What does the term ‘compliance’ describe?
The term compliance describes the ability to act according to an order, set of rules or request.
Describe the two levels, in the context of financial services businesses, at which compliance operates.
Level 1 - compliance with the external rules that are imposed upon an organisation as a whole
Level 2 - compliance with internal systems of control that are imposed to achieve compliance with the externally imposed rules.
What duty, objective and responsibility does a Compliance Officer fulfill?
DUTY - The Compliance Officer has a duty to his employer to work with management and staff to identify and manage regulatory risk.
OBJECTIVE - the overriding objectives of a compliance officer should be to ensure that an organization has systems of internal control that adequately measure and manage the risks that it faces.
RESPONSIBILITY - The general responsibility of the Compliance Officer is to provide an in-house compliance service that effectively supports business areas in their duty to comply with relevant laws and regulations and internal procedures.
What are the five key functions of a Compliance Department?
- Identification: To identify the risks that an organisation faces and advise on them
- Prevention: To design and implement controls to protect an organisation from those risks
- Monitoring and detection: To monitor and report on the effectiveness of those controls in the management of an organisations exposure to risks
- Resolution: To resolve compliance difficulties as they occur
- Advisory: To advise the business on rules and controls
What is Corporate Governance?
Corporate governance is a highly inclusive concept that covers a number of different aspects about the way in which an organisation is managed, directed and governed.
It can be described as a set of relationships between a company’s management, board, shareholders, and other stakeholders, which provides the structure through which the objectives of the company are set. Furthermore it provides the means of attaining and monitoring performance against those objectives.
What does the term ‘regulation’ mean?
The term ‘regulation’ generally refers to a set of binding rules issued by a private or public body with the necessary authority to supervise compliance with them and apply sanctions in response to violation of them.
What are five generally accepted key core objectives of financial services regulation?
Although there is no unified theory of financial services the key objectives of regulation is as follows:
- The protection of investors/consumers
- Ensuring that the markets are fair, efficient and transparent
- The reduction of systemic risk
- The reduction of financial crime
- The maintenance of consumer confidence in the financial system
What are three key attributes of effective regulation?
Effective regulation is regulation that:
- Contributes to the fulfillment of one or more of the core objectives of financial services regulation.
- Maintains an open market that can be participated in by the widest range of appropriate participants with no unnecessary barriers to entry and exit; and
- Provides an equal regulatory burden on all participants that meet minimum criteria.
What is primary legislation?
Primary legislation refers to the Law, Act or Ordinance passed by the legislative of a particular jurisdiction.
What is secondary legislation?
The legislature in many jurisdictions has the power to delegate or subordinate law making powers to other agencies that may then make delegated or subordinate legislation often referred to as “secondary” legislation.
In the context of financial services, secondary legislation is generally legislation that has been drafted by a regulatory body empowered to do so pursuant to the primary law by which it is established.
What are regulatory codes or rules?
Codes generally set out the broad principles by which a regulated business is expected to conduct its business.
Rules are generally very detailed and relate to every regulated activity and function.
What are regulatory guidance notes?
Guidance can either be in the form of a statement of best practice or a statement of minimum best practice.
Occasionally a regulatory authority will feel compelled to issue detailed guidance to regulated businesses on how it expects them to actually discharge their legal and regulatory obligations.
Anti money laundering and terrorist financing is one area where most regulators around the World have issued guidance.
What seven functions does a regulator usually fulfill?
In broad terms regulators fulfill the following seven functions:
- They lay down rules or principles that determine who can conduct financial services business
- They authorise financial services businesses
- They lay down the rules by which regulated financial services businesses must conduct their business (both prudential and conduct of business rules)
- They supervise compliance with the rules either through desk based supervision or onsite inspections or a mixture of the two
- They conduct investigations into suspected breaches of the rules sometimes in conjunction with other law enforcement bodies
- They enforce the rules
- They co-operate and exchange information with other regulators
What four steps does a regulator utilize in it’s supervisory process?
Many regulators adopt a risk-based approach to supervision and follow a process of supervision that can be divided into the following four steps:
Step 1. Defining the objectives
Step 2. Obtaining information from regulated businesses
Step 3. Assessing the risk that regulated businesses face and pose
Step 4. Taking action in response to the risk assessment
What two key methods does the regulator utilize in supervising regulated businesses?
There are essentially two methods by which compliance with regulatory rules is monitored – Onsite supervision and Offsite desk based supervision.
- On site supervision: entails visits by the staff of a regulator to the offices of a regulated entity, with the objective of satisfying etc
- Offsite desk based supervision: requires regulated financial services businesses to provide relevant information by means of ‘supervisory returns’ normally prescribed within legislation and or license conditions.
What are the two commonly accepted objectives of prudential regulation?
- To maintain a low probability of insolvency and any consequential loss to an organisation’s ultimate customers; and
- To ensure the resolution of the position of any organisation whose viability is impaired, while protecting the interests of their customers to the maximum possible extent.
What are conduct of business rules?
Conduct of business rules:
- govern the manner in which a business conducts itself in its relationships with consumers.
- impose minimum standards of acceptable conduct upon regulated businesses.
What nine aspects of the activity of a financial services business would be subject to the conduct of business rules?
- Advertising
- Customer communications
- Customer agreements
- Conflicts of interest
- Customer understanding and suitability
- Customer dealings
- Customer due diligence
- Client assets and money
- Breaches, errors and/or near misses.
What is regulatory enforcement?
Enforcement is:
- a necessary product of the process of authorisation and supervision, in the sense that a regulator must enforce compliance with rules.
- as much about investigating, gathering and sharing information as it is about imposing penalties.
What five processes does regulatory enforcement normally entail?
Enforcement generally entails the following:
- Inspection
- Investigation powers
- Surveillance powers
- The imposition of corrective or remedial action
- The imposition of penalties
What are the seven common enforcement powers of a regulator?
- Power to inspect and request information
- Power to seek orders to compel a business to comply
- Power to remove directors and auditors;
- Power to appoint an administrator
- Power to impose administrative sanctions and / or to seek orders from courts or tribunals;
- Power to initiate or to refer matters for criminal prosecution;
- Power to suspend operations or trading
What six basic factors should you consider when looking at risks in your organisation?
- The nature of the operation
- The diversity of its operations
- The complexity of its business
- The scale of its business
- The volume of transactions
- The size of the transactions
What are four possible compliance strategies?
- Policies, standards and awareness
- Reporting hotline
- Audits and assessments
- Tone at the top (leadership backing compliance)
What is the Sarbanes-Oxley Act (SOX)
The Sarbanes-Oxley Act of 2002 is a federal law that established sweeping auditing and financial regulations for public companies.
Lawmakers created the legislation to help protect shareholders, employees and the public from accounting errors and fraudulent financial practices.
Additionally, the legislation, commonly referred to as SOX, established penalties for noncompliance with its provisions.
