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The Compliance Revolution

Posted by: Laurence Simons 15/12/14

The old image of compliance was unlikely to conjure up visions of agitated disorder or energised development but considerable change and upheaval has hit this field more recently.

The need to meet compliance requirements has always been important for businesses but in the aftermath of the financial crisis it has risen dramatically up the list of priorities. Longer term trends of globalisation and increasing legislation have also affected the way in which companies go about managing their compliance obligations. 

The combination of these factors has led to significant changes in the compliance landscape in recent years. Needless to say, all the activity in the compliance field has led to massive growth in the demand for compliance and risk management experts.

The Evolving Role of Compliance Professionals

Compliance in its traditional sense involved ensuring that a company respected and obeyed the values and principles laid down by management. In modern parlance it has come to mean something far more substantial; compliance has become heavily focused on obeying international and domestic legislation rather than simply implementing the corporate ethos.

In the wake of the 2009 global financial crisis, the amount of financial regulation has grown explosively both in size and complexity and there is no end in sight for new measures being introduced in major financial jurisdictions such as the UK and the US. Furthermore, the penalties and sanctions for breaching these regulations have become increasingly harsh. In addition to fines and criminal consequences, the reputational damage associated with breaching financial or corruption legislation is significant and could potentially lead to corporate extinction.

As a result, many companies both inside and outside the financial sector have focused considerable additional resources on in-house departments specialising in compliance. This has led to increasingly important role for the Chief Compliance Officer (CCO). The CCO is responsible for ensuring that the company conducts its business ethically, legally and in line with customary business practices. 

These three functions need not be mutually exclusive or isolated from the rest of the business, as they may have been perceived to be in the past. Much of the recent development in this area has been focused on creating a culture of compliance that can satisfy all three goals while at the same time maintaining a harmonious and commercially efficient working environment.

Compliance’s Relationship with Risk Management

In the past, compliance and risk management were seen as distinct departments pursuing their own individual agendas. In today’s world where corporate scandals are erupting with almost monotonous regularity - the forex fines just being the latest in a long line - a trend towards greater interaction is inevitable. This makes sense as clearly there is substantial overlap between the two disciplines.

Take the UK Bribery Act 2010 for example. Compliance with the provisions of this piece of legislation will be at the forefront of any CCO’s agenda. Equally the risk associated with being caught out by the Act will affect how risk management officers go about their business. Therefore, the necessary due diligence may be conducted by the two groups in tandem.

Compliance and Risk Professionals are Rising Stars

The demand for competent compliance and risk management officers has never been greater and the perception of these roles has acquired increased gravitas and responsibility. Recent Deloitte member firm surveys from the UK, the Netherlands and the US have shown a growing realisation on the part of senior management that compliance is a central part of corporate success. Its US study has shown that over 50% of companies have a designated CCO and this is likely to grow in the future.

However there is still some way to go. The same U.S. study revealed that only 37% of these CCOs have a seat on the executive management committee. An ineffective or ignored CCO may be equally as bad as having none at all, so it is essential that companies provide them with the appropriate setting in which to air their views and CCOs use their influence effectively. Failure to do so may lead to drastic consequences in the future.