Chapter 9 financial compliance programme

Chapter 9
Financial Compliance
Programme
The Presentation Slides for Teaching
Financial Regulations and Compliance Practices
Website : https://sites.google.com/site/quanrisk
E-mail : quanrisk@gmail.com
Copyright © 2018 CapitaLogic Limited

Declaration
 Copyright © 2018 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Principal, Structured Products Analytics, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, FRM, PRM.
Copyright © 2018 CapitaLogic Limited 2

Regulation vs compliance
Regulator Financial institution
Regulation
Compliance
Ordinances&
guidelines

Outline
 Compliance function
 Compliance programme
 Professional challenges
 Control self-assessment

Financial institution
Front office
 Sales
 Marketing
 Customer services
Back office
 Settlement
 Accounting
 Information technology
Middle office
 Compliance
 Risk management

Financial compliance streams
 General compliance
 Deposits, loans and mortgages
 Securities brokerage
 Licensing
 Regulatory reporting
 Others
 Specialist compliance
 Anti-money launder and counter-terrorist financing
 Private banking and wealth management
 Derivative securities and treasury products
 Credit risk modelling
 Technology risk management

Compliance function
 Large financial institution
 A separate function under the board of directors
 Medium and small financial institution
 Compliance department
 Risk management and compliance department
 Legal and compliance department
 Dedicated compliance for private banking
 Directly under the board of directors

Compliance function
 Knowledgeable specialist
 Independent of any other business functions
 Designated compliance officer

Compliance duties – internal
 Ensure a FI’s operations to be inline with statutory and
regulatory requirements
 Design and implement compliance programmes
 Develop policy templates
 Develop procedure templates
 Review and comment policies and procedures
 Drive training and awareness initiatives
 Conduct regular and ad-hoc compliance reviews
 Interpret ordinances and regulatory documents in simple
language to colleagues

Compliance duties – external
 The official communications channel with
regulators
 Review and approve documents to be
submitted to regulator
 Clarify ordinances and regulatory documents
with regulators and lawyers
 Co-ordinate compliance activities among all
external parties

Expectations from FI operations
 Say “Yes, please go ahead.”
 Compliance officer should tell
 What can be done?
 What cannot be done?
 Why?
 Who said so?
 Most important
 How can be done?

Outline

A typical compliance programne
 Senior management
oversight
 Policies
 Procedures
 IT systems
 MIS reports
 Training and awareness
 Compliance review
 Independent assessment
 Internal audit

Senior management oversight
 Compliance programme committee
 All directors as members
 Terms of reference
 Regular meeting
 Meeting agendas
 Meeting minutes

Policy
 General template prepared by the compliance
 Policy prepared by the senior management of a
functional department in accordance with the
general template
 Reviewed and updated annually
 Principle based
 Cannot be used directly for the FI operations
 Coverage and details match the regulatory
guidelines

Procedures
 General template prepared by the compliance
 Operational procedure prepared by the middle
management of a functional department in
accordance with the general template
 Include manuals, checklists, templates and forms
 Reviewed by the compliance
 Approved by the department head
 Reviewed and updated whenever there are any
regulatory and/or operational changes

IT systems
 Efficiency
 Effectiveness
 Operational control
 Two level authorization
 MIS reports
 Centralized historical records

MIS reports
 Customer risk classification
 No. of exception reports
 No. of cases under internal investigations
 Departmental comparison
 Trend analysis

Training and awareness
 All staff
 New staff
 Front office
 Back office
 Senior management and internal audit
 Compliance

Compliance review
 Regular
 Once every year, comprehensive coverage in a few
selected departments
 Once every quarter, thematic coverage for major
departments on selected subject
 Event driven
 Regulatory initiatives
 Triggered by incidents
 Triggered by media reports

Independent assessment
 An independent external expert to review,
comment and suggest improvements to a
compliance programme
 Independent external expert
 Big 4 accounting firms
 Solicitor firms
 University professors

Audit and examination
 Internal audit
 Local office
 Regional office
 Head office
 External audit
 Big 4 accounting firms
 Regulatory examination
 HKMA
 SFC
 IA

Outline

Challenges facing compliance
 External
 Regulatory requirements keep on tightening
 Regulatory documents are not written in human
language
 Internal
 Compliance is a cost centre
 Limited budget
 Lacking manpower
 High staff turn over rate
 No loyalty between employers and employees

Loyalty in compliance

Major issues of regulatory documents
 Guidelines, guidance papers, circulars, codes
and best practices have no legal power but
interpretive power
 Principle base
 Full of “suitable”, “adequate”, “appropriate”,
“necessary”, “sufficient”, “reasonable” etc.
 Most written by somebody totally without FI
experience

Myth of regulatory documents
Basel documents
Banking policy
Banking supervision
Bank operations
Bank compliance

Compliance as a difficult middle man
 Pressure from FI operations
 As relax as possible
 Pressure from regulators
 As stringent as possible
 Pressure from senior management
 Highest profits + Good compliance records

Compliance not an easy job
 High professional requirements
 Long working hours
 Everything in a FI may be subject compliance
review
 Confrontation with other colleagues
 Confrontation with regulators

Common issues
 Lack FI operations experience
 Do too much daily operations
 Lack professional inputs
 How not to do business by following the regulation?
 How to make profit without violating regulations?
 Overlook the backdoors
 Neglect the words between the lines

Sound practices
 Never get into daily operations
 Learn more about the daily operations
 Maintain an compliance professional network
 Use professional firms and academic scholars
skillfully
 Use compliance automation tools
 Streamline the schedule of internal audit,
external audit and/or regulatory examination

Regulatory expectation management
 Willing to be pin pointed by regulators
 Demonstrate improvement instead of
perfection
 Design strategically imperfect compliance
program
 Show action plan instead of corrective action
results
 Prioritize corrective actions

Regulatory relationship management
 Handle regulators as peers instead of superiors
 Senior management never entertain front line
regulators directly
 Never submit requested information to regulators
before due dates
 Use e-mail as the primary communications channel
with regulators
 Keep all communications records with regulators
 Ask regulator “Yes” or “No” instead of open end
questions
 Never commit in written support of any regulatory
initiatives

Professional services
 Independent
 To maintain relationship with other business units
 To eliminate biases
 To avoid cutting corners
 Expert
 To avoid blind spots
 To bring in external practices
 To inform latest industry development

Professional services
 Providing improvements to a compliance
programme
 Small firms better than large firms in terms of
quality of deliverables
 Providing confidence to regulators
 Large firms better than small firms in terms of the
brand name effect

Compliance tool box
 Ordinance
 Subsidiary legislations
 Guidelines
 Guidance papers
 Circulars
 Codes of conduct
 Best practices
 Exam study manuals
 Reports from
professional firms
 FATF documents
 MAS, OCC, SEC, FSA
and APRA documents
 Academic researches

Outline

Control self-assessment
 A business unit assesses its operations and
activities against a list of control procedures
extracted from a procedural document
 Internally driven and often incorporates
checklists and/or workshops to identify the
potential risk facing the business unit

Self-assessment of control procedures
Compliance level
Control procedure Full Partial Not N/A
The dept. should do this *
The dept. should do that *
The dept. should not do this *
The dept. should not do that *
The dept. should … *
The dept. should not … *

Supplementary information
 Fully compliant
 Why?
 Partially compliant
 Which part not
complaint?
 Which part complaint?
 Why?
 Not compliant
 Not applicable
 Why?
 Supporting document
 Title
 Version date
 Author
 Reviewer
 Approval authority

For partially or not compliant
control procedures
 Corrective action plan
 Action items
 Completion date
 Justification of not to compliant
 Cost out weights materially the benefit
 Alternative control procedure in placed already

CSA summary by subsidiary banks

CSA summary by control procedures

CSA summary by subsidiary banks
and control procedures

Compliance projection

Chapter 9 financial compliance programme

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