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By a brilliant stroke of timing, this month the first msc degree in financial services regulation is launched by London Guildhall University. Designed for regulatory and compliance professionals, it has already attracted a dozen students, all with several years’ experience in compliance or financial services. Banks overhauling internal audit and risk management procedures to ensure they, too, are not brought to their knees by the antics of a single employee, might consider the £8,500 fee to be money particularly well spent. Although a compliance officer on his or her own could not have stopped or necessarily even have spotted what was going on in any of the recent debacles, there is no doubt that financial institutions in general are starting to take compliance very seriously indeed. The dilemma every compliance officer dreads is whistleblowing. What happens if procedures and reporting lines are not being respected but the bank is apparently earning millions: if senior management disregard his warnings, should the compliance officer keep quiet or go to the regulators? If he keeps quiet he could run very real risks of censure, given his position, and find himself unemployable; if he blows the whistle he may lose his job and, again, find himself unemployable. It is a problem which faces in-house lawyers who, in their role as officers of the court, also have a split duty. Indeed, the parallels between in-house lawyers and compliance officers go a much further. Until five or 10 years ago, in-house lawyers, working in banks’ legal departments, were regarded as second-class citizens. The popular view was that they were only there because they were not good enough to be partners in a law firm. That view has changed. Nowadays in-house lawyers are highly regarded, not least because they usually decide which outside firm to use and when. So it is with the compliance officer. The compliance officer concept was first introduced to the uk by us banks which have long used them to put their points across in a forceful way to the Securities and Exchange Commission. But the role only became prevalent in the uk following the Financial Services Act 1986 and the Banking Act 1987. Neither mentioned the compliance function but it was embedded in the rule books of the self-regulatory organizations (sros). Nowadays regulators will look to see whether there is an active compliance function when deciding whether a financial services company is “fit and proper” to conduct investment and banking business. Initially, compliance officers tended to be drawn from different functions within the organization, ranging from legal and internal audit departments to settlements. Now they tend to be accountants or lawyers or, increasingly, former members of sros. In the largest financial institutions, the head of compliance typically commands a six-figure salary and sits on or close to the board. The difference between the us and uk functions is that in the uk the compliance officer is very much a part of the fabric of the self-regulatory regime. He acts as the regulatory window into the bank. He acts as the liaison between the bank and the regulators responsible for overseeing different parts of the bank’s business. Those in London can also act as regional compliance officers, supporting the financial officer’s compliance role in subsidiaries based in smaller jurisdictions. If the bank is owned by a foreign parent, the interlocking mesh of regimes can be complex. A further complication is that regulators license and supervise legal entities. The legal structure of a banking group may bear little resemblance to its lines of business and products, which can cross between subsidiaries and affiliates and operate across borders. The compliance officer has to achieve a fit between what the regulator is examining and the way the bank’s business is actually done, which in turn means he has to have detailed knowledge of those business lines and products. He may play a coordinating role in the development of new products, ensuring that the legal, tax and internal control requirements have been fulfilled and minimizing the regulatory impact to the product’s benefit. “Compliance officers and in-house lawyers are in a different position,” says Michael Taylor, course director of the Guildhall’s msc in financial services regulation and a former Bank of England official who worked on policy issues relating to the fsa. “Lawyers have a professional background to fall back on. Compliance officers don’t.” He is keen to see a professional association that can stand behind the individual compliance officer, with a code of conduct that would support him in difficult situations. It is something he hopes the msc may trigger. Part of the msc will be devoted to behavioural skills, focusing on how to intervene and influence and how to stand one’s ground. “Compliance officers have to be very proactive with strong interpersonal skills,” says Sue Lintern, manager of the securities and investments division at Michael Page City, one of the first recruitment companies to specialize in compliance officers. It has two consultants working full-time on filling compliance positions. “When the compliance function started it was assumed that once the systems had been set up they would be handed back to the in-house lawyer or internal audit function. But that wasn’t the case: the function became full-time. Now there are substantial departments with specialists covering different parts of a bank’s business. The compliance officer is not left out of any major decision at all. You have to be able to give good reasons for your advice and to demonstrate that compliance helps the business. You have to be able to walk the trading floor and pick up information.” It is a competitive marketplace. sros are not above having staff poached they tolerate it because they can see the advantages of having some of their own on the other side. Presence helps in the role. “The compliance officer has to be an arch-pragmatist, often taking decisions with imperfect information, relying to some extent on gut-feel,” says Brian Harte, vice-president and head of compliance at Chase Manhattan. “But those decisions must be timely otherwise he or she can find themselves isolated. Unlike internal audit, compliance operates in real time, in relation to deals and transactions.” Compliance officers find themselves under an increasing burden. With deregulation has come re-regulation. “New regulations have been introduced to provide alternative ways of protecting investors in the new deregulated environment,” says Taylor. “The level of regulation is getting increasingly intrusive,” says Harte, “which is of concern to practitioners.” “Rogue traders represent a failure of systems and controls which do not necessarily lie in the compliance officer’s ambit,” says Taylor. “It is really up to the line manager. But what it shows is that everyone must think like a compliance officer. They can’t leave it up to specialists like internal audit, risk management or compliance. Banks have started to rely on trading and non-traditional revenue streams. Those that do not have adequate management controls are seeing a few chickens come home to roost.” |
