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A Compliance Officer will go to Jail in 2016

Regulation, regulation, regulation.

In the property market there is a saying: “location is everything.”  In capital markets in 2016 the saying will be: “regulation is everything.”

The backlash from risky derivatives, the credit crisis, crooked high frequency trading (HFT), murky dark pools, insider trading and money laundering over the past few years has sent global regulators into hyper-drive. Everywhere you look there are more rules to obey. From the Volcker Rule to MiFID II, MAD II, MAR, BCBS 239 and CFTC rules, capital markets participants are being buried in regulatory paperwork.

MAR (Market Abuse Regulation), MAD II  (Market Abuse Directive) and AML (anti-money laundering) rules are the ones giving compliance officials nightmares; holding them responsible if anyone in their company breaks the law, which means criminal sanctions. It could be a rogue trader or a wild algorithm, but whatever it is that breaches one of the new regulations will be considered the compliance officer’s fault. So, in 2016, a compliance officer could pay the ultimate penalty and go to jail for not stopping an illegal act executed by one of his colleagues.

Regulatory, compliance and anti-money laundering staff are all rightfully concerned about this, according to a study from the British Bankers’ Association and LexisNexis Risk Solutions, and 54 percent of those surveyed said they would leave the industry if an opportunity arose. In an already tight recruitment environment, this could be disastrous for banks and other financial institutions trying to stay on top of a mountain of regulations.

The past few years have been difficult enough on financial institutions trying to clear up the mess after the credit crisis. Plus, trading activities have been hampered after regulations such as the Volcker Rule mandated keeping speculative trading ring-fenced away from client trading. HFT, algorithmic trading and dark pools are also more highly scrutinized, meaning extra layers of monitoring and risk controls.

Efforts to curtail insider trading and money laundering have skyrocketed, requiring super-powered monitoring capabilities with ultra-fast response times. Compliance departments are now expected to track down and stop any illegal activities such as these before they a) leave the bank and b) impact markets.

Although much of this demand is being driven by regulations such as BCBS239 and MiFID II, there are also some very valid business reasons why banks are exploring how to achieve greater real-time visibility into their exposures. After all, the sooner you are aware of a risk, the more efficiently you can manage it. And being able to manage risk effectively is one of the cornerstones of successful banking practice.

The new, regulation-heavy landscape means that financial institutions have to get more creative to address new competition while still remaining in compliance. The task is daunting, and losing compliance personnel will not make it any easier. If one goes to jail, all bets are off. 



Comments: (6)

Tapan Agarwal
Tapan Agarwal - Intellect Design Arena Ltd - London 08 February, 2016, 14:26Be the first to give this comment the thumbs up 0 likes

Well said Nigel...

How many rules must a compliance man understand...

before he sleeps in the sand...

And how many failures does it take to be known..

That more and more rules dont make banks less failure prone...

The answer my friend is blowing .....

A Finextra member
A Finextra member 08 February, 2016, 17:36Be the first to give this comment the thumbs up 0 likes

Compliance Officer should be responsible for his work. Oversight can happen. Government data are not perfect. 

For example, you cannot confirm a person's true identity & address on the basis of his  Computerized identity cards. Aliens have managed to got those cards and doing business freely. 

A Finextra member
A Finextra member 10 February, 2016, 14:41Be the first to give this comment the thumbs up 0 likes

Very insightful, relevant, and on-point.

Our global regulators need to do something about losing qualified people from the industry. I have known several compliance people who no longer work for broker dealers because of the personal risk that they take. 

It isn't a matter of compensation either. Most compliance officers from the junior most to the senior compliance officer need to have some form of legal counsel provided for them as part of their base packages so that they do not face personal liability alone.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 10 February, 2016, 18:28Be the first to give this comment the thumbs up 0 likes


Totally agree that compliance officer shouldn't be made to face personal liability alone. Brilliant suggestion about the need for legal counsel.

In the early 2000s, I set up my company's subsidiary in Germany. Although I was not a compliance officer, I carried all the compliance risks in my capacity as the MD of the German subsidiary. My company approved my request to be provided with two insurance policies that protected me from personal liability in the event the company ran afoul of local laws. Translating from German, they were called Third Party Liability Insurance and Legal Defence Insurance. Not sure if such insurance products are available in Anglo-Saxon jurisdictions (e.g. USA / UK) but D&O insurance should come close.

Nigel Farmer
Nigel Farmer - Software AG - London 11 February, 2016, 10:57Be the first to give this comment the thumbs up 0 likes

Compliance is becoming increasingly difficult, with a myriad of new and complex regulations such as Dodd-Frank and MiFID II. This is putting an increased burden on compliance teams who after all are cost centres and dont have the largest of budgets. The skillls required are expanding - understanding the regulation and how to apply it, detailed business knowledge across a range of asset classes eg for surveillance, and technical skills because of the increasing use of technology. And many banks are trying to relocate compiance teams either off-shore or away from the financial centres, in order to benefit from cheaper labour costs. No wonder people want to leave.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 11 February, 2016, 11:18Be the first to give this comment the thumbs up 0 likes

When I read this and this article about Zenefits yesterday, I realized how Uber, AirBnB and many other wannabe disruptors leverage regulatory arbitrage to their advantage. It struck me that technology is only part of the disruption formula, with the real secret sauce being a cavalier attitude towards compliance. Sometimes I wonder if banks are doing this totally the wrong way and whether they should be emulating fintechs in more than just technology. Seriously.

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