Facing increased scrutiny from regulators, energy trading companies acknowledge the many risks entailed in failing to establish effective compliance programs, but are currently challenged by compliance costs and shifting enforcement priorities, according to a newly released survey by compliance software provider NICE Actimize, a NICE Systems Company, and international law firm Fulbright & Jaworski LLP.
Of the energy trading representatives polled in the study, none believed that audit and enforcement actions taken against energy trading firms will decrease. Yet in the face of increased scrutiny from regulators, more than one-quarter of the respondents believe their organisations are not devoting sufficient staff and resources to compliance priorities.
“Similar to the risk management arena a decade ago, the energy industry is becoming convinced that the failure to implement effective controls could lead to significant risks, regulatory enforcement, potential penalties and reputational harm,” says Jim Heinzman, managing director of trading markets at NICE Actimize. “The research indicates that the industry recognises the risk and harm associated with not investing in compliance, yet most organisations are not currently using systematic compliance programs but rather manual or first generation systems for compliance analysis.”
“We are at an inflection point in the energy trading industry,” comments Erik Swenson, a partner at Fulbright & Jaworski. “The regulatory requirements and oversight expectations have increased, but the industry is challenged with how to respond to the evolving expectations. We expect firms to continue to adapt to this new regime by implementing new programs in the next 12 to 24 months as the regulatory front continues to evolve.”
Need for Improved Compliance
The research indicates that many in the energy trading industry recognise that regulators are increasing their enforcement activity, resources and infrastructure. Approximately 80 percent of respondents believe regulatory audit and enforcement actions against energy trading firms will increase. Almost 40 percent of respondents believe regulators already have the capability to examine energy trading activity, while others believe regulators will increase surveillance capabilities in the coming years. Accordingly, improved compliance programs and infrastructure, including the use of automated surveillance, may become a significant industry need.
There is an apparent gap between how respondents perceive their own compliance capabilities versus those of the industry as a whole. Only 14 percent of respondents rate the energy trading industry’s readiness to comply with new energy trading regulations as ‘good’ or ‘excellent’, yet nearly two-thirds of respondents felt that their own firms’ internal compliance and control systems were capable of meeting new requirements.
Less than half of respondents indicated they currently have an oversight system in place that monitors for suspicious activity on a daily or intraday basis. Collectively, this data suggests a disconnect between the industry’s understanding of, and execution against, current and proposed regulations which require daily, and in some instances, intraday, monitoring.
The study was conducted late in the second quarter of 2010. The research participants – 142 energy trading company representatives from around the globe – completed an online questionnaire that consisted of more than 30 questions.