Compliance From the Top
Compliance is all about dealing with the customer in the right way, in fact I would characterise that as treating the customer in a fair way. Compliance should not be solely about rules and regulations. Compliance has to be brought in by senior executives and senior management, otherwise the culture will be unsuitable. Regulations may have been necessary, and may be necessary for new entrants, new activities but proper principles should be adequate.
My focus is on how compliance directors need to encourage, influence, and even have the authority to direct senior management to comprehend and understand their responsibilities. There are tremendous advantages to good effective compliance processes:
The responsibilities of senior management are as wide as they are varied. From board directors to senior executives to management; there must be documented clarity of roles and responsibilities; established governance structures with systems and controls; and the prevention process that I refer to as lines of defence. This can be summed up as the corporate culture with its resulting reporting and escalation practices.
The UK’s Financial Services Authority (FSA), in its ARROW programmes, wants to understand how firms operate so that it can gain the necessary re-assurance of seeing a well-managed firm and can reduce its oversight role – a benefit to both.
What is expected of senior management? The FSA makes clear that it expects senior executives to be fully engaged in compliance issues; and what they are looking for at board level includes the following:
There is an uncomplicated answer to this question; by showing the clear link to business benefit from better compliance.
This could be the opportunity to move compliance onto the front foot, however, this may well be a significant challenge. There will be a move to outcomes, with firms able to decide how they wish to achieve them; together with a rebalancing of principles versus rules ratio. This is not a soft touch, but perhaps more proportionate; more flexible, more adaptable and more efficient. This, then, enables innovation provided the environment and spirit is right. There is the question of requiring and developing essential new skills such as interpreting, negotiating, influencing, educating, facilitating, supporting, measuring and recording, then embedding. This could be the culture of change, with compliance and its required sound judgement moving from being the policeman to the business partner. Can this challenge be met to create greater value? Are we up to the challenge?
Shareholder value is driven from sustainable business with good levels of profit, from real growth and efficiency. The compliance role is to focus on the customer. Customers will buy if they feel they are getting value and that does not necessarily mean ‘cheap’. Customers wish to ‘trust’ the firms they deal with for any longer term needs. In the long term, keeping customers is more valuable and cost effective than just focusing on getting new ones. A short-term ‘knee-jerk’ focus will lose out to longer term customer strategies of retention.
Compliance means transparency, good service, meeting needs, delivering on promises, building relationships, driving the right behaviours and the right outcomes. Integrity and fairness will outperform sharp practice or short cuts especially if one offers products customers want or need, not what you want them to want!
Does the vision set by the board now meet the ‘treating customers fairly’ (TCF) expectations? Is the right message in place, communicated and then acted upon? Actions are often better than words – are the executive living the message? Thus, setting the right culture has to come from the top and in this endeavour compliance can help. A firm’s culture can take an age to change; but actions today can move it forward in a very positive manner. By clearly embedding TCF from the board to the front line will encourage the right behaviours, achieve the necessary regulator approval, but much more importantly, providing you meet their needs, ensure customer value will be enhanced. A key factor is to provide MI that takes the customer experience from the front line and builds up the picture to show how fairness builds franchise, creates value and enhances shareholder returns, which will keep the board content. A bottom-up and top-down approach focusing on customer outcomes is crucial.
TCF should be a given, but can we build competitive advantage? New product development is a key area to address. Do we really meet needs or try to over complicate to squeeze out more or to follow a latest fad? The handling of complaints, getting the basics right can be a challenge, but driving clear improvements as a result, certainly in sales, service or advice areas, will often mean retention and even advocacy if handled appropriately. Focusing on what matters to the consumer has to make sense. By keeping the consumer happy will only result in satisfaction, more likelihood to buy again, then more return per customer thus more profit? Sales processes that really do become an experience that meets the needs of our customers can be tricky when we try to link with systems development. Keeping communications aimed at the target audience with information that is timely, relevant, appropriate, well presented, understandable and, above all, clear. Customers want to hear what is going on from us, not from the media.
There is the need for the right balance at the right levels to drive the right standards. Incentives are the drivers of performance. What does this mean? How does a business get the right balance so that the sales decisions being made when figures are behind target are the same as when they are going well? Short-term gain against longer-term aims of sales growth versus quality measures – which should take the larger share in the reward model?
A major question is how should we set targets to encourage the right behaviour? It is paramount that the same elements are in place throughout the firm; these include share value; sales results; persistency and retention together with service quality, profitability, – customer satisfaction and loyalty and advocacy. The requirements are simple: balanced scorecards, from top to bottom.
If your regulator is comfortable with how you are running your business, then lighter touch may well result – risk-based – but you will need to earn it! Compliance should ensure there is a good dialogue between the firm and the regulator. If there is a clear line of communication and a trusting relationship in place, there will be less intrusion. It is vital that the senior business leaders are fully engaged with the regulator, when necessary, which will help FSA get a better ‘feel’ of the culture and skill-set. FSA confidence is important in their risk-based assessment of the firm. Under the Basel regime, this could have a significant impact on your capital. Improving your regulatory capital position can release funds for business enhancement.
Compliance has a role to play in raising senior executive and board awareness of how their accountabilities and responsibilities must focus on compliance issues. Governance frameworks and risk management structures are there to help, but the individual directors and executives must understand their roles to deliver the necessary direction to meet business goals and also regulatory requirements. A firm’s culture is set from the top, but compliance can help shape it if we can make our messages sufficiently positive and business focused, perhaps even when pointing out weaknesses. More principles-based regulation will provide plenty of opportunity to re-consider how firms operate, but decisions will need to be closely recorded and logically thought through – value may be driven from fewer rules, but evidencing how outcomes are achieved will be crucial.