Charles H. Duell is famously misquoted for stating that “everything that can be invented has been invented”. Even though misquoted similar sentiments have been echoed many times throughout history, fortunately (or unfortunately, depending on your preference), there is always constant change. Alexander Wägeus shares his thoughts on innovation and a compliance role in change.
As innovation precedes regulation the compliance role is tested
FinTech disruptors are challenging our perception of the finance industry by developing new and innovative products that from a user experience perspective look and feel simple but behind the scenes are far from it. Simultaneously, there is a surge of new firms breaking the traditional value chain of payments and banking. The products offered by the latter are not seldom building on an existing offering re-packaged and distributed through digital channels that are more easily accessible to the consumer than ever before. As firms grow their portfolios, compliance is sometimes weighed against the more tangible commercial interests and as innovation precedes regulation, the emergence of new products poses a challenge not only for law makers and regulators but also for compliance professionals.
Proactive compliance advisory becomes more important
In this context it becomes apparent that the traditional compliance role needs to be adapted in order to continue adding as much value as possible to the organisation. While independent compliance monitoring constitutes an integral part of a firm’s governance and control framework, this work is largely reactive and should, to the extent possible, also be combined with proactive measures such as qualitative advice and support. It could be argued that in a fast-paced environment the latter is equally or even more important as it enables the firm to identify and rectify potential compliance related issues before they materialize.
First line compliance is increasing
One approach that FCG sees firms taking is to supplement second line compliance with first line compliance. In doing so, the firm off-loads many of the ad-hoc tasks from second line allowing it to focus exclusively on the activities within the annual plan. This approach also provides the business line with the necessary expertise allowing it to stay agile while at the same time strengthening the overall compliance culture. Another positive spillover effect is that there will probably be fewer and less severe findings issued by both compliance and internal audit subsequently freeing up additional resources that would otherwise have spent valuable time on remediating compliance deficiencies which could have been avoided.
However, far from all firms have the resources to take this route and the regulatory requirement to have one or more full time compliance professionals placed within the second line can prove costly. In these instances, another solution could be to retain first line compliance professionals and outsource second line compliance to an external vendor. Having a strong compliance culture within the business line, where all employees are aware of the regulatory risks associated with the operations, will make them less prone to taking uncalculated risks and by extension lessening the resources needed for second line monitoring activities.
That said, having a strong business line supported by first line compliance professionals does not make second line compliance obsolete. On the contrary, second line compliance will still be crucial in providing the management body with up to date information about compliance risks and deficiencies allowing it to exercise oversight and control over the firm’s operations.