Compliance managers warned of troubles ahead

Compliance departments face regulatory challenges warns Chase Cooper

LONDON – “Expect serious new regulation as a result of the events of the past 12 months,” warned Nick Gibson, director, compliance solutions at Chase Cooper, at a compliance breakfast briefing held in London this morning.

The fallout from the credit crunch and the continuing market volatility is expected to last at least another two years, according to Gibson, and compliance managers need to be ready to face the new challenges that will emerge over the next 18 months. As highlighted in the Senior Supervisors Group’s paper on lessons learned from the crisis areas the regulators will be focusing on include ensuring firms review their risk management practices to avoid relying too much on models without the addition of expert judgement, enforcement of internal controls (also following the Société Générale rogue trader event), senior management engagement and understanding of accountability for risks, and stress-testing parameters and scenario analysis.

Bearing these areas of focus in mind, compliance managers were warned to take several steps now to prepare for the future. They should initiate greater collaboration between their risk management function and the compliance department to share information and priorities. As budgetary tensions within financial institutions increase in the illiquid environment, compliance officers need to prepare to expand and manage risk under the pressure of a cost freeze until the new regulatory focus bites. They also need to avoid over-reliance on compliance risk models and place more focus on the application of expert judgement. Reinforcing and reminding senior managers again and again about their responsibility and accountability is also a priority before the regulators do.

Firms will need to watch for unusual trading activity in their own securities at a business or senior level, and keep an eye on the behaviour of front-office staff. As traders face potential redundancy, low bonuses and sitting on portfolios that are impossible to value in the current climate, the risk of abuses ramps up. Keeping an open dialogue with regulators was also flagged as one of the top areas of concern for compliance officers.