Compliance moves centre stage

Historically the compliance function was given little status and often wasn’t considered relevant to the central thrust of a business. Compliance was solely about interpreting rules and regulations and wasn’t given a voice when it came to important organisational events and issues. All that has changed, according to Harry Gill, Head of Compliance at Absa Capital.

Speaking at the 11^th Annual Conference of the Compliance Institute of South Africa, Gill told delegates that several factors, not least of which was the credit crisis, have come together to give the compliance function a seat at the decision table.

“While interpreting and applying regulatory rules remains a core function, compliance officers are now asked to proactively apply those rules effectively which means understanding their businesses inside out. This has lead to specialisation by compliance officers, particularly in the investment banking arena. If you don’t have a deep understanding of every aspect of a business, particularly in a sophisticated industry like financial services, you can’t apply the rules properly.”

Gill said that a new view of the compliance function as a vital component of business success had emerged internationally, and that compliance officers were moving into the role of trusted advisers to management. Initially some businesses resisted this trend, not wanting compliance to get too close to day-to-day business operations. But now it’s considered a rule of the game that compliance can know what the business is doing without being conflicted themselves and without making decisions that aren’t ultimately good for the wider organisation.

Julie Methven, CEO of the Compliance Institute SA, said the same trends were being demonstrated locally and that this was evidenced in the Institute’s Generally Accepted Compliance Practice framework which sets out principles, standards and guidelines for best compliance practice.

Compliance officers are also becoming thought leaders. The days of paying people to process are gone, Gill said, now they’re being paid to think. “It sounds obvious, but it’s been a major mindshift. Organisations increasingly want compliance officers to think big, to be engaged with management, to think about the spirit of the rules and regulations and to look at the big picture.”

Methven added that legislation is increasingly principles-based, which requires compliance officers to think about the end result of their company’s actions, instead of following a tick-box approach.

Several factors are driving this change, in addition to the credit crisis. Gill said there is a higher level of expectation from regulators in terms of the quality of controls they expect. And many regulators are starting to employ professionals with business knowledge such as ex-traders and ex-bankers, particularly overseas, allowing them to push harder at financial services institutions and requiring compliance officers to raise their game. In addition, regulators have, or are seeking, stronger teeth, and are imposing much stricter penalties.

Management is increasingly realising the importance of compliance and understanding both the negative consequences of poor compliance and the positive consequences of good compliance. “They’re starting to see that successful compliance is good for business as clients want to trade with organisations that know what they’re doing. They don’t want to put their money where it could potentially vanish overnight,” said Gill.

Reputational risk is another key factor that has had a strong impact on compliance moving centre stage. Organisations can survive a loss in one of their businesses; they can take clients going bankrupt. But they can’t survive significant, sustained damage to their reputation. “Most CEOs around the world now consider reputational risk a major concern,” said Gill. Because of the overlap between regulatory risk and reputation risk, compliance has stepped up and is now increasingly being consulted on reputation issues. This has also helped to raise the profile of the compliance profession. “If you have a seat at the table on reputational risk, you have a seat on every major thing that happens to an organisation.”

Finally, Gill spoke about the professionalism of the compliance industry. He said that as the demands on the compliance function increased, so the need for a higher level of compliance skills ensued. In South Africa, the Compliance Institute was in the process of developing a new professionalism framework which would raise the bar with regard to standards of compliance practice and ensure that compliance officers are suitably educated, experienced and trained.