Rules rules and more rules; how to get it right

November 24, 2015

Business today is all about compliance. Without it, running a profitable and successful business is virtually impossible, especially when the retribution can amount to hundreds of millions of pounds in fines and a ruined reputation.

Take April of this year for example: within one month, two large international banking institutions were fined more than £350 million. While that in itself is damaging to their individual finances, many believe the impact to their reputation, and that of the rest of their industry, is in the long run more harmful. Customers easily lose trust in banks, and this can quickly lead to falling revenues. Moreover, a damaged reputation can easily infiltrate staff morale and fuel the populist media image of the banker as the wicked grim reaper.

As a result, the challenges facing financial institutions today are widening. As well as maximising profit, the focus is now also on rebuilding and strengthening trust in the sector. For some, trust is the measure of 21st Century success, and the key to restoring this trust is compliance.

Rules and regulations are nothing new. Individual requirements have come and gone over time, with emphasis on different areas of business, society and the economy. Now however, compliance is all-encompassing. As well as adhering to strict financial and legal guidelines, businesses must also be seen to be ‘doing the right thing’ ethically and ensure that every person within their operation takes full responsibility for their actions.

A successful banking system requires a compromise between borrowers and savers. Unfortunately this balance is hard to sustain, especially with the ever-growing demands and pressures on the banking sector to offer super-fast platforms, savings and credit products. Add to this, the well-reported financial scandals and industry mismanagements of recent years, and the sector has a lot to contend with. 

To aid the situation, and placate those calling for increased regulation, the Financial Services Authority (FSA) was set up to oversee and supervise the financial markets in the UK. Its powers were increased to include the supervision and the regulation of insurance, banking and mortgage companies.

Then followed the financial crises of 2007-8 when global financial markets were destabilised following rising defaults on subprime mortgages in the US, prompting massive government bailouts of the global banking sector. At this point the FSA came under intense public criticism for not doing enough to prevent the credit crunch, which in the UK began with the near-demise of Northern Rock.

Tougher measures were then introduced to regulate the financial markets, with the abolition of the FSA and the creation of two new bodies instead: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Currently the two bodies work hand in hand to oversee the UK financial markets. The main difference is a more principle-based approach centred around integrity and encouraging open and fair dialogue between institutions, customers and regulators.

In the light of these changes, and the heavy ramifications of not following the regulations, organisations are becoming much more aware of the importance of compliance and the need to adopt an effective Governance, Risk and Compliance (GRC) management system. A GRC comprises three key elements which should operate collectively in assuring that a business enterprise fulfils its regulatory objectives: Governance encompasses the creation of procedures and controls which empower a company to meet its objectives, vision and strategy; Risk management involves calculating and dealing with risks that could obstruct the business on the path to realise its goals; and Compliance focuses on the guidelines, policies, rules and principles that facilitate the solid and well-organised governance which is regarded as a vital component to a company’s success.

For it to work effectively, GRC should be one department which standardises data and action across governance, risk and compliance functions with the aim of operating more proficiently, allowing effective data sharing and avoiding wasteful overlays. It should act as an advisory and informatory body to the board and senior management of any potential changes in the regulatory environment so that they can be incorporated in strategic planning and vision, promptly and adequately.

Effective compliance also decreases an organisation’s risk of being forced to shut down or pay hefty fines. It also identifies the areas of redundancy and incompetence, allowing monetary and human resources to be distributed more efficiently. By managing all the risks involved, the company’s reputation is preserved, therefore ensuring that the business continues to thrive and costs are kept to a minimum.

Corporate Social Responsibility is also considered to be an important issue and should be in the core of commitment when interacting with surrounding business and within the collective environment. Such change of behaviour is the only way for the banking sector to flourish and develop into the fully compliant and responsible industry of the future.

On an individual level, remuneration should take into account adoption of GRC principles and bonuses should only be rewarded after success in sustainable compliance.  To support a compliant culture, the banking sector needs to ensure that career paths and opportunities are created in compliance departments and that all compliant achievements are rewarded, thus restoring confidence amongst employees.

Creating and strengthening trust in the banking sector is without doubt one of the main challenges of the future. If trust is the measure of 21st Century success and a compliance culture the key to restoring this trust, then it is something not to be ignored. Such change in behaviour is the only way for a banking sector to flourish and develop into the fully compliant and responsible industry of the future.

(This article was written by Yvonne de Ville, an independent contributor)

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