In recent years lawmakers and regulators developed a growing number of local and global laws and regulations. Although the development of them and the extent to which they are enforced varies from country to country, all financial markets are subject to certain rules. Thus companies need to develop an appropriate approach to manage the risk of non-compliance in order to avoid serious consequences that breaching any of the regulations can lead to.
An important objective of the regulations is to restrict the ability for criminals to abuse the financial system and to identify criminal activities once they take place. Hence financial firms not only need to conduct themselves according to the applicable laws and regulations but they also need to guard themselves against being used by others for illegal purposes. For instance, a firm needs to observe if, through any transaction, its customers do not intend to facilitate illegal conduct. A firm that knowingly or as a result of lack of due care participates in such transactions is exposing itself to significant compliance risk.
What’s more, the increase of global nature and independence of financial markets has facilitated international co-operation and the developments of common standards. Consequently, there is a growing range of acts of legislation that have an effect beyond national borders making the regulatory landscape more complex. Companies need to be aware of the legislations they are subject to and understand the potential impact of them.
A poor approach to compliance can lead to serious consequences including fines and penalties levied against the company and its key executives and managers risk of reputational damage and substantial financial losses.
Although compliance is not the responsibility of compliance staff alone and needs to be embedded within a firm and become part of its day- to- day activities and corporate culture, a firm is able to manage its compliance risk more effectively if it has a compliance function in place. Consequently, companies should maintain sound compliance function, either in house or outsourced, that routinely monitors compliance with the laws and regulations and ensures that deviations are appropriately reported and compliance risk controlled in line with the company’s objectives.
Compliance function in small firms may be an individual person, a separate department or a part of an overall risk management function. In large firms, on the other hand, it can be located within business lines or have local compliance officers. Some firms may also establish separate units which deal with specific topics such as combating financial crime, money laundering or terrorist financing prevention.
Regardless of the size and structure, compliance function plays a significant role in the overall risk framework of financial services firm. It is not limited to simple compliance with laws and regulations; it also encompasses sound fiduciary principles, prudent ethical standards, client documents, internal policies and procedures, and other contractual obligations. Some of the responsibilities include, but are not limited to, implementing processes and policies surrounding compliance monitoring, customer complaints, AML, financial promotions and client on boarding; monitoring of client transactions and funds; regulatory filings and reporting, providing training to staff and acting as a contact person for compliance issues.
Some questions each company should ask itself:
- What are the main areas of risk associated with the firm’s business activities?
- Does your company have a compliance policy, procedures and guidelines in place to cover all areas of risk?
- Is the policy and procedures enforced in day-to-day activities?
- Is compliance part of the company’s culture?
- How do you monitor and test compliance with the policy and procedures?
- Does your company have reporting procedure on compliance matters?
- Does your company have a procedure in place to cover a disciplinary action for breaches of the compliance policy?