Devastating. Game-Changing. Revolutionary. Not since the early 30’s has there been an event that transformed the economic landscape of not only the United States, but also the world.
I’m speaking, of course, about the Financial Crisis of 2007-2008. An event we now know as the “Great Recession” through the illuminating lens of hindsight, it crippled the world’s economy to a point where swift action was needed to be taken by the government. From TARP to Dodd-Frank, the US was forced to act in order to avoid a potential global meltdown. And while some may argue that these actions were too little too late, there’s no denying that these events stemmed the rise and importance of compliance as we know it today.
Numerous different events, people and pieces of legislation are cited as causes of the crisis. The Graham-Leach-Bliley act signed by Bill Clinton repealed the Glass-Steagall act of 1933 and removed many barriers to market previously faced by banks and insurance companies. The subprime mortgage crisis and resulting housing bubble, risky behavior by bankers, consumers taking loans they can’t afford: the list goes on. However, the fact remained that the United States needed to ensure measures were taken to prevent this sort of confluence of conditions from occurring again. Oversight and regulation, specifically within the financial industry and industries alike, seemed to be the only solution to avoiding a most unfortunate déjà vu.
In 2009, US Treasury Secretary Tim Geithner worked in conjunction with President Obama to introduce a series of regulatory proposals that would address issues such as consumer protection, stricter rules on derivatives, and Federal Reserve authority. Larger fines would be levied and governmental institutions such as the SEC and the DOJ were given expanded power to enforce compliance. The piece of legislation that had the greatest effect on financial regulation was the Dodd-Frank and Consumer Protection Act. This act was “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” The government would no longer be lenient with firms and meticulous rules were introduced. Compliance -- an issue often previously overlooked within organizations -- gained significant traction because of this. And to this day, the importance of compliance within the enterprise has only increased.
What exactly is compliance? By definition Regulatory Compliance is “the goal that organizations aspire to achieve in their efforts to ensure that they are aware of and take steps to comply with relevant laws and regulations.” Post-recession, compliance laws have become significantly stricter. Regulatory bodies, especially in the financial industry, have revised their guidelines in order to be harsher on insufficient action taken by companies.
Compliance is now too expensive to be overlooked and companies are understanding that they need to keep a very tight hold on all of their electronic data. The SEC has strict minimum requirements that compliance officers need to meet as they monitor emails and files. It also requires an annual review of corporate compliance policies. But when the experts aren’t confident about the metrics they’re using to evaluate their compliance program, good intentions can only get a company so far. In fact, a Deloitte survey found that 42% of CCO’s aren’t confident about the metrics they use to evaluate their compliance strategy. To meet the growing compliance demands, organizations need to expand compliance departments beyond the one or two dedicated individuals that they usually comprise. It’s clear that a major methodological shift is necessary, and some forward-thinking large firms are leading the charge to leverage compliance structure as a strategic business advantage… not just a passive tool to check off government requirements.
For example, Barclays is opening a compliance academy in an attempt to improve its compliance efforts and train employees. JPMorgan Chase has acknowledged the gravity of compliance challenges by doubling their compliance budget for the year of 2014, and Wells Fargo is giving expanded power to the CCO role. The list of changes goes on and on and expands across all industries. How else can these issues be fixed? CCO’s need to be given a seat at the table. Fines from regulators can cripple, and compliance officers know better than anyone else how to avoid these. Their voices and strategic concerns need to be heard at C-level meetings and implemented now rather than later. Formulas need to be developed for individual companies. There is no one-size-fits-all solution here. Understand the information inside your organization and act before it is too late.
Companies have said in the past they can’t afford to pay too much for compliance, and that scraping by was good enough. Today this is no longer the case; given the regulatory environment, companies can’t afford to NOT pay for compliance. However, there are ways to spend smarter rather than harder. Knowing your whole data environment and giving top compliance officials the power to implement appropriate policies are one of the steps.
The Financial crisis has brought on a whole new uprising of issues and regulations which have changed firm landscapes. By the nature of economic cycles, another bubble is destined to form, whether we foresee it or not. Fully preparing for compliance proactively will make any potential burst survivable. Understand your environment, understand your company… and regulators will take note.