Compliance and Regulation - Introduction

Introduction

Why am I writing this blog?  There are two reasons, firstly I wish to enhance my own knowledge of the subject area and secondly I want to simplify the rules so that they are much easier to understand and implement.  I am, if you like, doing the thinking for you.  There is a caveat to this, I am not an expert in compliance however you wish to interpret that, I am learning and developing my understanding as any other reader would do.

I am a qualified and accredited management accountant and my interest is to develop my skills to make me more employable and knowledgeable within the financial industry.  It is primarily in this context that I am writing this blog.

Structure

The title of the blog will give the specific area that I am examining or any subset of that area.  Within the opening part of the blog I will link back to the owner of that piece of work for example, in the case of Client Assets (CASS) I will provide the links and references to the website so that the reader can refer to the original document to either challenge or validate my interpretation of the rules.  I will also, where appropriate, provide a key to support the documents and comments.  Be aware that to get the most recent version of a document then you must consult the original owner, I will update where I can and when prompted.

Definition of Compliance

The definition I am about to give is not specific to any industry or professional body, but it is a common sense application of the term to any situation.  I have referred to the Oxford dictionary as my start point.

Compliance – The action or fact of complying.  It actually means you are in the process of doing as you are told or you are doing as you are told.  For example if I drive within the speed limits I am in compliance.  If I see a sign changing the speed limit from 70mph to 50mph then I will begin to adjust my speed so that I comply with the new limits, preferably before I enter the new zone.

What is missing is the context and there are several obvious areas to which we can group the rules and whether or not compliance is required:

·         What are the rules?

·         To whom to the rules apply?

·         Where do the rules apply?

·         When do the rules apply?

·         Why do the rules apply?

We operate in a global environment but it is subdivided into trading blocs, nations and industries which, of course, overlap.  There is a precedence or hierarchy and often a great deal of duplication.  There are also a frameworks of structures designed to oversee and ‘enforce’ the rules.

What are the rules?

In simple terms let us start with these groupings:

·         UN Mandates.

·         EU Directives.

·         Industry bodies.

·         Professional bodies.

·         National legislation.

·         Social/Ethical standards.

By examining the headers it becomes apparent that some of these rules will be voluntary and some will be mandatory.  Even the mandated rules may be difficult if not impossible to enforce. 

What do I mean by social/ethical?  Well, let us take the recent media interest in corporate and individual tax avoidance.  It is quite within the rules to avoid paying tax by using tax efficient mechanisms to reduce your bill to HMRC, however, it is not socially acceptable that a wealthy individual or corporation pays less tax that the average person on the street.  Should they be penalised?  Tax evasion, it must be stressed, is illegal and is not the same as avoidance.

From the point of view of the corporations and indeed the wealthy individuals, why should they not make themselves more competitive and gain more value from their earnings?  If others had the means or financial support to be able to do the same thing then they too would wish to pay as little tax as possible.  Cash in hand is a common method for paying for tradesmen to do work, it is tax avoidance and therefore illegal, but most people will have done this at some point.  This is not meant to be a debate on the rights and wrongs but merely to point out that the definition of social/ethical rules, as far as I am concerned, is what society will tolerate.  It does not mean that they are obligatory or enforceable.

Most rules come about as a result of:

·         A desire to protect a position or group for example the Corn Laws under the Importation Act of 1855.

·         A desire to raise funding through taxation.

·         A result of some event such as the Financial Crisis of 2008 and the subsequent stress tests introduced to the banking industry.

·         Proactive attempts to regulate organisations or individuals.

These rules are all under the influence to one degree or another of various holders of power and influence.  Naturally they would wish to achieve the best outcome to meet their interests and this inevitably involves conflicting positions.

Why comply?

This is the fundamental question and apart from the stock answer that is ‘you have no choice but to comply’, the more relevant reason is that you avoid punitive fines or loss of value when you are caught in breach of the rules.  Put it simply you get punished and that, in terms of penalties can result in all or some of the following: fines, imprisonment, loss of market share, falling share price, loss of liquidity, collapse of the business or loss of reputation.  There is a balance between compliance and the cost of compliance with the latter extremely difficult to judge in some cases.  The LIBOR and FX market rigging gave rise to significant levels of fines and loss of reputation and share value.  The investors felt the pain as well as the senior staff implicated and responsible although the horse has bolted in these cases, regulation will now catch up to deal with the situation.

The decision to comply will be a risk between accepting the penalty and trying to retain some competitive edge or accepting the need to comply and, in doing so, avoid the penalties.  The main issue with complying is that when the rules are introduced the businesses may not necessarily be in compliance at the time, even given the transition period allowed for in many cases.  Businesses are not keen to acknowledge their failure to comply as this will generate pressure and costs to rectify the situation.

So, with that set as the background I will now, as regularly as I can, contribute towards this blog and analyse relevant sections of regulation.  Just to recap, my focus is on financial regulation, but I may touch on other relevant topics from time to time.