In general, compliance means conforming to a rule such as a specification, policy, standard or law. Regulatory compliance describes the goal that organisations aspire to achieve in their efforts to ensure that they are aware of and have taken the necessary steps to comply with relevant laws and regulations. Due to the growing number of regulations and a need for greater operational transparency the compliance function has acquired a prominent role within organisations.
In this article, we will examine the compliance function in general, taking a closer look at the following items:
- The Importance of the Compliance Function
- The Key Functions of the Compliance Unit
- The Risk of Non-Compliance
- Interacting with the Regulator and Beyond
- Ethics and Compliance
Importance of the compliance function
The concept of compliance ensures that corporations act responsibly and within the regulatory and legal frameworks. This is perhaps the most important benefit of compliance for a business. No business wants to face criminal charges for not adhering to the law. There are so many different regulations and laws with regards to how a business should manage its staff, how stock and advertising is handled, the rules of engagement when buying and selling or negotiating with customers, employee salary, safety rules, and a host of others. With a proper compliance kit and team, a company can stay on the right side of the law and operate in a safe manner.
Internal compliance to rules related to safety, wages, employee benefits and protection, and compensation will create a positive environment in the workplace. Employees are more willing to work hard when they feel that that they are being well compensated for their efforts and that they are safely employed. It is important for internal compliance to be adhered to, since it will ensure that employees are satisfied and that all complaints or issues are monitored and addressed properly before they grow and adversely affect the entire corporation.
The key functions of the compliance unit
There are both internal and external functions related to compliance that must be mentioned:
- The Internal Functions include:
- Identifying relevant risks an organisation faces and ensuring that operations are in line with regulatory standards
- Designing and implementing compliance programmes while also resolving compliance difficulties as they occur in real time
- Reviewing and commenting on policies and procedures
- Reviewing and commenting on public announcements
- Acting as an advisor and providing input to Board of Directors and senior management
- Driving training and awareness initiatives
- The External Functions include:
- Serving as the official channel of communication with regulators
- Reviewing documents to be submitted to regulators
- Clarifying laws and guidelines with regulators
- Interpreting the laws and guidelines and explaining them in simple language to the company’s other employees
A proportionate, risk-based compliance strategy works most effectively when it has been fully and clearly communicated to the regulated sector.
The rapidly changing regulatory environment, the lack of global standards, and an increased regulatory burden, in terms of what it takes to develop efficient systems and processes make it challenging to assemble a sound compliance strategy.
Therefore, it is important to continuously assess the compliance risk. Compliance risk is the risk an institution may suffer as a result of its failure to comply with all applicable laws, regulations, codes of conduct and standards of good practice. Such failure may lead to legal or regulatory sanctions, financial loss, or a loss to the reputation of the firm. The following factors should be taken into account when assessing compliance risk:
- The nature of the operation
- The diversity of its operations
- The complexity of its business
- The scale of its business
- The volume of transactions
- The size of the transaction
In the end, non-compliance is expensive because it diverts attention away from normal operations, increases regulatory scrutiny, and invites legal action, all of which lead to increased costs.
Interacting with the regulator and beyond
The relationship between the compliance function and the regulated sector is obviously important.
Compliance typically requires building strong relationships with local regulators such as the Securities and Exchange Commission (“SEC”) in the US. In the UK, on the other hand, the financial watchdog role is split between the Bank of England, the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”). Furthermore, the Securities and Futures Commission regulates Hong Kong, while Singapore is under the watchful eye of the Monetary Authority of Singapore. Besides being monitored by individual country regulators, European banks are also overseen by the European Securities and Markets Authority (“ESMA”) and the European Banking Authority (“EBA”).
In recent years, however, local compliance teams need to have expertise in overseas regulations that have a global reach. The Foreign Account Tax Compliance Act (“FATCA”) is a 2010 US law, but its provisions affect US taxpayers abroad and banks from London to Hong Kong have been hiring people to work on FATCA compliance. Similarly, banks in all major financial centres need staff experienced in handling Basel III, a regulation that places more stringent demands on the amount of capital banks are required to hold.
Ethics and compliance
Ethics and compliance are essentially different sides of the same coin. Compliance entails following the law, while ethics is doing what is right regardless of what the law says. Compliance is something that the government requires you to do. Ethics, on the other hand, is something you choose to consider when taking action. As an example, various countries have environmental laws that require products to be labelled in a certain way and may include font requirements, placement rules, etc. Failing to properly label a product or follow some other technical regulation may not merely be unethical or immoral, but undoubtedly is noncompliant, which means that the company may face fines, liability or other government action. By contrast, a government may not force a company to make its products environmentally safer or easier to recycle, but doing so may be the ethical thing to do.