With more regulatory scrutiny being cast on compliance duties, corporate compliance officers need to start elevating their profiles within their companies
There are many聽demands on compliance officers’ time and many issues with which聽. However, recent regulatory fines in the United Kingdom have thrown new light on the importance聽of good governance, which can be the cornerstone of a well-run financial services firm.
“The primary objective of corporate governance should be safeguarding stakeholders’ interest in conformity with public interest on a sustainable basis,鈥� wrote the Basel Committee on Banking Supervision in a recent paper, .聽鈥淐orporate governance determines the allocation of authority and responsibilities by which the business and affairs of a bank are carried out by its board and senior management.”
Governance includes responsibilities such as determining strategy and objectives, selecting and overseeing personnel, meeting shareholder obligations, and aligning corporate culture, activities, and behavior with the expectation that the bank will operate in a safe and sound manner.聽It聽is a significant factor in financial services regulation, and many of the rules聽with which financial services firms must comply are founded in good governance principles. Further, boards have responsibility for the firm’s integrity and for compliance with applicable laws and regulations.
Governance is more subtle than straight rule-based compliance and requires a greater level of tact, persuasion, and cunning to exert a positive influence. This is partly because of the subjective nature of governance. A one-size-fits-all approach to corporate governance is not mandated, leaving the field open to numerous opinions and models. Compliance officers may not, unfortunately, be seen as experts in governance within the firm.
Regulations based on governance
The penalties for financial firms and their managers which fail to employ adequate governance practices can be severe. Three recent regulatory actions have underlined this point: two enforcement actions 鈥� , which was fined by the Prudential Regulation Authority; and , which was fined by the Financial聽Conduct Authority (FCA), both of which had governance issues at their core 鈥斅燼nd聽the release of the FCA’s thematic聽on .
A theme running through all three聽actions was the role of a financial firm鈥檚 board of directors. Sigma was fined 拢531,000 and three directors聽more than 拢200,000, ostensibly for “failing to make reports crucial in fighting potential market abuse.” The main failures related to weaknesses in the firm’s governance such as inadequate oversight by聽its governing body.
MS Amlin was fined聽around 拢9.7 million for failing to comply with its regulatory obligations relating to聽the governance and oversight of underwriting. The governance聽failings included underwriting controls, management information, data quality, and risk management strategies and systems.
Meanwhile,聽the FCA highlighted “strong board governance, clear board-level accountability and independent challenge” in ,聽which reported聽the results聽of its thematic on the effectiveness of governance.
Board & chair
Regulators have made it clear that they regard a strong board of directors as crucial to a firm’s success. To underline this focus, the聽聽includes聽five principles on board leadership that all firms need to follow and sign off on,聽on a comply or explain basis, in their company accounts. The principles include ensuring that the board: i) promotes the long-term sustainable success of the company; ii) establishes the company’s purpose, values, and strategy; iii) makes the necessary resources ready for the company to meet its objectives; iv) encourages effective engagement with shareholders and stakeholders; and v) creates workforce policies and practices that are consistent with the company’s values.
Chairs of boards of directors聽are there to lead the board and聽are responsible for its overall effectiveness in directing the company.聽Chairs should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, chairs should facilitate constructive board relations, and should ensure that non-executive directors are able to make an effective contribution聽and聽that all directors receive accurate, timely, and clear information.
Compliance officers
“We believe that governance goes beyond formal governance at the board and in the most senior levels of leadership,” the FCA said in its thematic.
Senior management, at all levels and in most roles, need to be able to apply the characteristics of the board and the principles of good governance, namely: individual competence; clarity of responsibilities and organizational structure; strong risk management; effective control frameworks; accurate, timely reporting; and transparency and trust.
Traditional compliance officers have responsibility for overseeing the firm’s adherence to regulations, policies, and procedures. To do this,聽they need the seniority, independence, and the mandate to operate at board level. In many ways, compliance officers need to adopt the same characteristics as chairs to fulfil their responsibilities.
In addition, a strong sense of fairness and clear accountability 鈥� for their own work, but also an understanding of who is responsible for what 鈥� must聽be part of聽compliance officers’ basic psyche. They need the resources and knowledge to be able to undertake their roles.
Viewing the firm, and the issues within it, from the chair’s position not only gives compliance officers the necessary perspective from which to report, but聽it may also help to contextualize findings and give compliance officers confidence and respect when discussing issues with senior management. This is not an excuse to soften messages when it is necessary to be forthright, but having a 鈥渃hair mindset鈥� may give compliance officers a route to more common ground when聽they do need to deliver聽difficult messages.
