This is a two-part blog introducing compliance for beginners, starting with the definition of compliance in a corporate setting, the evolution of compliance in financial services, and the prospects and stability of compliance as a career. The second part will explore the future development and growth potential of compliance, as well as desirable traits and some of the potential drawbacks.
In short, we can define compliance as a function that ensures company adherence to regulatory requirements, relevant laws and policies. This includes standardized practices and procedures unique to the company, as well as policies established from an ethical standpoint.
Ultimately the above applies just as much to Baking as it does to Banking.
In the past, the stereotype of the compliance officer was that of an incompetent internal policeman, trying to stifle the creativity and dynamism of the revenue generating business. There are some exaggerated yet memorable scenes in the movie Boiler Room that depict the gung-ho traders’ aggressive attitude towards the solitary compliance officer.
However, this image has changed substantially since the Global Financial Crisis of 2008, with the front office more likely to be portrayed as the villains, especially through the eyes of the media (think The Big Short and Wolf of Wall Street). Step by step, the industry has built an increasingly complex regulatory environment on local, regional and global levels. Regulations such as the Volcker Rule, Dodd Frank, and MiFID have all put a hefty price tag on compliance (or rather non-compliance). Regulators have not been shy at slapping heavy fines and strict sanctions on even the largest global financial institutions for their malpractice – with some legal proceedings for involvement in the sub-prime mortgage crisis still ongoing more than a decade later. These public trials did not only damage the banks’ profits (and bonus pool) but have also harmed their reputations amongst their clients and peers. In a world of ever-widening choice, with local and global firms jostling for market share, reputation matters a great deal.
With so much at risk, the banks are now paying greater attention and investing significantly more money in their compliance departments in order to bolster their defenses. Compliance has grown into a bigger and more significant function, with various sub-sectors and areas of specialty, such as Know Your Customer (KYC), Anti-Money Laundering (AML), Regulatory Management and Business Advisory.
Although hiring across investment banking is generally on a downward trajectory in major financial centres – especially in areas that are already succumbing to automation and outsourcing (i.e. front office and operations) – control functions such as compliance remain a key area of growth, thanks in large part to stringent regulatory conditions.
At present there are no visible signs on the horizon that regulators will dramatically loosen the shackles on financial institutions to the point that compliance becomes non-significant, where substantial job-cuts would be a real threat. Even a tweaking of existing regulations, such as the Dodd Frank, is unlikely to put compliance in reverse gear. This is primarily because we live in an increasingly multilateral and interconnected world with ever-evolving regulations, agreements and policies tying jurisdictions and businesses together. The fact that the Trump administration has been advocating for repeals of post-crisis financial regulations in the US – in direct contrast to European regulators – has caused uncertainty in global markets and if realized, would arguably create an even more complex and demanding regulatory landscape for compliance departments to navigate.
Companies must remain on top of these developments in order to avoid slipping up and paying the penalty, and to do so requires a comprehensive compliance framework.
There certainly are areas where jobs could be negatively affected, such as those involved in monitoring systems or people for issues, such as Fenergo for KYC /AML and SMARTS for Trade Surveillance. Intelligent software can crunch through data and scan for patterns faster and more efficiently than human. That having been said, a computer might not be as effective in checking for ethical or moral inconsistencies, such as what one trader might say to another. The human touch will always be required for many compliance and risk matters, as regulators are unlikely to accept organizations relying solely on computers to maintain defenses, especially for organizations such as banks, pension funds and insurers that are susceptible to systemic risks.
Having provided a brief, general overview of Compliance, the next article will focus more on how the field is evolving and looks at what characteristics / skills are typically suited to the work.
Please keep posted for Part 2 which will be released shortly, and if you have any questions or comments on the above feel free to contact me.