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And Another Thing…

I teased a theme on Monday in the column regarding the oversight of FX businesses to which I want to return. If there is one recurring theme that I hear from talking to managers in the trading businesses, both voice and ‘e’, it is that not only do their compliance teams not understand the nuances of markets, they take up valuable time from people on the desk asking unnecessary questions and having basic themes explained to them. It’s just not an efficient model.

I ought to stress, this is not going to be a compliance-bashing piece (well not totally!), rather it is to highlight a growing problem in the industry. We all know that compliance is an all-consuming beast that is eating up resources at a rate of knots – that is one of the consequences of a sustained period of uncertain morality in financial institutions – but should we be asking whether it is becoming too big?

This is a tricky area, of course, after all, who wants to be the one to say they don’t need more compliance? The mood in the industry is still very much ‘safety first’ and it would be a brave, but probably right, person, who asks, ‘have we enough compliance now?’

I think we should be having the conversation, however, because it seems clear that while compliance is growing in size, it is probably reducing in competence. This is not meant to be insulting, rather to express the opinion that inevitably as more staff are hired, the talent pool of people who know markets thoroughly thins out, and inevitably less-experienced staff take up important positions.

I don’t see how this is a good thing. Where is the ‘safety’ in having compliance people who don’t understand enough? Not only do they have to ask basic questions that take up time, but they can probably be fobbed off with an answer from an experienced market practitioner that could veil any misconduct anyway. It’s just typical ‘let’s throw resources at this area’ thinking that sees, once again, the equivalent of a cannon being brought to bear on opening a door that is slightly stuck.

What benefits everyone in this industry, including the compliance teams, is the latter populated with a limited number of skilful, knowledgeable people that can ask the right questions. That way any potential problems are spotted earlier, they can be dealt with and, because the compliance staff are well-trained or have experience, they will have a credibility that trading business managers cannot ignore.

There is also one other potential issue with this surfeit of semi-literate compliance officers – and that is how they themselves are potentially exposed to legal risk.

If an officer doesn’t understand the problem, is blind-sided by a miscreant using bluster and enough technical knowledge to sound suitably authoritative, then how long before a compliance officer is charged with not stopping bad practice?

Of course they can persist asking questions until they understand the answer, but that is not doing them or the business any good. A service provider could be looking at delivering a specific product to a client in competition – if the compliance team hold up the process long enough they could see the firm lose a potentially significant deal and – on a broader scale – weaken a lucrative relationship within the wider organisation.

We need, therefore, to think more carefully about the growth of compliance. Undoubtedly training has to be a big part of the up-skilling process, and that is something firms should be thinking about now, not in a year or two’s time when it could be too late. Equally though, they should be thinking about how their compliance unit is structured. Are the right people in the right place and asking the right questions?

I suspect that if (and I know this is getting into regulatory hell now) they did an audit on their compliance business, a great number of firms would find they actually derived little value from them. There are, of course, pockets of excellence, but the sheer size of the teams means inevitably there are going to be weak pockets of oversight.

That is something the individual, the firm and the industry needs to worry about – and it is something they should do something about.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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