The Compliance Revolution - Jackman David

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as to increase the likelihood of positive behaviours.

      5. Outcomes-led: Focus on systemic outcomes on the wider economy and society (and occasionally, environment). By evaluating impacts as part of the regulatory mix, regulation incorporates an understanding of the community purposes of regulation and the effects in social and economic terms that interventions are seeking to create. An outcomes-based system allows for far more creative methods of compliance and regulation where systems and processes is not the ultimate goal. New external criteria bring new criteria for success and enforcement, and allow regulation to be employed for a wider range of objectives.

The Difficult Step – Stage 3 to 4/5

      Each stage builds on the last and introduces additional regulatory and compliance tools and priorities. Part II will focus on the new components introduced in stages 4 and 5. In Part III we will see how these stages add the essential components of an infrastructure (we shall call this the Ethical Space) necessary to enable compliance to be strategically effective and contribute towards corporate maturity. We will also find in Part III that the processes at work in stages 1–3 reach a critical point when entering stages 4 and 5. This “difficult step” is from stage 3 to 4/5 and requires a revolution in commitment and the depth and rate of change.

Limitations of the Model

      Any development model has limitations and some of the questions to consider are:

      ● Is the length of each stage the same, or can stages be elongated or shortened?

      ● Is it possible to skip a stage entirely and move from one stage to the next without, for example, the stage of crises?

      ● Is it possible to regress? Is progress irreversible?

      ● Can you get stuck in one stage? If so, why?

      ● Is a final downturn inevitable, or will the curve continue upwards?

      In some cases crises set the underlying development curve back a stage or two as regulators can often feel more secure and demonstrate credibility by resorting to “tougher,” more familiar ways. But this effect is usually short-lived and can be detrimental to restoring confidence because enforcement actions become more visible and numerous and undermine the maturity of the relationship between regulator and industry sector. It is better in the long term for regulators to keep their eye fixed on the development model and to return to the trajectory as soon as possible.

      In the specific case of the 2008 financial crisis, the progression to a more sustainable stage had started before the crisis broke. The shift of approach was not dependent on the crisis as a trigger. However, the crisis, while causing a short-term step backwards in the way suggested above, further drove the progression of regulation and set more favourable conditions for both achieving sustainable regulation and also refocusing on outcomes. The foremost lesson for politicians and the public from the 2008 crisis is that “Problems of Wall Street cause problems on Main Street.”

      International Comparisons

      It is possible to place regulatory regimes or jurisdictions along the development curve in terms of their stage in the journey. Some may be large and powerful regulators in terms of legal powers, reach and style of enforcement action but that does not mean that they are sophisticated in terms of the mix of approaches used. Equally, this does not mean that such regimes are not effective, but they could be more effective if they advanced their methodologies and added to their regulatory toolkit. It is also the contention that compliance will be more embedded and therefore resilient under pressure if regulators move up the development curve. Stages 4 and 5 are inherently lower cost and so more sustainable in the long term.

      In general terms many regulatory–compliance systems are not as far along the curve as they need to be given the challenges they face and increasing public expectations. This partly explains why regulation and compliance has been viewed as less-than-fully-effective during and after the 2008 financial crash – as we will explore in Chapter 3. There have also been examples of regulatory failure in other sectors, e.g., phone hacking in the UK media, which gives the impression that regulation in general, is ineffective.

      Regulation is a social activity, and the development of one regulatory system tends to drag along others. Some regulators tend to be cautious and do not want to be ‘first movers,’ while others are more competitive or seek to be the beacon in a particular region or sector. If advancements made by one seem to be successful, it is only a matter of time before other regulators follow. The key to future international success is that there is a critical mass of regulators that pursue the direction towards stages 4 and 5, impressing on those in stages 1–3 the need to move forward. This is particularly important simply to reduce the opportunities for arbitrage between jurisdictions.

      To re-emphasise a conclusion from Chapter 1, the primary advantage of the regulation–compliance system progressing along the developmental model curve is that it can deliver more effectively the social/economic outcomes for the wider community. This is the end; compliance and regulation are only means to that end.

      Example of the UK

The UK is a useful example of the development of a financial services regulatory system (see Table 2.1) and has been tracked to a greater or lesser extent by many other jurisdictions, including Singapore.

Table 2.1 Examples of the general model of regulatory and compliance development from UK financial services regulation – characteristics from each stage Jackman, D 2015

      Using Regulatory Toolkits

      It is the combination of approaches and tools that delivers effective compliance and regulation, not one set replacing the previous set. There exists a growing compliance and regulatory menu or toolkit, but it is how the elements are selected and used together that is the real skill. The range of tools available and the sophistication with which they are combined and used determines the maturity of the jurisdiction and the professionalism of the compliance sector. How the mix is balanced and selected for any one firm or set of circumstances is decided upon and delivered by regulators and compliance officers making critical judgments, not following checklists or risk models only. How good these professional judgments are really matters. Quality judgment is what firms and societies pay for.

      To decide how successful a regulator is in using this toolkit, the Monetary Authority of Singapore (MAS), has the following tests or tenets:

      ● Is the financial system as a whole stable even in the instance of the failure of one or more financial institutions?

      ● Is the financial system serving the needs of customers and the economy efficiently?

      ● Are regulatory standards of a high quality, consistent with international standards and best practice, yet appropriate to the local context?

      ● Is there shared ownership of the desired outcomes of regulation among stakeholders?

      ● Does the balance of benefits and costs weigh in favour of regulation?

      ● Are market incentives alone likely to deliver a desired outcome?

      ● Are the obligations imposed by regulation on regulated entities clear?

      ● Does regulation take into proper account market practices and legitimate commercial considerations?

      ● Does regulation provide regulated entities with legal certainty and predictability where it is needed and, where appropriate, flexibility to apply their own practices to meet regulatory objectives?

      ● Does the regulation provide a level playing field for potentially competing activities and institutions?

      ● Does regulation recognise that some institutions may have lower risk profiles and stronger governance and controls? Does it provide differentiated treatment where appropriate and can it adjust

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