Maintaining regulatory compliance

March 2021  |  SPECIAL REPORT: MANAGING RISK

Financier Worldwide Magazine

March 2021 Issue

A bruising 2020 has given way to an equally testing start to 2021. As progress with COVID-19 inches forward, few believe that life or business will return to how they were pre-pandemic. In the UK and elsewhere, there came the added uncertainty surrounding the end of the UK’s transition period for exiting the European Union (EU), the curtain of which came down on 31 December last year. Maintaining regulatory compliance, never a simple thing with which to grapple, is further complicated by these unique challenges.

UK firms now find themselves in uncharted waters. None of this is to say that the outlook is uniformly bleak; disruption can be more informative than normality. Properly assessed and understood, extremity and hardship can furnish more lessons than a decade of tranquillity. It can facilitate a reassessment of strengths and weaknesses, providing a chance to reflect on areas for improvement and a clearer picture of what is and what is not important. Overall, it can be an excellent lesson on where attention should be focused. Maintaining compliance with regulation and law is, as ever, vital, and the trials of 2020 can help us see with more clarity the most appropriate means of achieving this aim.

For compliance, the first step is assessing the landscape, not just to understand the obstacles that lie in wait, but also the avenues that lead to successful compliance. This is harder than it sounds, and half of the real issue: horizon scanning for future obstacles and opportunities, both short- and long-term, will make it immeasurably easier to propose a route forward and ensure compliance. The fly in the ointment is that for two of the most pressing issues there is little time available to look ahead, and both require immediate and ongoing action – Brexit and COVID-19.

First, Brexit and the transition deal. The UK government has announced that by March 2021 a framework between the EU and UK will have been agreed on regulatory cooperation of financial services. However, given the stalling and extended delays that have occurred at every step of the UK-EU negotiations, it is not hard to see how this could be delayed beyond the March deadline, and compliance officers should bear this in mind as the agreement deadline approaches. They must also make provisions for an agreement not being reached. At the same time, and somewhat paradoxically, they must prepare for an agreement and digest its consequences. In other words, a balancing act, as ever, is required of compliance.

The Financial Conduct Authority’s (FCA’s) temporary permissions regime (TPR) is also now in force and ‘passporting’ – the capability of European Economic Area (EEA) firms to operate in the UK and vice versa – has now ended. EU firms operating in the UK can continue to do so under the TPR until further notice. This is a sensible solution to a tricky situation, and firms should be aware of what the TPR means for business, the stipulations it imposes and what it means for those now operating within it. Compliance should also be alert to any updates issued by the UK government or the FCA regarding the TPR and the knock-on effects for firms.

UK firms operating in Europe are advised by the FCA to adhere to local regulations, and that decisions made by firms are to be shaped by the interests of customers. It is evident that the FCA acknowledges the difficulties the dissolving of the transition period represents, and the new landscape firms are entering. Firms should also know that the FCA has been granted Temporary Transitional Power (TTP) by HM Treasury. Measures put in place via the TTP are to be found on the FCA website, and it is vital compliance officers are aware of these and how they impact them and their firm.

The end of the transition period also marked the beginning of the FCA becoming the regulator of certified credit rating agencies. Those firms providing these services must now be registered with the FCA. Similarly, trade repositories must also now be certified by the FCA. It is imperative that compliance officers stay abreast of changes and updates from the UK government and the FCA – and that these consequences are disseminated and absorbed by the board and senior management.

COVID-19 is obviously a beast of a very different nature. Most firms have responded by adapting with an admirable degree of agility and verve to the disruption to business, the migration of employees from the office to the home, and the rapid imposition and revocation of restrictions that the UK government has oscillated between since March last year. These sudden shifts in policy continue to appear as if from nowhere and financial services are as vulnerable as any other industry to slipping through the cracks. There are, however, specific points that are relevant to compliance, for instance on information security and the spurt in cyber crime that has occurred during the pandemic. The FCA has also produced a raft of useful advice for firms on COVID-19, available on its website, covering financial crime to client assets and mortgages.

One of the unintended, happier side-effects of the pandemic for compliance may be a more seamless acceptance by employees of regulatory compliance. In other words, employees accustomed to adapting to changes enforced by the virus in their personal and professional lives are more likely to be receptive to guidelines and regulation in other spheres, specifically at work, in the future. Looking ahead, harnessing this attitude to regulation in employees and using it to the firm’s advantage will be inestimably valuable for compliance, who will be operating among a workforce experienced and flexible to the evolving demands of regulation.

A crucial way of retaining this acceptance and understanding of compliance regulation is through regular training. It has been a while now since training was considered subsidiary to the main responsibilities of any professional, but making sure compliance staff and other employees are receptive to it still requires imagination and commitment. A simple but effective way of doing this is by thinking about training as education, which in essence is what it is: absorbing knowledge for a more effective, more robust performance in your role and for your firm.

Nowhere is this more pertinent than with technology, which is having the fastest and most profound impact on financial services, as it is in every other profession. Regulatory technology has emerged from nowhere over the last decade or so, flowering into something increasingly a necessity in many firms. Such is the pace of technological change that training is an imperative that cannot be ignored. The key point is to receive training that is relevant, practical and geared to the needs of compliance professionals.

There is a salutary lesson, here. If there is anything that should be taken from 2020, it is that firms, overall, do possess the ability to adapt under extreme circumstances. Responses were more impressive for the fact that there was no precedent to go on, no template to adopt for a neat solution. For compliance, the reaction was overall one of impressive professionalism under pressurised circumstances. To keep it up, diligent attention to regulatory guidance and an understanding of upcoming changes to that regulation are required.

What must be expected is for this period of uncertainty to continue – there will be no soft-landing return to a pre-Brexit, pre-COVID-19 world. To maintain regulatory compliance, these realities must be accepted by firms and reflected in the conduct of business.

 

Jake Plenderleith is editorial manager at the International Compliance Association. He can be contacted by email: jake.plenderleith@int-comp.org.

© Financier Worldwide

BY

Jake Plenderleith

International Compliance Association

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