Читать книгу The Compliance Revolution - Jackman David - Страница 16

Bolt pulls up the ladder, secures the hatch.

– Simon Armitage, “Last Day on Planet Earth,” in Seeing Stars (London: Faber and Faber, 2010)

An Unfortunate Unconformity

Compliance has not had a happy record since 2008. This is partly because the apparent development in compliance and regulation into stage 4 of the General Model may have been superficial and not properly embedded. Also other firms and regulators were either complacent or comfortable in stage 3 and had failed to improve. In general, where regulators had been trying to press forward into stage 4, such as the UK's Treating Customers Fairly (TCF) initiative, compliance may not have had the frame of reference to have really got it, and so were unable to keep in step with changing regulatory expectations. This created an unstable unconformity between pioneering regulators and compliance. This is a high-risk situation for a regulatory and compliance system.

This unconformity may have left compliance looking somewhat bewildered and embarrassed. Remedial actions have also seemed hasty and superficial, rather than embedded. So, despite regulation beginning to enter stages 4 and 5, the compliance results in the same period have been uncertain and fragile – as 2008 unearthed. It is reasonable to assume that development in compliance needs to progress further and faster, as Part II suggests, as some firms start from a position well behind the curve. Compliance must play catchup. But before setting out in a determined fashion it is necessary to consider the shortcomings we saw first time around, and this may help focus on how best to change.

The 2008 Global Financial Crisis

In 2006, the author wrote an article in the financial press warning that “the emperor has no clothes,”2 and so it proved. There were many causes of the 2008 GFC. Compliance failings were central. But it is also fair to say that the roots of the crisis and the contributory factors were many and various. The undoubted compliance failings were by no means the only factors adding to international instability. Causes and accelerators were to be found in almost every component of the financial system, including:

● Encouragement of the subprime sector by government policies, starting in the 1990s or even before.

● Target-driven selling in banks.

● Bonus culture.

● Relaxed and competitive credit policies.

● Consumer greed – wants became needs.

● Regulators, governments, and banks were happy to sustain the myth of continuing runaway growth. UK Chancellor Gordon Brown announced that New Labour had “abolished the cycle of boom and bust” as far back as 19973– all seemed delighted to believe him.

● Voters and consumers were comfortable and complacent and therefore unchallenging.

● Inadequacy of capital models and business-as-usual stress-tests.

● Panic due to a lack of understanding of complex products, the real levels of toxicity and liquidity.

● Retail banks trying to behave as though they were investment banks or being led by their investment bank arms (and acquiring such arms if need be, e.g., RBS's takeover of ABN AMRO in the midst of the crisis).

● Lack of product due diligence by buyers of complex products such as collateralized debt obligations (CDOs)

● Sometimes knowing connivance amongst the producers of complex products as disclosed by the U.S. Congressional hearings.

● Interconnectedness of the global financial system and some banks discovered to be “too big to fail” (e.g., Lehman Brothers).

● Lack of international cooperation and information sharing until it is was almost too late.

The FSA Turner report highlighted from this list:4

● Unsustainable credit boom and asset price inflation (with inadequate capital requirements)

● Increasing complexity and opacity of the securitised credit model

● Misplaced reliance on sophisticated mathematics

● Transmission of loss of confidence and bank funding liquidity into real economy effects

● Hardwired procyclicality creating self-reinforcing feedback loops

● Impaired ability to extend credit to the real economy exacerbating the economic downturn

Economist Robert Shiller added:

The central bankers didn't see it as their mission to think about mortgages that are being written or to worry about the shadow-banking sector, because they weren't banks so they weren't under supervision, so they let things go. Those are mistakes, but understandable given the bureaucratic structure.5

Compliance failing included:

● Insufficient due diligence seems to have been carried out on complex products traded.

● Insufficient attention was paid by compliance on the capital or funding positions of banks.

● Insufficient warnings were given about lending practices such as high multiples of income, low deposit requirements, buy-to-let mortgages, self-certified mortgages, and mortgages over 100 percent of asset value.

● Modelling of stressed situations that could arise was insufficient.

● Aggressive advertising and rewards were obvious but unchecked.

● Some more conservative banks, such as Standard Chartered and HSBC, to an extent, stood aloof, but this did not encourage different patterns of behaviour amongst the compliance community.

These are the basics of compliance supervision. There may be instances where individual compliance officers had insight and spoke up, but they were either not listened to or did not have the stature or import to make a meaningful difference. Some, it is understood, were relieved of their duties for their efforts as the race for new business was on.

Regulators' relative inaction and lack of pressure made it difficult to find an intellectual justification for a more compliance intervention. Particularly inexplicable was the unwillingness of regulators and compliance to do anything very differently after the early warning collapse of Northern Rock in 2007. Unfortunately, the performance of regulators and of compliance are actually and metaphorically bound together.

Legacy of Failure

Given compliance's recent record, it would be reasonable for boards, governments, and consumers to ask whether compliance is actually worth the money. Why should companies, the industry collectively, or its many stakeholders have confidence in the compliance function?

Yet, despite this record, firms and financial systems across the world continue to plough increased resources into the compliance sector. Compliance is one of the fastest growing functions in the industry. Progressively fewer businesses view regulation as a burden, and while in 2007, prior to the crash, 76 percent of UK businesses surveyed predicted that the “burden from regulation would increase” in the next year, this figure fell to 43 percent.6

Why is this, when a rational response would be to cut budgets, numbers, and status and try some other way? Why may businesses be more accepting of regulation following a crisis than in times of plenty? The answer lies in the question. There is no plan B, no other way available, apparently, for the moment. This lack of alternative has allowed an opportunity for compliance and regulators to reassert their credibility. The default setting continues to be more rules, more and heavier enforcement intervention, and more expectations placed on compliance functions. The industry and its stakeholders seem to have no other option but to continue to believe in the compliance infrastructure as the principal instrument for maintaining stability and improving outcomes. However, the legacy of failure includes:

2

D. Jackman, “The Housing Market Has No Clothes,” Financial Adviser (June 23, 2006).

3

D. Summers, “No Return to Boom and Bust: What Brown Said When He Was Chancellor,” Guardian Online (Sept. 11, 2008), http://www.theguardian.com/politics/2008/sep/11/gordonbrown.economy.

4

Financial Service Authority, The Turner Review: A Regulatory Response to the Global Banking Crisis (London: FSA, 2009) 11, http://www.fsa.gov.uk/pubs/other/turner_review.pdf.

5

Robert J. Shiller interviewed by Christopher Jeffery in Central Banking Journal (May 16, 2012).

6

Department for Business, Innovation & Skills, Growth Dashboard (July 18, 2014), www.gov.uk/government/uploads/system/uploads/attachment_data/file/337297/Growth_Dashboard_July_2014.pdf. Accessed 10-Dec-2014.