Compliance Management Reloaded - A profession demanding new skills

Should compliance managers be acquiring new skill sets? It looks like the industry is demanding more from a compliance manager. Let’s consider some of the recent trends in the industry and the future of the compliance management profession and the possible need for additional skills

Given the events over recent months, the Turner report, published earlier this year looks at a wide remit and makes some recommendations, and throws up some interesting points. This report is primarily focussed on banking; however, it is applicable to other sectors also. The general trend in the industry is for the compliance manager to know more than what is generally required to mitigate compliance risk.

Compliance Manager needs risk management skills

One of the key points highlighted by the report is risk mitigation. We all know that if a business is run badly, it will most likely fail. In part, poor controls, systems and process, and judgement lead to failure. Turner fully expects that the FSA will “play a more active role in assessing the technical competence of senior risk managers”, and “it will consider whether governance structures for risk oversight need to be changed, with a more direct relationship between senior risk management and Board risk committees”. It seems that running a business is a risky occupation and the management need to keep an eye on – so no earth shattering revelations here! The main objective of the compliance function is to mitigate operational risk as the regulations were initially introduced to mitigate operational failures.

Compliance Manager and the HR function

Another key point mentioned in the Turner report is around remuneration, which is now “within the scope of risk management”. The Turner report gives a full 2 pages on this area, but without any details. For full details, we will need to wait for the Walker report due in October ‘09

When these two elements are put together, they form picture of where the FSA is going with this, which seems to be that risk is and continues to be a key factor, however, remuneration now also falls into this important factor category. The FSA is looking to embed risk management within HR processes. This will have important implications on remuneration committees and non executives who serve on them.

Remember this is largely applicable to the banks. Does this mean that the Compliance Officer should be sitting on the remuneration committee? The FSA certainly thinks so. With the current backdrop, where the taxpayer is currently propping up the banking system, perhaps this makes political sense and a move designed to appease the taxpayer and provide some scrutiny on behalf of the taxpayer, who is the most unusual stakeholder.

Compliance Manager and technology

In the UK, the FSA has adopted a principles based approach to regulation. This is done by stating the high level ‘commandments’ and then providing guidelines. They have firmly put the onus on the senior management to demonstrate that they are complying with the ‘spirit’ of the rules. This has meant regulated firms starting to follow ‘best practice. Best practice is something that the regulators look for when visiting firms. If a firm is following what is considered to be best practice, than, the FSA considers this to complying with their rules in the best way.

Let us consider an example for best practice. Pre-trade compliance checking in relation to client guidelines was not possible in the past. Therefore, firms relied on post-trade compliance testing to see if trades where within the guidelines. Normally this was done manually and most probably once a month. As compliance software systems and technologies have evolved, it is now possible to carry out pre-trade checking using compliance software before a trade is executed. It is checked to ensure that there is no breach on any guidelines before execution.

It is an accepted fact that technology is a driver for changing best practises in the industry. Therefore, a compliance manager should have his ears close to the ground to be up to date with the trends in the compliance software industry.

Conclusion

The image of a compliance manager is undergoing a revolutionary change. You cannot categorise him as just a general counsel or an accountant wearing a black hat considering compliance risks alone. As an emerging leader with a seat in the board, the compliance manager has much wider scope for his reloaded profile.

About the Author and the background for this blog