2012 10 bsg uk can compliance be interesting supporting notes version 1


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2012 10 bsg uk can compliance be interesting supporting notes version 1

  1. 1. SUPPORT MATERIALSCan compliance be interesting? This briefer provides the detail supporting a presentation and is not intended to be a standalone paper. To follow along with the presentation, please refer to ht t p: / /bi t . ly /c an co mpl ian c eb ein te r est ing A short story Sally is the breadwinner and matriarch of a single income family. This is based on one of the notional user stories BSG used when designing a system to implement the National Credit Act in South Africa. Sally applies for a loan and the bank needs to determine whether it is reasonable that they provide credit to her. As a result of the checks implemented by BSG, it is understood that her entire family rely on her for income (8 people). She is able to prove income using some papers prepared by her employer but it turns out she is informally employed on a cash basis so has no regularity of income and could be fired at any time. On this basis, it is decided that it would be irresponsible to lend to Sally. Her ability to repay the loan could be compromised at any time and, if it is, the cycle of debt would entrap her entire family. Understanding compliance is about understanding what the legislation is trying to achieve, not just what boxes need to be ticked to progress a business process. The walk of shame The South Sea Company  Founded 1711 with a view to consolidate and reduce the cost of national debt. At the time, each department operated independently, so there was no way of understanding the overall national debt. Granted a monopoly to trade with South America but due to Spanish control of South America there was no realistic prospect of trade.  Company stock rose greatly in value as it expanded its operations dealing in government debt, peaking in 1720 before collapsing to little above its original flotation price. This became known as the South Sea Bubble.  The originators of the scheme knew that there was no money to invest in a trading venture, and no realistic expectation there would ever be a trade to exploit, but the potential for great wealth was widely publicised at every opportunity so as to encourage interest in the scheme. The founders were found to be engaged in insider trading using their advance knowledge of when national debt was to be consolidated in order to make significant profits from purchasing debt in advance.  The expectation of vast wealth from trade with South America was used to encourage the public to purchase shares, despite the limited likelihood this would ever happen. Between August and September 1720, the price of the stock dropped from £1000 to £150. At BSG we are  A result of these events was the Bubble Act, which forbade the creation of joint-stock companies without royal charter. The act was repealed in 1825. The South Sea Company continued its passionate about management of the part of the National Debt until it was abolished in the 1850s. design and delivery of change which makes a difference for our customers and their customers. Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT www.bsgdelivers.com // @bsguk This document can only be reproduced in its entirety. This document does constitute any form of advice from BSG (UK).
  2. 2. SUPPORT MATERIALSCan compliance be interesting? Continental Illinois  In 1984, Continental Illinois became the largest ever bank failure in U.S. history, when a run on the bank led to its seizure by the Federal Deposit Insurance Corporation (FDIC). Continental Illinois retained this dubious distinction until the failure of Washington Mutual during the financial crisis of 2008, which ended up being over seven times larger than the failure of Continental Illinois.  In May 1984, Continental Illinois became insolvent due, in part, to bad loans purchased from the failed Penn Square Bank N.A. of Oklahoma. It was subsequently considered that due diligence was not properly conducted on the purchase of the loan book.  Due to Continental Illinois size, regulators were not willing to let it fail. FDIC feared a failure could cause widespread financial trouble and instability and infused $4.5 billion to rescue the bank. A willing merger partner had been sought for two months but could not be found.  The term "too big to fail" was popularized by Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the FDICs intervention with Continental Illinois.  Continental Illinois was renamed Continental Bank. Over time FDIC sold off its interests and ultimately Continental Bank became part of the Bank of America group. Herstatt Bank  A privately owned bank in Cologne. On June 26, 1974, German regulators forced the troubled Bank Herstatt into liquidation. That day, a number of banks had released payments of Deutsche Mark to Herstatt in exchange for USD to be delivered in New York. Because of time-zone differences, Herstatt ceased operations between the times of the respective payments. The counterparty banks did not receive their USD payments.  As a response, the G-10 formed a standing committee under the auspices of the Bank for International Settlements known as the Basel Committee on Banking Supervision. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee also frames guidelines and standards in different areas - some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross- border banking supervision.  The failure of Herstatt Bank was one factor that led to the creation of the continuous linked settlement platform (CLS), which launched almost 30 years later in 2002. This payment versus payment (PVP) process enables member banks to trade foreign currencies without assuming the settlement risk associated with the process, whereby a counterparty could fail before delivering their leg of the transaction. Enron  Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Claimed revenues at the end of 2000 were $101bn.  At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. The scandal also brought into question the accounting practices and activities of many corporations throughout the United States and was a factor in the creation of the Sarbanes–Oxley Act of 2002. The scandal also affected the wider business world by causing the dissolution of the Arthur Andersen accounting firm.  Enron filed for bankruptcy protection in late 2001 and emerged from bankruptcy protection in November 2004, pursuant to a court-approved plan of reorganization. A new board of directors changed the name of Enron to Enron Creditors Recovery Corp., and focused on reorganizing and liquidating certain operations and assets of the pre-bankruptcy Enron. On September 7, 2006, Enron sold its last remaining business. Northern Rock  On 14 September 2007, the Bank sought and received a liquidity support facility from the Bank of England, following problems in the credit markets. On 22 February 2008 the bank was taken into state ownership. The banks assets were likely sufficient to cover its liabilities, but it had a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis.  Northern Rock is not the only British bank to have called on the Bank of England for funds since the sub-prime crisis began but at the time was the only one to have had emergency financial support from the Tripartite Authority (The Bank of England, the FSA and HM Treasury). The bank was more vulnerable to a credit crunch as its high risk business model depended on funding from the wholesale credit markets – 75% of its funds coming from this source. A collection of BSG (UK) BA practitioner www.bsgdelivers.com // @bsguk insight can be found at +44 20 7390 8674 http://bit.ly/bsgukinsight info@bsguk.co.uk Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT
  3. 3. SUPPORT MATERIALSCan compliance be interesting?  On Friday 14 September 2007, the first day branches opened following this news becoming public, many customers queued outside branches to withdraw their savings. It was estimated that £1 billion was withdrawn by customers that day - about 5% of the total bank deposits held by Northern Rock.  On Monday 17 September, as worried savers continued to flock to some Northern Rock bank branches to withdraw their savings, it was reported that an estimated £2 billion had been withdrawn since the bank applied to the Bank of England for emergency funds. By early afternoon in London, Northern Rocks shares, which had lost 32% on the previous Friday, fell a further 40%. Later that day, the Chancellor of the Exchequer, announced that the British Government and the Bank of England would guarantee all deposits.  Over the next few months there were efforts to stabilise the bank. Change in leadership, sale of significant assets to pay off the Bank of England loans, etc. At the same time, there were ongoing talks within the banking industry to try negotiate a takeover. Lehman Brothers  Lehman Brothers was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the US.  Lehman borrowed significant amounts to fund its investing in the years leading to its bankruptcy in 2008. A significant portion of this investing was in housing-related assets, making it vulnerable to a downturn in that market.  Over the course of 2007 and 2008 it became clear that Lehman’s exposure to the subprime crisis was significant. In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten.  In the first weeks of September 2008 Lehman’s stock continued to plummet. The president of the Federal Reserve Bank of NY tried to negotiate an emergency purchase of Lehman’s but was not successful. (The Bank of England and FSA had veoted a deal for Barclays to purchase Lehman’s).  Lehman Brothers filed for bankruptcy protection on September 15 2008. Various aspects of the business were subsequently purchased by banks across the globe, including Barclays purchasing the core business. There were a series of substantial knock-on effects in the markets Lehman’s served including the then single biggest Dow Jones single-day drop since 09/11 (4.4%).  The U.S. Trustee-appointed examiner of the Lehman Brothers Holdings Inc. bankruptcy said the firm exceeded its own risk limits and that the U.S. Securities and Exchange Commission "simply acquiesced." The near collapse of Bear Stearns in 2008 caused both the SEC and the Federal Reserve Bank of New York to place embedded teams within Lehman to monitor its condition. The Federal Reserve Bank also was in regular talks with the SEC and the New York Fed about the situation. "So the agencies were concerned. They gathered information. They monitored. But no agency regulated. RBS IT failure  Millions of account holders at RBS and subsidiary banks were unable to access money for up to two weeks. The bulk of these were unable to access for up to a week but for Ulster bank customers the outage lasted up to a fortnight.  The Register reported that this was due to an error in scheduling a batch processing job as part of a systems upgrade. Because this didn’t run on night 1 of the issue, all subsequent transactions also could not be run. The bank then spent days playing catching up. The report suggested this was in part due to offshoring the management of this to India.  RBS set aside £125m for customer redress. Barclays / LIBOR  The London Interbank Offered Rate is a notional average interest rate leading banks in London would be charged if borrowing from other banks. It is set daily by the BBA based on overnight submissions from 16 reporting banks and is subsequently used to set the price for many thousands of financial products (interest rates, mortgage rates, derivative pricing, etc.)  Barclays were found guilty of manipulating the LIBOR rate. Barclays were fined £290m. It is expected that other high street LIBOR reporting banks are likely to be found guilty of similar manipulations.  The BBA are looking to transfer oversight to regulators although it’s not yet clear where this will be transferred to.  For more information, see BSG (UK) internal knowledge briefing - http://www.slideshare.net/BSG-UK/2012-07-xx-libor-in- 5mins-version-1 A collection of BSG (UK) BA practitioner www.bsgdelivers.com // @bsguk insight can be found at +44 20 7390 8674 http://bit.ly/bsgukinsight info@bsguk.co.uk Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT
  4. 4. SUPPORT MATERIALSCan compliance be interesting? HSBC Mexican drug cartels  A US Senate report revealed that HSBC’s lax anti-money laundering policies allowed Mexican drug money, Iranian terrorist money, and even suspicious Russian money to enter the U.S. and gain access to U.S. dollar liquidity over the last couple of years.  HSBC actively circumvented rules designed to “block transactions involving terrorists, drug lords, and rogue regimes.” In one case, “two HSBC affiliates sent nearly 25,000 transactions involving $19.4 billion through their HBUS [HSBC’s U.S. affiliate] accounts over seven years without disclosing the transactions’ links to Iran.”  A report compiled for the committee detailed how HSBCs subsidiaries transported billions of dollars of cash in armoured vehicles, cleared suspicious travellers cheques worth billions, and allowed Mexican drug lords buy to planes with money laundered through Cayman Islands accounts. Other subsidiaries moved money from Iran, Syria and other countries on US sanctions lists, and helped a Saudi bank linked to al-Qaida to shift money to the US.  HSBC acknowledged that “in the past, we have sometimes failed to meet the standards that regulators and customers expect.” Vowing to improve their oversight and compliance with the law, they committed to fixing what is wrong, taking the opportunity to learn from previous mistakes.  The investigation showed how the bank’s regulator, the Office of the Comptroller of the Currency (OCC) failed to take a single enforcement action against HSBC despite numerous violations by the international bank. Among them, failing to monitor $60 trillion in wire transfer and account activity, a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity, and a failure to conduct anti-money laundering due diligence before opening accounts for HSBC affiliates. Standard Chartered  Standard Chartered is said to have schemed to hide 60,000 transactions valued at about $250bn (£160bn) which breached sanctions with Iran. The CEO admitted to only 300 breaches, with a much smaller value of about $14m.  The bank agreed a £220m fine to settle the matter which, at the time, threatened their banking license.  The settlement includes the installation of monitor for at least two years to evaluate the banks risk controls. Inspectors from the DFS (New York Dept Finance Services) will be installed at the banks office in New York and the bank will "permanently install personnel" in New York solely to ensure that it adheres to money laundering laws. Selected regulators The intention in detailing selected regulators is to demonstrate the complexity of the environment. This list is not intended to be exhaustive. UK: FSA  The Financial Services Authority (FSA) is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom.  It is in the process of being split up under a plan announced by the Chancellor in 2010. It will become the PRA and the FCA.  PRA: The PRA will be part of the Bank of England and will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies. This means ensuring banks hold enough capital and liquidity to withstand shocks unaided.  FCA: The agency will regulate financial firms providing services to consumers and maintain the integrity of the U.K.’s financial markets. It will focus on the regulation of conduct by both retail and wholesale financial services firms. UK: SOCA  Serious Organised Crime Agency  SOCA takes over responsibility for dealing with suspicious activity reports (SARs), previously made to the National Criminal Intelligence Service (NCIS) under the money laundering legislation.  In June 2011, the coalition government announced that SOCAs operations will be merged into a larger National Crime Agency, to launch in 2013. US: The Federal Reserve  The Central Banking System of the USA.  Responsible for conducting the nations monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. A collection of BSG (UK) BA practitioner www.bsgdelivers.com // @bsguk insight can be found at +44 20 7390 8674 http://bit.ly/bsgukinsight info@bsguk.co.uk Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT
  5. 5. SUPPORT MATERIALSCan compliance be interesting? US: The SEC  Federal agency which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nations stock and options exchanges, and other electronic securities markets in the United States. US: Commodities Futures Trading Commission  The U.S. Commodity Futures Trading Commission (CFTC) is an independent agency of the United States government that regulates futures and option markets. US: Office of the Comptroller of Currency  The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and thrift institutions and the federal branches and agencies of foreign banks in the United States. Europe: European System of Financial Supervisors  The European System of Financial Supervisors is an institutional architecture of the EUs framework of financial supervision created in response to the financial crisis.  European Banking Authority o Activities include conducting stress tests on European banks to increase transparency in the European financial system by identifying weaknesses in banks capital structures. HQ in London.  European Securities and Markets Authority (ESMA) o ESMA works in the field of securities legislation and regulation to improve the functioning of financial markets in Europe, strengthening investor protection and cooperation between national competent authorities. o The idea behind ESMA is to establish a “EU-wide financial markets watchdog”. One of its main tasks is to regulate credit rating agencies, such as Moody’s.  European Insurance and Occupational Pensions Authority o Regulates the insurance sector Europe: European Systemic Risk Board  It is tasked with the macro-prudential oversight of the financial system within the Union in order to contribute to the prevention or mitigation of systemic risks to financial stability in the Union. Global: Bank for International Settlement  The BIS was established by an intergovernmental agreement in 1930. The Bank was originally intended to facilitate reparation payments imposed on Germany by the Treaty of Versailles after the First World War.  BIS has two specific goals: to regulate capital adequacy and make reserve requirements transparent.  The BIS provides the Basel Committee on Banking Supervision with its seventeen-member secretariat, and with it has played a central role in establishing the Basel Capital Accords of 1988 and 2004. What ’s hot? Dodd-Frank  US regulation designed to prevent “too big to fail”. Governs the entire financial services industry.  For more information, see BSG (UK) Insight paper - http://bit.ly/bsgukdoddfrank FATCA  US Foreign Account Tax Compliance Act  Trying to close the tax gap where US citizens living and working abroad are not declaring their interests to the IRS. A collection of BSG (UK) BA practitioner www.bsgdelivers.com // @bsguk insight can be found at +44 20 7390 8674 http://bit.ly/bsgukinsight info@bsguk.co.uk Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT
  6. 6. SUPPORT MATERIALSCan compliance be interesting? RDR  RDR is a framework of requirements and regulations created by the Financial Services Authority (FSA) to address certain long- standing problems with how the financial service industry operates and, at the same time, prepare retail investment advisers for the future. Short Selling  Calls for increased disclosure and settlement on short positions.  It introduces a pan European disclosure regime for net short positions in EEA listed shares and sovereign debt, as well as a ban on naked physical short sales of EEA listed shares and sovereign debt, and a ban on credit default swap positions in EEA sovereign debt which, broadly speaking, do not serve to hedge exposure to the underlying debt  Regulations come into force November 1. Basel  Global accords, under the auspices of the Basel Committee (part of the BIS)  Capital requirements and liquidity management in the banking sector Solvency II  EU directive that codifies and harmonises EU insurance regulation  Capital requirements and liquidity management in the insurance sector  Scheduled to come into effect 1 January 2014 AML & KYC  Anti-money Laundering and Know Your Customer  For more information, see BSG (UK) Insight paper - http://bit.ly/bsgukamlkyc What ’s next? Vickers  Independent Commission on Banking, chaired by John Vickers. Presented recommendations to UK Government in September 2011.  Its headline recommendation was that British banks should ring-fence their retail banking divisions from their investment banking arms to safeguard against riskier banking activities, but it also made a number of other recommendations on bank capital requirements and competition in retail banking. The government announced the same day that it would introduce legislation into Parliament aimed at implementing the recommendations. LIBOR  See above MiFID  Markets in Financial Instruments Directive (MiFID)  Provides harmonised regulation for investment services across the 30 member states of the EU. MiFID is the cornerstone of the European Commissions Financial Services Action Plan whose 42 measures will significantly change how EU financial service markets operate.  The main objectives of the Directive are to increase competition and consumer protection in investment services. For more insight For more insight into BSG’s approach to compliance projects, please refer to http://bit.ly/bsgukcompliance A collection of BSG (UK) BA practitioner www.bsgdelivers.com // @bsguk insight can be found at +44 20 7390 8674 http://bit.ly/bsgukinsight info@bsguk.co.uk Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT