Costs of compliance in Asia
May 2014 | LEGAL & REGULATORY | BANKING & FINANCE
Financier Worldwide Magazine
Financial institutions in the seas of Asia find themselves afloat in a rising tide of regulation. Pressures are mounting on three fronts: invigorated enforcement; regulatory reform; and regime overreach. Navigating through to safe harbour has never been an easy nor inexpensive task for institutions, but past events, events in motion and events to be are not only increasing costs to institutions but are worryingly allocating greater liability to the institutions’ appointed captains and navigators of these uncharted and turbulent waters. A tipping point is fast approaching: are the financial regulators and their supervisees, financial institutions, asking too much, too soon of too few?
Captain, my captain
Institution compliance is construed as the sole responsibility of the compliance function. Certainly, the compliance function charts waters to safe harbours and keep the institution afloat day-to-day, but this view does a disservice to the persons who pay in earnest for any errs in compliance: the institution’s appointed key men. In many regimes it is a requirement that several persons of the front office are nominated and approved to be key men. Key men are ultimately responsible for the institution’s activities and compliance with applicable statutory laws and regulatory requirements. Whilst they may delegate performance of such duties, costs incurred from noncompliance exposes them to personal liability.
The use of key men is a popular approach and is widely regarded as an effective means to ensure front office compliance as front office activities and complexities are generally separated by functional and physical Chinese walls. Further, as key men are generally senior management of the institution, they possess sufficient authority to ensure front and back office remain compliant. Yet, with the pressure on three fronts building in a concurrent and uncoordinated manner, this approach appears untenable.
Some numbers: 271 Securities and Futures Commission (SFC) inspections across 38,629 licensees for the year ending March 2013, up from 160 across 37,310 licensees for the year ending March 2008; 27 SFC licensees disciplined with fines amounting to HK$83.5m for the year ending March 2013; five SFC licensees banned for life for the year ending March 2013; and 266 Monetary Authority Singapore (MAS) regulatory actions for the year ending March 2013, up from 170 for the year ending March 2007.
A clear trend emerges illustrating major regime supervision branches in Asia are redoubling their efforts in enforcement both in terms of absolute and relative numbers. Warranted or not, to address and minimise the possibility of disciplinary action taken against their institution, and to ensure key men mitigate the possibility of temporary or permanent bans or reputation damage, the compliance function and key men must be intimately knowledgeable of the institution’s existing systems, policies and procedures to ensure they are meeting with regulatory requirements.
This is a time consuming process as new staff of the institution and, in particular, key men and compliance personnel must be brought up to speed with the existing framework. To minimise costs, compliance functions and key men should enact initial and annual training to ensure staff are compliant. However as more and more regulatory reform begets more and more systems, policies and procedures, there will come a point where training of certain systems, policies and procedures will be favoured over others creating gaps in knowledge. In this case, training on systems, policies and procedures must be conducted on a priority basis according to the key men and compliance function’s decisions.
Parallel to enforcement actions, institutions, key men and compliance functions face a constant evolution of regulations at home and abroad. Some are welcomed, ensuring a fair, orderly and efficient market, such as changes to over-the-counter derivatives transactions. Others are playing catch-up to previously self-regulated standards, such as Electronic Trading. And a few fragment the market whilst providing little protection and decreasing service offerings to the general public, such as the Foreign Account Tax Compliance Act (FATCA) or the Alternate Investment Fund Management Directive (AIFMD). Most alarming of all though is the rate of implementation. The few but substantive reforms mentioned are all due for implementation over the coming year.
Whilst unfair to say all reforms impact financial institutions uniformly, uniform costs still arise. Due diligence must be conducted to ensure which, if any, branch of the institution falls under the regime change. Cursory inspections cannot suffice as today’s reforms have international implications. FATCA has been a clear example of this. Many financial institutions in Asia remain unaware of its reach and a fair few may be in for a rude awakening when withholding commences.
Therefore, to stay on top of regulatory changes both enacted and proposed, compliance functions and key men must establish a review program to periodically review news from regulators. Industry forums and associations provide a good medium for staying up to date with trends. Institutions can make regulators account for and address the opinions of the institution by submitting comments during public consultations. Whilst resource intensive, it provides an excellent exercise in ensuring the compliance function understands the needs of the front office, can communicate those needs to regulators and is continuously exposed and updated as to the changes for each reform lowering costs in the long run.
Of the three pressures, overreach, and the fear of overreach, has been growing. Cross jurisdictional regimes such as FATCA and AIFMD would appear to signal a coming storm. But that view is erroneous. What it illustrates is something sought by all financial institutions – regulatory cooperation. As regulators cooperate on enforcement actions around the world, foundations will be laid for greater cooperation on regime reform ensuring equivalent international standards. Subsequently, compliance costs will drop as overlapping, conflicting and obscure or individual regulations are replaced in favour of a unified approach, taking advantages and putting aside the disadvantages individual regulators have created in their efforts toward a fair and efficient market. For now, key men and compliance functions should map out their institution’s branches and the statutory laws and regulatory requirements applicable to each branch. In time, these will change.
As the costs of compliance in Asia rise as a result of increasing enforcement, reform and overreach, key men and compliance functions take on ever greater responsibility to meet with myriad reforms. If this level of activity becomes the status quo in regulation, the market and general public will suffer as fewer take up the mantle of responsibility, thereby reducing liquidity and services. In a bid to reduce costs both to the institution and on a personal level, key men and the compliance function must ensure that training is given to staff initially and periodically, that systems, policies and procedures meet with regulatory standards, that regulatory reform news is reviewed, and that companies strive to voice opinions to local regulators on domestic compliance issues. But if the recent overreach is interpreted as the first steps toward greater cooperation between regulators, compliance costs will drop dramatically as systems, policies and procedures are unified. Is a golden age of compliance about to begin? We believe that that ship is set to sail.
Josephine Chung is a director and David Foster is an associate at CompliancePlus Consulting. Ms Chung can be contacted on +852 3487 6903 or by email: email@example.com. Mr Foster can be contacted on +852 3487 9298 or by email: firstname.lastname@example.org.
© Financier Worldwide
Josephine Chung and David Foster