and anti-money laundering (AML) detection. It contains quantitative and qualitative data gathered from 190 compliance professionals from sell-side and buy-side firms, market infrastructure providers and corporate and retail banks and provides a comprehensive profile of year-over-year trends dating back to 2015.

Similar to previous years, respondents were prominently from sell-side firms, with solid representation from the buy side and market infrastructure providers as well as retail and corporate banks. The largest respondent base was in the Americas and EMEA, respectively, with increased representation from APAC. Respondents work in trade surveillance and general compliance roles – mostly in senior positions. Nearly two-thirds of respondents oversee more than one core compliance area, including AML, A/E-comms monitoring, fraud, and trade surveillance. 

Cultural evolution

Once viewed as a cost center and a barrier to doing business, the compliance department has taken on a more strategic role, especially in sell-side and buy-side firms, according to the survey. Respondents in all regions participate in conversations about strategy. They view their most important function as protecting the firm’s brand reputation and managing reputational risk, which helps to attract new customers who want to do business with a respectable organization. Avoiding regulatory fines for compliance violations continues to be a priority. 

A significant percentage of respondents endeavor to promote the development of an internal compliance culture in the age of social governance. They have become more proactive in ensuring that employees maintain compliance standards and understand specific requirements. 

Counterintuitively, when asked what functions fall under the firm’s mandate for reputational risk management, the percentage of respondents who reported that promoting a firm-wide culture of proactive compliance fell significantly from 2020 to 2023. Our interpretation is that fewer organizations mandate such initiatives because compliance departments have become more accountable. We also believe that the public, clients, and regulators have more trust in compliance controls when it comes to communicating compliance infractions.

Top compliance challenges

New compliance challenges emerge over time and priorities shift. However, over the next year, new reporting and administrative requirements detailed by regulation was ranked as the top challenge. Compared to our last survey, a larger percentage of respondents noted that they are only somewhat prepared or not prepared to meet new requirements. Respondents from EMEA perceive they are more prepared than their counterparts in the Americas and APAC. 

The challenge cited second most often was understanding and implementing technology capabilities. One observation is that North American regulators have taken a tougher stance in punishing compliance failings and imposing fines compared to other jurisdictions. Yet, it takes North American firms a long time to change their legacy processes and infrastructure, and trade surveillance in that region is extremely complex. On the positive side, institutions have invested in upskilling staff to understand and adapt technology, and they have forged closer partnerships with technology vendors to provide more transparent, usable, and explainable solutions.

Mitigating potentially manipulative or abusive behavior in the organization’s trading activity ranked in third place, followed by managing the firm’s reputation and mitigating any potential manipulation or abusive behavior within the organization. 

Almost all respondents cited conduct risk as being the greatest compliance risk to their firm, and they see it as either a significant or a material risk. Most respondents also indicated that insider trading and employees’ personal trading activity are significant or material risks. Notably, the proliferation of trading platforms has made it harder to police personal trading. 

Technology and solutions

Nowadays, most survey respondents are opting for a combination of third-party and in-house solutions for trade surveillance, A/E-comms, fraud, and AML. They favor a hybrid approach because compliance requirements and processes are complex, legacy systems are often hosted on-premise, and many institutions deploy multiple anti-financial crime platforms, solutions, and teams. 

The approach varies according to the size of the institution and the maturity of the region. Large institutions lean toward a hybrid approach because their organizations are more complex and require more customization, whereas small institutions are less likely to have solutions developed in-house. Further, institutions in the Americas are more likely to harness the hybrid approach than institutions in APAC, which favor third-party solutions.

When it comes to A/E-comms solutions, however, more firms outsource to a third party than adopt a hybrid model. Few respondents deploy in-house solutions for this purpose. Our take is that this reflects the technological strides that have been made in this space and the growing challenges of monitoring in-house.

Some firms implement A/E-comms as a stand-alone model – where all A/E-comms alerts are reviewed by an analyst and escalated as required to a relevant business unit. This is particularly prominent in the Americas because of the complexity and maturity of the market in that region. The stand-alone model also appeals to respondents in small- and medium-sized institutions as well as buy-side firms and corporate and retail banks. In sell-side institutions, however, A/E-comms are more likely to be part of a broader trade surveillance solution.

Most respondents currently use third-party trade surveillance solutions either on their own or via a hybrid model. Many respondents that rely on platforms built in-house for their surveillance activities appear to be shifting toward an outsourced model. In fact, the biggest shift in spend is toward a fully outsourced third-party model. This reflects the fact that third-party solutions have become easier to integrate and more scalable and flexible. This swing is most pronounced in APAC.

A significant percentage of respondents – especially those from small institutions and institutions in APAC – are not using a cloud provider for compliance mainly because of concerns about information security and the cost of migration. Those who have a cloud strategy are planning to migrate workstreams and infrastructure in the short term and move toward cloud-agnostic services and consolidating cloud providers over the long term.

Compliance budgets

Since 2016, compliance budgets have grown at a median rate of between 1% and 10% year on year. The growth rate was beginning to slow prior to Covid, but then there was an uptick in 2021 when respondents accelerated their compliance-related digital transformation projects. 

The current economic climate is pointing toward reductions in spending. Still, most respondents have continued to invest in technology, especially in areas including fortifying knowledge and expertise of industry regulations, fraud detection, and holistic integration. Many have experienced the short- and long-term benefits of compliance-related technology spend. In addition, most survey respondents are not putting major transformation programs on hold, and many are heightening their focus. 

Despite the challenging climate, compliance budgets are expected to increase overall, with around two-thirds of respondents expecting budget growth and nearly one-third forecasting double-digit growth. Respondents at exchanges and regulators are the most optimistic about compliance budget growth. Finally, more respondents are planning to spend on core and new technology, especially in areas such as A/E-comms, holistic integration, natural language processing (NLP), artificial intelligence (AI) capabilities and cryptocurrency capabilities.

The 2023 Global Compliance Survey demonstrates that compliance is perceived to be a core strategic function that generates value for financial institutions. The compliance technology market remains healthy, and the level of investment has not only held up but it has grown in some core segments. Ultimately, this contributes toward the increased effectiveness of market abuse prevention and detection. 

Access all the data and insights from the Nasdaq 2023 Global Compliance Survey here.