“Consumer Banking” Compliance Assessment
The business entities have evolved tremendously over time. Among the many advancements made in the business industry is the issue of the creation of different operating units. One of the most important operating units is the compliance unit. Each operating unit is accorded its own mandates and terms of references. This way, each unit is made somehow independent to the extent that it operates within the requirements of the entire organization’s goals. In addition, each operating unit is charged with its responsibilities. This is in line with the purpose of the creation of the unit in the first place. The number of the operating units depends on the classes of functions that are identifiable in the entire organization. Furthermore, all the operating units must be able to link with one another. This is because they are all operating in the best interest of the entire organization. If one fails, all the others are affected. Therefore, none can work in solitude. It is also important to note that all the units should have a proper reporting procedure to the management and finally to the board of directors. This is because they are answerable to the board. Understanding the nature of each business unit is therefore very important. Identification of the elements that constitute the business unit is also important. In this way, we can appreciate the role of each business unit, how they link to each other and ultimately how they contribute to the success of the entire business.
Compliance unit is a very special unit in the financial industry. It is special because its functions are not business activities but giving advice to other business units on how to improve compliance with the rules and regulations. Just like any other operating unit, the effectiveness of the compliance unit in discharging its duties is affected by factors such as terms of reference, authority, reporting responsibilities, accountability and the quality of the staff. All these factors together will see that the unit is successful in its operations or it fails. If it is successful then it is relevant to the entire firm because it will provide the much needed assistance. If it fails, the entire firm will likely fail because the compliance risks will ultimately catch up with it while unaware. It is therefore important to look critically at the factors that ensure that the established compliance unit is effective.
First and foremost, the terms of reference for the compliance unit predict the effectiveness of the unit. The terms of reference spell out the specific task that the unit is mandated to carry out. The task should be stated clearly with no ambiguity. For instance, in the case of the compliance unit, the task is to advise the business on how to comply with the set rules, regulations, laws and standards. In addition, the compliance department monitors the business activities to find out whether they are within the regulations set out. The department also monitors the conduct of employees to identify actual violations or potential violations of rules, procedures, policies, regulations and standards that are guidelines in the industry. In a nutshell, the duty of the compliance department is to create programs that support the firm’s compliance. It is the duty of the senior management and the business line supervisors that ensure ultimately that there is firm compliance with laws and the regulations. Furthermore, in the terms of references, the objectives of the compliance unit must be stated clearly. This way, the department will have the backdrop for measuring its performance just like any other business unit. The objectives of the department may be with regard to how many trainings that will be done at a given time, how often surveillance will be conducted, how often policies will be reviewed among others. Lastly, the purpose of existence of the department must be clearly understood if the department has to be effective in discharging its duties. For instance, the department should be made aware that its main purpose is to assist the management in identifying compliance risks, assessing them and advising on what should be done to avert their repercussions as well as their recurrence. There are set guidelines that dictate the operations of the compliance unit. They stipulate the boundaries of the operations of the department and the limits of its mandate. If these guidelines and the instructions are adhered to, the effectiveness of the compliance unit will be realized in the firm. There will be no conflicts of interest between the compliance unit and the management responsibilities.
The other important factor that influences the effectiveness of the compliance department is the authority. The authority of the compliance department should be clearly stated out. To ensure monitoring of the business activities and the conduct of the employees, the compliance staff should be given unlimited power to access all the information in all the business units in the firm. The compliance staff should be answerable to the board and the senior management alone. For instance, suppose the business unit in a bank in charge of loan processing is about to commit a crime with respect to the regulations that govern the operations. A client comes to the office of the business line manager in this business unit. It happens that the client is a friend of the manager. According to the set regulations governing advancing loans, the client does not meet the criteria. The manager maneuvers and bends the rules in favor of his friend to get the loan. This is an issue that touches on compliance. Without enough authority on the part of the compliance staff to investigate the conduct of the manager in this business unit, then it would be impossible to unearth such a misconduct. Perhaps it could end up undetected. To this extent, the compliance department would be deemed to have failed, but only because it had no authority over such circumstances.
How the compliance staff report their findings is also very important if the department is to be effective. In order of hierarchy, the board of directors is at the top. The senior management is the second. The board gives instructions to the senior management staff. The senior management gives instructions to the business line managers who in turn command business unit supervisors. The supervisors give orders to the employees. The compliance department does not play any direct role in the business, it is therefore termed as a non-business department in the firm. The board and the senior management ultimately enforce compliance with the rules and the regulations starting with the business line managers and the business unit supervisors. Then the supervisors ensure that the employees toe the line in matters that regard laws, rules, regulations, procedures and the standards of the firm. The compliance department is involved identification of the possible violations of the compliance. If such violations are identified, they should be communicated to the right person. The head of the compliance department reports directly to the board and senior managers for an appropriate action to be taken. This is because, as we have already mentioned above, it is the responsibility of the board and the senior managers to ensure full compliance in the entire firm. The fact that the compliance department can report directly to the board makes it possible to avert a possible crisis that could result from misconduct of employees.
Another factor that influences the effectiveness of the compliance unit in a firm is the quality of the staff members. The staff should be well educated in matters that regard the state laws that affect the firm. In addition, they should have a good understanding of the rules, regulations, procedures and standards of that firm. This knowledge will help them in making proper decisions when carrying out their duties. This is because it is impossible to tell when a violation has happened or is about to happen if one does not know what was supposed to done in the first place. The issue of quality of staff arises also in business units that are involved selling process. It is important for the compliance officers to know the line of products that are being sold and the suppliers who supply them. This is because some business entities enter into agreements with certain suppliers.For instance, in a certain business entity in Singapore that sells electronics from Samsung Company, the following violation of the compliance was committed and went unidentified. In this particular instance, the manager in charge of sales decided that he could order some electronic devices from Sony Company without informing the rest of the management team.. The reason why this manager decided to do such a thing oblivious of its consequences to the entire business was because he thought that Sony products sold more than Samsung products of the same line. One junior compliance officer was inspecting the products in the business stock. He noticed both Sony and Samsung products but did not question. This is because he did not know that there was a deal between the business entity and Samsung Company and that presence of Sony products meant that the manager was not compliant.
The regulation of the financial services sector requires a delicate balance being maintained between over-regulation on the one hand and under-regulation on the other. This is because financial services are delicate matters that are sensitive to any external changes and the impact of any external force is significant in the survival of the financial industry. Regulation of financial industry emanates from two levels. These levels include external and internal levels. External regulations are the most significant because they essentially target satisfaction of the consumer of the services and not necessarily the well-being of the financial industry. They are meant to make the financial institutions disciplined in terms of their services to their consumers. They are made by external bodies that oversee how the financial institutions operate with respect to the quality of services that the end user receives. For instance, the consumer requires to know the truth about the services that they are about to purchase. Therefore, they require information that is not misleading. If left to the financial institutions, they would not care the truthfulness of the information they give but the quantity of the sales. They would give misleading information that is only aimed at convincing the consumers to like their services. Internal regulation is aimed at maintaining the survival of the business in the world of competition. It ensures that the business shapes its niche and maintains its reputation. This way, it ensures that the business maintains the competitive atmosphere. Too much external regulation would have catastrophic effects in terms of survival of financial institutions. Too little regulation would lead to suffering of the consumers. A balance is therefore paramount to be maintained.
In Singapore, the Monetary Authority of Singapore (MAS), besides being the Central Bank, itis the institution that is charged with the responsibility of regulating all financial institutions including the banking and insurance sector. The MAS uses many instruments to regulate financial institutions. First and foremost, it uses Acts of Parliament to regulate financial institutions. These Acts constitute the laws that if broken or violated culminate to a severe penalty. Among the most important Acts are the Banking Act 1999, the Financial Advisers Act 2005 and the Insurance Act 2002. Another instrument that the MAS uses is directives. They directives spell out the legal requirements of the financial institution. Notices are also issued to certain class of financial institutions to impose certain requirements that are legally binding. Moreover, the MAS applies guidelines as an instrument to regulate financial institutions. Guidelines dictate the best practice standards that govern the conduct of the specified institutions. Codes are also applicable because they set out the rules governing the conduct of financial institutions with regard to the performance of certain activities. Examples of codes are those that govern how Takeovers and Mergers can be done. Practice Notes are used to guide the financial institutions on administrative procedures that pertain to the matters of licensing, reporting and compliance. Circulars are also very useful. They are documents sent to specified financial institutions to pass particular information such as changes that can be anticipated in the near future. Finally, the policy statements of the MAS give more information on the expectations of the MAS on the financial institutions.The MAS has immense powers to regulate all the financial institutions. Among its powers is the power to approve financial institutions and to control their operations.
The MAS strives so hard to maintain the balance in the regulation matters to avoid over-regulation and under-regulation. Over-regulation hinders the creativity and innovations of the companies. The insurance personnels would feel restricted in the way they respond to the external demands if the MAS monitors the company’s every move. On the other hand, if the insurance companies were to be left unregulated or under-regulated, the consumers would suffer greatly. This is because the insurance companies would use any means, whether ethical or unethical to gain an advantage over the competitors at the expense of the consumers. According to the Insurance Act 2002, Cap 142 has several provisions that dictate how insurance companies should be created and operated. For instance, it is only a person who has been licensed by the Authority under the Act who can carry out an insurance business in Singapore. This provision ensures that all the insurers are recognized by the state of Singapore and that there is no chance that a consumer may be conned by a fraudster. According to the Act, anyone who claims to carry out insurance business while unregistered is liable to a criminal offense. The Act also gives guidelines that pertain to how Take-overs should be done in the insurance companies. Without proper Take-over procedures, the consumers may suffer. The authority also dictates how shareholding to the insurance companies is done. This way, the rights of the shareholders are maintained and their confidence in the insurance companies to which they have shares is boosted.
The MAS has also issued circulars to the insurance companies to convey important messages . An example of the circular issued to the insurance companies Chief Executives is that dated 18 November, 2013. It required all the insurers to submit their assets and liability exposures. As already stated, guidelines are another important tool through which the MAS regulates the insurance companies. An example of a guideline that is dated 1st April, 2013. It was a guideline on the use of internal models for liability and capital requirements for life insurance products containing investment guarantees with non-linear payouts. Also, on 17th May 2013, a guideline outlining the criteria for the registration of an insurance broker was issued. It requires that the applicant be a company among many other requirements. On 6th September 2013, a guideline was issued to all the financial institutions guiding them on how to safeguard the integrity of Singapore’s financial system. It categorically stated that MAS would not tolerate the use of the financial system to conduct illegitimate and criminal activities. Therefore, all financial institutions were required to uphold the integrity of the financial systems. Notices have also been issued on several occasions by the MAS the insurance companies. An example of the notice is that issued on 29th November 2013 with regard to the unsecured credit facilities to individuals. This notice provided requirements that an insurer has to comply to when granting unsecured credit facility to an individual.
All the above are illustrations where the MAS has regulatory authority over the insurance companies. We have seen that it regulates all the steps of the operations of insurance companies from establishment to matters of takeover and mergers. It is imperative that such a state body like the MAS should have control over financial institutions. The MAS is known to enhance open operations in the financial institutions in order to promote competitiveness and spirit of innovations. This way, the MAS fulfills our argument that financial institutions should not be over-regulated. On the other hand, the MAS ensures that transparency,accountability and integrity principles are upheld in the operations of these financial institutions. It ensures transparency because the consumers need to know what kind of services they are about to purchase from a financial institution. Again, these financial institutions are to be held accountable for their operations when they lead to positive or negative results. As already mentioned, all the financial institutions are supposed to uphold the principle of integrity by not carrying out their operations to advance criminal and illegitimate activities. In this manner, the MAS is fulfilling our argument that financial institutions should not be under-regulated.
The need to escalate “Non-routine and Complex Matters” to a designated officer would not arise if all the officers are properly trained in dealing with such issues. This statement simply means that escalation of non-routine and complex matters is done because the officer who detects such an issue is not trained adequately to handle it. This also happens when a compliance officer identifies an issue, but then his or her authority is limited to escalating it to a supervisor or manager.
First and foremost, it is important to know which are these non-routine and complex issues that can arise in matters of compliance. According to the Financial Industry Competency Standards for Compliance, the following issues constitute non-routine and complex matters. They include issues such as intentional breaches of regulations, guidelines and policies; insider dealing; misconduct; misrepresentation; sign-off new product; sign-off advertising and promotional materials by the insurance institution among others. These are issues that are not covered by the existing policies on how they should be handled in case they happen.
A compliance officer has no power to reprimand an employee. He or she has no power to fire an employee on the grounds of misconduct. If this is the case then, issues such as intentional breaches of regulations, guidelines and policies need someone who can resolve them so fast to avert any compliance crisis. The power to deal with the complex and non-routine matters is in the hands of the supervisors and the executives of any firm. The compliance officer is left with an option to escalate such matters whenever they arise. This process of escalation takes time because the compliance officer has to document all the steps involved as well as the action taken by the appropriate person to whom the matter has been reported starting with the head of compliance department.
There are certain things that can be done to empower compliance officers to be able to deal with these non-routine and complex matters. First, these compliance officers need proper training to make them aware of possibilities of occurrence of such matters. Moreover,they need to be equipped with adequate skills to cope with such issues when they occur in order for them totake appropriate and rational steps. Although they may not be given powers to demote or fire a disobedient employee, they can be given a means through which they can address such matters to the board as a matter of urgency. In addition,when these compliance officers are trained adequately and are competent, supervisors may delegate some functions to them. Such functions may include the power to demote and to fire misbehaving employees. However, it is the responsibility of these supervisors to conduct a follow-up and review to ensure that the delegated functions are performed properly. Most important is the fact that the supervisor remains responsible for such delegated activities.
In short, if the compliance officers are adequately trained so that they can adequately handle the non-routine and complex matters, the wastage of time in averting possible compliance crisis would not occur. This wastage of time occurs especially if the supervisors don’t take the necessary action to handle such issues. This requires that the matter should be escalated to the board of directors. Before the board sits to discuss the issue, it may be too late to avert the crisis and enough damage would already have occurred. Moreover, the process of escalation is very lengthy. It starts with the Head of Compliance. A complete brief need to be prepared explaining the issue and giving any relevant background information and the impact or the implications for the involved business unit, the personnel and the entire organization. Where possible, possible recommendations and alternative courses of action should be provided and their possible implications. All these steps cause unnecessary delays at could be detrimental to the organization in the long run. Therefore, training compliance officers as well as empowering them can help save the reputation of the firm in time. In addition, this could also help save an imminent collapse of the firm like in cases when employees decide to disregard the set regulations in the operations.
Scanlan, A. and Purdon, C. 2006. Compliance Program Management for Financial Services Institutions in Today’s Environment. Bus. Law., 62 p. 735.
MAS Annual Report 2011/20 (www.msa.gov.sg)