For the record

While meeting the gamet of stringent regulations might be an enormous task for financial institutions, most now realize that complying not only benefits the industry, but can have a positive impact overall for a company. Anthony Smith, Compliance Director for SECOR Financial Services Solutions, explains to FST why compliance is so vital for organisations and how treating customers fairly should be an issue that all take seriously, sooner rather than later.

FST. What kind of impact on IT does meeting compliance have for an organization?
AS. People don’t always like the word ‘compliance’, but effectively it is unavailable. At the heart of good compliance is good record keeping, and it’s amazing how many big firms still operate with paper-based systems. If it goes up in flames then they’ve lost everything. There have been disasters, which have meant whole loads of records have disappeared overnight. Then there is the other extreme with people purposely shredding records such as with Enron. Good IT systems, which are properly backed up are therefore effective. They are also effective in anti-fraud, anti-money laundering that can damage the reputation of the market, and ultimately damage the customer who will have to pay for it.

IT can make compliance happen in a much more efficient and transparent way. So if, for example, the managing director phones up and asks how many complaints you’ve had about a particular contract, over a certain period of time etc then you should be able to log on and it produces answers straight away rather than wasting time searching through manual systems– and never being sure you are accurate.

Compliance can actually drive efficiency and good IT can drive regulatory compliance. It makes sure you are consistent, operating efficiently and also you can see what resources you need.

FST. How has the way industry approaches compliance changed over the years?
AS. There has been a move to calling it risk management. It is worth remembering that just because you have complied with the rules, it doesn’t mean you have complied with the principle. The most important thing is to understand the spirit of the rules and how ultimately they are meant to protect the end customer. For example, it is no good checking your marketing material has been signed off by different individuals when collectively the end customer cannot understand it and is mis-led.

Following the various scandals, complying with Sarbanes Oxley has been a massive undertaking. Any firm that has interaction with the US has to comply. If the London Stock Exchange is taken over by the New York exchange then every firm in the UK will have to comply with Sarbanes Oxley also.

Complying properly guarantees that what you have on your balance sheet isn’t a whole lot of creative accounting and it is clear and transparent. However, a determined fraudster will always achieve, in some shape or form, their goal. Some say that Sarbanes Oxley is not enough and doesn’t address the fundamentals.

Some US firms are more tolerant of the possibility of failure and of being fined. Whereas, in Japan organizations do not tolerate employees getting things wrong. Particularly in Japanese banks where they won’t let their employees out of the door unless every figure is correct and balanced to the nearest yen.

FST. What advice would you give to organizations so that they can keep the cost of complying to regulations down?
AS. Take a look at your risk and compliance functions. You probably have some highly competent people who will have a unique view of the business. You may find that someone a bit lower down in the organization in the compliance function might know a lot more about what is happening than the Chief Executive.

Marketing departments may just go out to grab the next product without necessarily thinking about the long-term consequences of getting it wrong. Many organizations have been based around maximizing sales without thinking about the consequences of these sales and how they will come back in the long-term. Firms need to listen to their compliance people and provide them with up-to-date technology to enable them to make sure that things are happening, as they should be.

Management information should be presented like a dashboard and be clear and transparent and genuinely tell you what is going on rather than what people would like you to think is going on.

FST. Would you agree that complying with regulations such as Sarbanes Oxley has actually improved business practice and brought benefits to companies?
AS. It depends who you ask – but yes, with most firms I reckon it generally has. It’s enabled firms to look at their balance sheets in a critical way and challenge what is there. As a result, they’ve been able to save money and improve their processes and procedures. It can have positive effects if you approach it with an open mind and an honest and open way, as a business benefit rather than seeing it as a burden.

FST. Treating Customers Fairly is a set of British FSA (Financial Services Authority) principles focused on improving customer services for organizations in the Financial Services sector. Why is this initiative so important for firms to follow not just in the UK, but the US also?
AS. The FSA has made it their number one focus at the moment. It’s based on their Principle 6 –treating customers fairly. They’ve made it a fundamental issue of their monitoring processes. If you have to think about everything you do in terms of treating your customers fairly then there can be consequences that you might not imagine. If you go back through history and think of all the advertising you’ve done in the past and then see whether it is fair, then in some cases you’ll find it will cost you millions to put things right. It’s really how far do you actually go with treating customers fairly particularly in terms of picking over what’s happened in the past. You should review your products at least annually to ensure they continue to meet the needs of your customers through each part of the product cycle from promotion to new business, administration and claims handling.

Firms really do need to pay attention to it. Rather than see it as a burden. They should see it as an opportunity to review what they do. Most senior management will tell you that, of course, they treat their customers fairly but actually that’s not what’s happening. When you go in and examine what is really happening contrary messages are going out to front line staff, and often the sales and marketing staff are completely out of control – they are not treating their customers fairly at all.

Treating Customers Fairly is a universal theme. It is something that could ring alarm bells for firms whatever country they are in. FSA do have regular meetings with their US counterparts and this could be an example of UK ideas going to the US rather than the other way around.

FST. The regulator deliberately avoided outlining any precise definitions of TCF, leaving it up to senior management to reflect on what it should mean to the business. Do you think this was a sensible idea?
AS. There is not a precise definition of fairness and the regulators want senior management to take responsibility for compliance within their firm. It is really about the culture senior management set at the top, which counts. You can either be fair or unfair but you can be more than fair. It depends on the level of service you want to offer your customers as there are not degrees of fairness just different ways of achieving a fair result. This is why it is impossible to define exactly what fairness means and the approach can only be demonstrated by example.

FST. Overall, how well do you think organizations are fulfilling the initiative? What benefits is it bringing to the industry?
AS. So far progress is limited and management information to demonstrate TCF is happening is very limited. Some firms have approached TCF by producing a suite of policies that everyone should adhere to. This may provide a basic framework but is not enough to achieve compliance. TCF is really about the culture of the firm and the example set at the top being replicated throughout the organization.

Some remuneration policies encourage employees to obtain positive feedback from their colleagues. As a compliance officer it may be necessary to deliver bad news and in an effort to achieve a good bonus, compliance may be restrained from doing their job effectively to the detriment of consumers. It is these fundamental issues that need to be tackled rather than grand gestures from the top.

FST. What interesting trends in compliance do you predict in the future?
AS. I predict a continuing trend towards principle-based regulation. Rules are a particular feature of financial services regulation but often fail to achieve their ultimate goal. Senior management need to take more responsibility for how their firms operate and whether they achieve fair outcomes for themselves, their customers and all their stakeholders. This is a tough challenge and one that requires real competence at every level.