Regulatory reforms and the challenges on the Compliance front“Only in growth, reform, and change, paradoxically enough is true security to be found” says an American author. Banking and financial markets, where security in its literal sense is of prime importance, have strongly been affirming this through their reforms. It is indisputable that the 2007-08 financial crisis took a toll on almost all the major economies of the world. The crisis shook the stability of these economies and created the need for another big reform in banking and financial regulation. While it is necessary for regulatory bodies to bring in such reforms to maintain financial stability, it also gives rise to new regulatory compliance challenges for corporations, banks and financial institutions.
The key regulatory bodies including the Fed, CFPB, SEC and FINRA introduced the Dodd-Frank Wall Street Reform and the Consumer Protection Act to prevent excessive risk-taking and to bring back financial stability. While banks and financial institutions are still coping with new compliance requirements under the recently introduced Dodd-Frank Act, more amendments are expected in this already complex piece of legislation. Additionally, the geographical scope of applicability of acts such as the Foreign Corrupt Practices Act (FCPA) and the Foreign Account Tax Compliance Act (FATCA) is increasing globally with a view to targeting internationally located American companies and SEC issuers. Thus, non-compliances can no longer be brushed under the carpet under the pretext that issuer corporations are located outside the USA. A good example of this expanding scope would be conflict minerals-related compliance requirements under Sec. 1502 of the Dodd-Frank Act and the OECD framework, which drill down to the smallest branch or subsidiary of the SEC issuer irrespective of its location on the map.
Like American regulations, European directives too have adopted Basel, which requires adherence to vigorous risk management and compliance arrangements. For example, in the European market, Basel was incorporated into Germany’s Banking Act, which mandates robust governance arrangements. Basel II recommends that banks have their own risk management systems. Consequently, Sec 25a of the Banking Act as well as the BaFin now stipulate the minimum requirements for risk management and appropriate internal control procedures. Similarly, Pillar III of Basel II prescribes stricter disclosure requirements that are incorporated in Sec 26 of the Banking Act. For those operating in the insurance domain, Solvency II Directive Pillar II imposes qualitative requirements including risk management and compliance. Pillar III contains stricter reporting and disclosure requirements. As a result, the regulatory reforms undertaken in Germany recently are going to create numerous challenges for German corporations, banks and financial institutions until they come to terms with the updated compliance requirements. The rapidly increasing compliance and risk management requirements are certainly going to make them burn the midnight oil!
Another smart move by the regulatory authorities involves offering huge monetary returns and imposing hefty penalties. The significance of whistleblowers is ever-increasing. They are encouraged to speak up and given huge monetary awards for reporting non-compliances. This has made it easier for even common employees to report non-compliances, thus creating a new challenge for corporations on the compliance front. Also, regulatory bodies have always been using hefty penalties as a deterrent for non-compliances as an effective measure. With these new penalties set to attain even larger proportions, corporations will end up paying a much steeper price, possibly endangering their existence. For example, the dreaded penalty of 3.25 m euros, the largest penalty ever was imposed by BaFin on one of the investment management companies in the UK for incorrect and late disclosures under the Securities Trading Act.
On the one hand, regulatory reforms and stricter measures for non-compliances is the need of the hour for regulatory bodies in order to effectuate a steep drop in non-compliances. On the other hand, the broader ramifications of such reforms will make companies adopt a drastically different approach with regard to Compliance.
(Please Note: This is only a research based article providing personal analysis concerning the given topic.)
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