Why Compliance Matters
In an increasingly regulated financial world, there have been arguments that firms and sectors are capable of self-regulation. The recent recession and financial crisis however has brought home the realisation that effective regulation and compliance creates a safety net for both firms and consumers when there is a dip in the economy.
To begin, what is Compliance?
The Merriam Webster dictionary defines compliance as the act, or process of complying to a demand, proposal, regimen or to coercion. To discuss why compliance is important, it is important to know what happens when a firm is not compliant with the relevant rules and regulations. Consider a game of football. There is a pitch, goalposts, football teams and spectators to watch the match. As the game begins, the spectators start to notice that something is not quite right. There is no referee in sight on the pitch. Using this analogy, compliance matters because the compliance team is the internal referee for most financial service firms.
Financial Services Regulation in the UK is focused on protecting consumers. This is because consumer protection is one of the FSA’s statutory duties, but this can also be seen as a general trend towards consumer protection and business ethics. For instance, over the past few years, there has been a lot of talk about the ethics of the city. FSA regulation has evolved over the past decade from rules; moved to principles based regulation and is now based on a combination of rules and principles. Even more importantly, FSA regulation is outcomes focused which means that if the rules and principles are not enough to protect consumers or perhaps prevent financial crime, firms now have to go beyond the stated rules and regulations to ensure that consumers are protected or financial crime prevented.
In 2011, HSBC was fined £10.5m for failing to ensure that suitable advice was given to the elderly customers of its subsidiary NHFA Ltd. In this case, advisers at NHFA Ltd advised elderly consumers many of them, living in care homes to buy medium term investments that were over a longer time period in some cases than their life expectancy. Although this is unquestionably irresponsible and unethical business behaviour, if there were no rules or principles prohibiting it which could be enforced, this would be a case of a big business treating it customers appallingly and getting away with it.
Similarly, firms have been fined for practices such as failures in creating and maintaining good systems and controls to ensure that customers are treated fairly. Credit Suisse in particular was fined nearly £6 million for failing to document that it had assessed the level of risks that client were willing to take and had retrospectively amended records in response to an FSA file review.
Compliance is important for businesses because a good compliance service will detect gaps in the system and controls of a Firm. Detecting these gaps in firm’s adherence to relevant rules and regulations in itself gives firms a chance to create stronger systems and controls and will reduce the possibility of breaching regulatory requirements. A good compliance service will assist firms in finding viable solutions that will enable them to meet their regulatory needs. Regulatory requirements such as stress testing, also helps firms to evaluate their liquidity risks and prepare themselves for financial difficulties or recession.
A compliance team can also act as the ethical barometer of a firm. This could be through the development of internal policies or best practice guides to ensure that the firm not only complies with rules and regulations but also develops and maintains good businesses ethics. As ethics is concerned with the morality / the right or wrong effects of decisions, It is fair to assume that when ethics is applied to businesses, it can help to reduce the risk of firms carrying out their business in ways that are unfair to customers and improves the reputation of the firm involved.
Both the FSA and the SEC recognise the importance of ethics in business. In the UK, individuals appointed to significant influence functions and customer functions are assessed to ascertain whether they are fit and proper before becoming approved by the FSA. Approved persons are required to conform to a code of practice which assigns personal culpability for breach of the ethical standards contained in the statement of principles for approved persons. Hector Sants, the Chief Executive of the FSA in a 2010 speech “Can Culture be regulated” noted that when he joined the FSA, he was told by senior management that “the FSA do not do ‘ethics”. This view has since changed to an acceptance that regulators cannot avoid judging culture. As ethics is one of the key aspects of a firm’s culture, a compliant firm is now not only required to be compliant with regulations and rules or principles but also demonstrate that it has a good compliance culture.
The question then is not why compliance is important, but what can firms do to ensure that they are fully compliant.