Financial compliance is about making sure a company follows the rules. It’s meant to maintain investor confidence and make sure markets are efficient, transparent and fair. Over time, compliance systems have become more sophisticated and complex as regulators work to monitor everything from trading activity and accounting standards to tax evasion and money laundering. New rules often pop up after a bubble or crash – with a major push towards increased regulation after the 2008 financial crisis, which exposed several weak spots in the U.S. banking system.
How does it work?
Financial services companies tend to have a person in charge of compliance who may be their general counsel (an in-house lawyer) or a compliance officer. Their role is to make sure the company follows external rules as well as internal controls. To adhere to compliance requirements, businesses have to show that they have a compliance system in place and that they meet business conduct requirements, as well as financial reporting, working capital, insurance and bonding requirements. They also have to notify regulators any time there are changes to the information provided.
What type of risk do they manage?
It’s the job of compliance officers to ensure a company and its representatives deal with clients honestly and in good faith, avoid conflicts of interest and maintain books and records that accurately reflect their business activities and client transactions.
They need to stay on top of their industries’ best practices, keep an eye on potentially troublesome situations and figure out how to mitigate those risks. New “know your client” rules, for instance, state dealers and advisors must ensure that any security purchase or sale recommended for a client is suitable.
But financial firms also deal with ongoing requirements like making sure all marketing materials, websites and performance data have clear and adequate disclosure, that dealers and advisors provide clients specific information about the client-advisor relationship.
Who makes the rules?
Compliance tends to be set by a country’s or province’s securities regulator. These organizations set out the rules and monitor companies to ensure they are following the required guidelines. They conduct investigations and dole out penalties as needed – from trading bans to fees to jail time.
In the U.S., the U.S. Securities and Exchange Commission (SEC) is the main enforcer of market law, but it works closely with Congress, other federal departments and agencies, stock exchanges and private sector organizations. The SEC was created after the 1929 stock market crash to protect investors, provide clear and reliable information and restore confidence in capital markets.
Canada doesn’t have a national securities regulator, and whether one is needed has been the subject of much debate. Right now, each province has its own regulator, but they tend to work closely with other agencies. The Ontario Securities Commission (OSC), for instance, is part of the Canadian Securities Administrators (CSA), a forum for the 13 securities regulators of Canada’s provinces and territories. It also works with the Department of Finance Canada, the Office of the Superintendent of Financial Institutions Canada (OSFI) and the Bank of Canada.
Companies have to register with securities regulators and fill out routine questionnaires about their operations. They will often be given a risk ranking and monitored according to their assigned level of risk. In Ontario, the OSC conducts compliance reviews to ensure advisors, exempt market dealers, scholarship plan dealers and investment fund managers are complying with Ontario securities law. The Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) also undertake reviews of investment dealers and futures commission merchants and mutual fund dealers (respectively).
How has the job of compliance officers changed?
Compliance officers are moving toward a more active role in monitoring risk and watching for regulatory changes that may impact a business rather than simply offering advice when asked. It’s become a bigger and more time-consuming job, and one that requires a broader understanding of the inner workings of an organization, leading some in the industry to complain that the system has reached “peak compliance.” Several fintech options have popped up to help companies manage that workload, such as Alpha CCO an online platform that allows companies to standardize the data gathering process in a cost-efficient manner, as well as consulting firms who are available to help companies manage the increasing regulatory burden.