Passionate about investing

Compliance: Whats the point?

4 March 2013

Hi all, I wanted to share my thoughts on Compliance and more importantly on why its important to have a solid corporate governance.

Now, before we get into this, we first must understand what Compliance is, as defined by the Merriam Webster dictionary;
“The act, or process of complying to a demand, proposal, regimen or coercion.”

Furthermore, regulatory compliance describes the goal that corporations or public agencies aspire to achieve in their efforts to ensure that personnel are aware of these policies and take steps to comply with relevant laws and regulations.

I have been in this environment for several years and I have been bitten by the jaws of Compliance a few times, which resulted in written warnings and disciplinary hearings. Trust me, its not a process you would ever wish upon yourself.  In the eyes of Compliance, its guilty until proven innocent!  I didn’t really appreciate that until being appointed Chief Compliance Officer.

Now, I’m not a football fan, but allow me to paint you a picture using a football analogy.  Believe it or not,  the complex business of finance is like a game of football.

There is a pitch, goalposts, football teams and spectators to watch the match. Football players do not just turn up for a game and start kicking a ball around. There are rules to the game. Imagine if two teams arrived at a stadium, went on the pitch and started kicking the ball against each corner of the pitch. Minutes into the game, the spectators already notice that something is not quite right. There is no referee in sight and none of the rules of the game are being observed. Five minutes later, the game has turned into one big fight.  Compliance is the internal referee.

FSA regulation has evolved over the past decade from rules to principle-based regulation and is now a combination of rules and principles. Even more importantly, FSA regulation is intrusive and outcome-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 and financial crime is prevented.

Take for example HSBC, which in 2011 was fined £10.5m for failing to ensure that suitable advice was given to the elderly of its subsidiary NHFA Ltd. Advisers at NHFA Ltd advised their elderly clients to buy medium term investments that were over a greater time period than their life expectancy.

Irresponsible and unethical business behaviour you may say, but consider that, if there were no rules or principles which could be enforced, this would be a case of a large corporation mistreating its clients and getting away with it firmly.

Firms have also been fined for non-segregation of client money and for failures in creating and maintaining good corporate governance to ensure that clients are treated fairly.

Credit Suisse was fined £5.95m for failing to document the level of risks that clients were willing to take and had retrospectively amended records in response to an FSA file review.

Compliance is important for businesses because it will promote sound business ethics and best practices, meaning these enforcements in principle will be less likely to occur.

Compliance Teams are expected to create processes that reduce a firms regulatory risk, in addition to identifying and correcting gaps in the systems and controls. Detecting these gaps in a firm’s adherence to relevant rules and regulations in itself gives the opportunity to create stronger systems and controls, resulting in the reduction of breaching regulatory requirements.

As far as ethics is concerned with the moral right or wrong effects of decisions, it is fair to assume that when applied to business, it can help reduce the risk of firms carrying out their business in ways that are unfair to clients and improves the overal reputation.

Both the FSA and the SEC recognises the importance of ethics in business.  When appointed CEO of the FSA, Hector Sants was told by senior management that ‘the FSA does not do ethics’ as mentioned in his speech ‘Can Culture be regulated‘.

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 strong compliance culture.

To conclude with a quote:
“It’s a sign of troubled times when the concept of pressure becomes an acceptable excuse for ethical shortcuts and moral shortcomings.  Pressures are just temptations in disguise and its never been acceptable to give in to temptation.  Ethics is about the way things ought to be, not about the way things are.  When it comes to ethics, motives is very important.  A person of character does the right thing for the right reason.  Compliance is about what we must do; ethics is about what we should do.  Ethical people often do more than the law requires and less than it allows.  The area of discretion between the legal must and the moral should test our character.  Noble talk and framed ethics statements are no substitute for principled conduct.. The test is doing the right thing.”
Michael Josephson

Simon Osborne
Vice President

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of The Broadgate Financial Group.