With more regulatory scrutiny being cast on compliance duties, corporate compliance officers need to start elevating their profiles within their companies
There are many demands on compliance officers’ time and many issues with which compliance officers must grapple. However, recent regulatory fines in the United Kingdom have thrown new light on the importance 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,” wrote the Basel Committee on Banking Supervision in a recent paper, Corporate governance principles for banks. “Corporate 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. It is a significant factor in financial services regulation, and many of the rules 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 — MS Amlin Underwriting Ltd. , which was fined by the Prudential Regulation Authority; and Sigma Broking Ltd. , which was fined by the Financial Conduct Authority (FCA), both of which had governance issues at their core — and the release of the FCA’s thematic on the effectiveness of governance in credit rating agencies.
A theme running through all three actions was the role of a financial firm’s board of directors. Sigma was fined £531,000 and three directors more than £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 its governing body.
MS Amlin was fined around £9.7 million for failing to comply with its regulatory obligations relating to the governance and oversight of underwriting. The governance failings included underwriting controls, management information, data quality, and risk management strategies and systems.
Meanwhile, the FCA highlighted “strong board governance, clear board-level accountability and independent challenge” in its letter to credit rating agencies, which reported the results 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 UK Corporate Governance Code includes five principles on board leadership that all firms need to follow and sign off on, 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 are there to lead the board and are responsible for its overall effectiveness in directing the company. 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 and that all directors receive accurate, timely, and clear information.
“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, 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 — for their own work, but also an understanding of who is responsible for what — must be part of 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 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 “chair mindset” may give compliance officers a route to more common ground when they do need to deliver difficult messages.