September 25, 2020

Compliance = change or extinction

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3d9c691fd3a1e80f63a4a70c2a2e3155_LBy Shamini Chase From Business BVI

Over the last decade, we have witnessed a number of events and crises that have resulted in a plethora of regulations impacting financial industries globally. It would be remiss not to acknowledge the divergent views that exist on the topic of global financial regulation. Some argue that a heavily regulated environment will stifle market participants with adverse consequences on financial markets. Conversely, others reference events such as the 2007-2008 global financial crisis as the adverse consequences of under-regulation. To venture into an examination of the contentions propounded by either side of the debate would be a futile exercise.

Instead, what must be acknowledged is that the architecture of the global financial market has already changed to one that is heavily regulated. The objective of this article is to assist readers in appreciating the important role of compliance following this change. It is submitted that the only option to ensure survival in this regulatory minefield is to embrace this attitude of compliance. To achieve this, the article:

provides the reader with a background, explaining how and why this change occurred;
discusses the important role of compliance in the success and viability of a financial institution by exploring the effects of non-compliance;
explores how consequences of non–compliance by financial institutions are systemic on the jurisdiction of operation and its economy; and
discusses the evolution of the compliance officer as a key player in ensuring the success and viability of a financial institution in today’s heavily regulated environment.

Background

In the financial services industry, compliance refers to adherence to the regulations, policies, and guidelines that apply to a financial institution (FIs). Hitherto, compliance was not a concept widely appreciated by FIs. More often than not, regulatory standards and prohibitions were blatantly ignored; compliance was largely perceived as a hindrance that prevented FIs from attaining optimum growth and profits.

After the worldwide and disastrous effects of the 2007-2008 global financial crisis, international policy makers recognised the need for more stringent monitoring and supervision of FIs to avoid a recurrence of this calamity.

Governments also agreed, as they were the ones left to bail out these large FIs due to the grave systemic consequences which would result from their failure. This has resulted in a plethora of regulation enacted to ensure that FIs are aggressively monitored and supervised – such examples include the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act which made significant changes to America’s financial regulatory environment, and the Financial Action Task Force (FATF) revision of their global anti-money laundering (AML) standards. The overall objectives of these rules and regulations were to restore market confidence; ensure consumer and investor protection; ensure financial stability and reduce financial crime.

The Effects Of Non-Compliance

The important role of compliance in this regulatory environment can more effectively be appreciated by discussing the implications of non-compliance. The fact is, it has simply become too costly not to be compliant.

Demonstrating their aggressive approach towards enforcing compliance, international regulators have encouraged, or rather, bullied governments to ensure that non-compliance is sufficiently deterred.

In response, governments have significantly amplified fines and penalties for non-compliance and regulators have been unsympathetic in their enforcement of these sanctions. The objective of this new stringent enforcement of compliance is to attack where it hurts; the pockets of FIs.

Notable examples in the United States include, HSBC was fined US$1.9 billion dollars for its blatant failure to implement anti-money laundering controls in 2012 and Standard Chartered Bank’s US$300 million dollar fine in August 2014 (on top of the US$327 million dollar fine imposed in 2012) for failing to keep its promise to regulators to remedy anti-money laundering problems. In Europe, the European Union’s (EU) anti-trust regulators slapped a €446 million fine on Societe General, for manipulating benchmark interest rates. The EU regulators also fined other notable FIs including Deutsche Bank, JP Morgan and Royal Bank of Scotland (RBS), €1.7 billion for rigging the Euro Interbank Offered Rate (EURIBOR).

Additionally, regulators have also increased their on-site and off-site testing to ensure prudential monitoring and supervision of FIs. The UK went as far as revising its regulatory model to ensure effective monitoring and supervision of their FIs.

In the BVI, the Financial Services Commission (FSC) has followed the stead of foreign regulators, significantly increasing its regulatory oversight through both onsite testing and offsite monitoring. As a result, there has been a significant increase in the number of FIs subjected to enforcement January 2015 Edition 65 actions, which include the issuing of fines, warning letters, directives and other penalties. Additionally, the fines and penalties for non-compliance with regulatory obligations have been drastically increased by amendments to the BVI’s AML enactments in 2012.

Beyond the fines, enforcement action also delivers a detrimental blow to the reputation of a FI. Loss of client confidence, loss of business, downsizing of operations and possible extinction, are all logical and likely consequences of a tarnished reputation. This reputational tarnishing is often played out through the media and assisted by regulators through publication of FIs subjected to enforcement action. The obvious aim is to serve as a warning to clients, and as an example and deterrent to other institutions.

The architecture has been intentionally designed to ensure that the above mechanisms allow very little room for non-compliance to go undetected. If and when detected, the consequences have been made to be so devastating, that FIs have been forced to comply.

The Systemic Consequences Of Non-Compliance

As discussed earlier, this heavily regulated environment and the rigorous enforcement of compliance with its many obligations really arose because FIs proved their inability to regulate themselves. Non-compliance by FIs carries the risk of tarnishing the reputation of the jurisdiction within which it operates. The collective failure of FIs (or one large enough financial institution), has detrimental effects which can be global in nature, depending on how interconnected those financial institutions are.

To avoid a repeat of the global crisis, although some academics argue that such crises are necessary, international regulators have placed the onus on domestic regulators and governments to implement a robust regulatory environment in their respective countries. Like financial institutions, countries are also subjected to enforcement action where they fail to comply with imposed undertakings. This is achieved through the blacklisting process, practiced by international regulators like the FATF and the Organisation for Economic Cooperation and Development (OECD), which publish a list of “non-cooperative and high risk jurisdictions” that have been evaluated and found to have poor compliance standards.

As a result of this blacklisting process, compliant countries do not want to risk tarnishing their reputation and possible sanctioning for engaging in activities with blacklisted or non-compliant countries. The resulting sequestration undeniably impacts a country’s ability to function and can significantly curtail a country’s realisation of economic growth.

The Evolution Of The Compliance Officer

Compliance has become the gold standard that FIs aspire to, not by choice, but really as the only solution for survival in today’s brutal regulatory environment.

A top-shelf compliance regime has become an invaluable asset of any FI in this environment and it requires investment. An undervalued or underresourced compliance function will result in unavoidable regulatory enforcement action. So how does one build a top-shelf compliance function? For starters, the significance of the role that the compliance officer now plays must be appreciated, valued and utilised by the FI. Additionally, the increased demand for compliance has led to the evolution of the role of the compliance officer, which is not a newcomer to the list of professions at a career expo. The role of compliance officer has enjoyed a long tenure in heavily regulated industries such as financial services and healthcare.

Undeniably, it is a role that has conventionally been undervalued in FIs. Once a role traditionally held as a dual function role, within either the legal or operations department, today’s compliance officer is a senior-level officer in a financial institution. In fact, many organisations have elevated the compliance role to a member of the elite C-suite with the growing prevalence of the Chief Compliance Officer, reflecting the importance of the role. Most organisations in other jurisdictions have similar variations to reflect the seniority of the position within the organisation’s management.

In an April 2014 article, the Financial Times reported that according to its resources, the compliance officer is one of the hottest areas of financial recruitment. As also reported in that article, the compliance officer role has gained importance in our current financial environment as financial institutions need to ensure that they play by the rules as a result of the “tsunami of regulatory initiatives and substantial fines that followed the financial crisis of 2007-09”.

The significance of the role of the compliance officer has not gone unnoticed in the BVI. It is now a requirement for every entity licensed and regulated in the BVI by the FSC to have a designated compliance officer who “…has the appropriate skills and experience and is otherwise fit and proper to act as the licensee’s compliance officer.” Additionally, the FSC must approve the compliance officer of each FI to ensure that he/she has the relevant skills, qualification and experience required for the job. Further, the compliance officer must also satisfy the Commission’s fit and proper test.

Today, the compliance function is no longer treated as reactionary or policing from the background. Now, compliance officers are, or ought to be, systemically involved in all important steps in the decision making process. To efficiently perform this role, the modern compliance officer must be commercially pragmatic and solutions based. He/she must understand the FI’s business and acknowledge the commercial reality when designing and implementing the internal controls for the organization. He/she must also be solutions based, in order to allow optimum business growth and expansion, whilst still ensuring the FI’s compliance with the regulatory framework and its own internal controls. It should be noted that in most instances, enforcement action against an FI takes place as a result of none or late involvement of the compliance function in the decision making process.

For more on this story go to: http://www.businessbvi.com/business/finance/item/531-compliance-change-or-extinction

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