The Financial Crisis and beyond… The much debated financial crisis didn’t leave the world of Regulation and Compliance alone. It wasn’t just the traders of Wall Street and the Dealers in Canary Wharf that were taking a hit. The whole regulatory structure as we knew it was to be restructured as a partial response to the events. National supervisors were facing greater harmonisation of practice at EU level.
Personally speaking (or in my humble opinion) I don’t think that the thought of having to “prop up the banking system” had entered into the majority of Senior Ministers minds before this event. However, that was to be the next move, and this introduces our next actor – the Resolution Authority!
This is a role for the Bank of England to play, as the Tripartite Authorities of HM Treasury, the Bank of England and the FSA now put in place legislation to deal with bank resolution after the collapse of Northern Rock. Major Banks are now required to have recovery and resolution plans… Which are in effect the equivalent of ‘living wills’. And following this intervention, the Government announces the planned break-up of the FSA in 2012. In what almost seems to be an about turn, or de-ja-vows it transfers the prudential supervision of banks and insurers to the Prudential Regulatory Authority (PRA), a new subsidiary of the Bank of England, with clearing house supervision to be undertaken directly by the Bank of England.
Overall financial stability becomes if not THE certainly a main key objective of the new regulatory regime. The interim Financial Policy Committee, a new committee of the Bank of England, is charged with responsibility over this area, and is planned to become part of the new regulatory structure.
The FSA’s objectives are altered by the Financial Services Act 2010, with Public awareness replaced by financial stability (contributing to the protection and enhancement of stability in the UK financial system). The FSA is now renamed to the Financial Conduct Authority (FCA), introducing a more intrusive level of supervision. This will, alongside other changes it is hoped, include a commitment to challenge a firm’s own judgement concerning their business models, strategy, and product development.
So, that brings us – within reason – up to date. However, there is still PLENTY more regulatory change on the way. As mentioned before, Europe itself brings in plenty of change, without our own Regulator. For example, no sooner have Europe agreed on the detail of UCITs 4, UCITS 5 comes along, with talk now of UCITS 6 not being that far off either. The main parts of change here I will discuss in a later piece – but suffice to say the instruments or ‘Qualifying’ instruments that can go into a UCITS Fund are being widened all the time, with what in old days would have been seen by many an ACD (Authorised Corporate Director) or Trustee as an illegible investment, or circumventing the objective of the scheme, these days are being used a lot more frequently. Such as “derivatives for efficient portfolio management” and derivatives for “Investment Purposes”.
I will focus on that on another article. For now, we have enough of the Regulation and Change Management to contend with.
So what next? What are the next challenges that you as a Compliance Officer? Or as a Managing Consultant? Or as a Controlled Function? (CF) Or as a Significant Influence Function? (SIF)
Without question, if you carry any of the above Controlled Functions it is VITAL that you are properly covered by Professional Indemnity Insurance. No matter how hard you try to legislate for things, and no matter how many Risk and Control measurements you put in place, you cannot “hedge” or mitigate for the unseen.
Tomorrow’s crisis or tomorrows fine on an unsuspecting Compliance Officer, or SIF Function is only going to get worse. The FCA is holding Senior Management AND individuals responsible for a lot of what goes wrong IRRESPECTIVE of the fact that they may have been oblivious to it. This is, in itself, an error of judgement as far as the Regulator is concerned As in THEIR view, you SHOULD have known!
Basically, your Systems and Controls were inadequate – OR you SHOULD have foreseen this.
Now, I know for a fact, that there is only so much a Compliance Officer can do – or for that matter a whole Compliance Department – yet – in the FCA’s eyes, if there is a failure or a Breach, you MUST address it – and ensure that you have “adequate resources”. Often individuals or Clients in the Senior Management or SIF Functions of which I look after look at me with an expression of dis-belief when I mention to them the two words “adequate resources!”
They look puzzled and to an extent sarcastically smile – as they say words to the effect of “Of COURSE we have adequate resources! We are a BANK for Heaven’s sake!” Then, in a total opposite to this reaction, other Clients – where we have carried out a full Audit and one of the over-arching conclusions is that of the need for “adequate resources” raise their eye-brows in a slightly facetious manner and say another two words to me! ….. (Well, sometimes it’s THOSE two words – but normally it’s ‘NO CHANCE!’)
So why the Polar opposites? Well, surprisingly enough, a fair few of the Senior Management Team interpret “adequate resources” to ONLY mean “financial / financial buffer”. Yet, others in (say) Compliance and Risk, also understand that the terminology of “adequate resources” from the regulators perspective includes staff. Both front office and compliance. And, sadly, this is often where there is (ironically) a ‘conflict of interest’.
Many a time I have heard the story from a Head of Compliance who has said that – when faced with our report – and the need for more resource – Beit both for training and development, cover and holidays and continuity of service, that when this is addressed, the Board do not think that there is sufficient a need or the Business Case is not strong enough to require any additional resources within Risk and Compliance. Here we have a clear, if not quite what the FCA expected, ‘conflict of interest’.
Risk, the mitigation of it, Beit front office, derivatives usage, operational, regulatory or otherwise, is healthy when mitigated properly, but left unchecked and under invested in can become lethal very quickly.
One thing is a given – if you DONT manage it correctly, or you are seen (retrospectively) to not have done so, you WILL be heavily fined, censured or similar by the FCA if there is an operative event that has brought you to their attention.
