Better career paths, new reporting lines as compliance gains status at banks – global report

March 20, 2014

By Bora Yagiz, Compliance Complete

NEW YORK, Mar. 20 (Thomson Reuters Accelus) – The increasingly important role compliance risk management plays in the banking sector is demonstrated in areas ranging from reorganized risk departments to clearer reporting lines and more rewarding career paths, according to a report by the financial consultancy Accenture.

“The roles of the risk, and especially of the compliance, departments have increasingly been gaining stature within banks in the last five years or so,” said Steve Culp, senior managing director of finance and risk services at Accenture. “Banks are more frequently increasingly adopting organizational structures that connect and align the compliance officers more closely with their decision-making bodies, such as with senior management or the board.” 

In the years before the financial crisis erupted in 2008, bank compliance officers held relatively little esteem in their organizations as opposed to, say, to their colleagues on the trading desk, and would likely be resented for concerns expressed too candidly.

Since the crisis, banks have faced more complex regulations and stricter enforcement. Failing to comply would damage their reputation and draw hefty fines. JPMorgan Chase, for example, has topped the list of banks paying compliance-related penalties, with settlements last year of about $20 billion to clear up legal claims over mortgage issues, derivatives and power trading.

UBS and RBS also had to pay $885 million and $612 million respectively for mortgage-backed securities and interest-rate lapses. The reputations of many other major banks were marred because of interest-rate benchmark rigging, tax fraud, and other misconduct.

In response, banks have scrambled to reorganize their compliance and risk departments. Goldman Sachs, HSBC, Barclays, and JP Morgan Chase have all elevated the role of their chief compliance officers (CCOs) and of their compliance departments in general, and empowered them with more corporate resources.

Following its London Whale trading debacle, JPMorgan decided last year to have its compliance managers report directly to the chief executive and not to the company’s general counsel. Barclays took a similar step when its chief executive announced early last year that, as part of a corporate culture transformation dubbed “Project Transform,” all compliance officers were to report directly to him.

For its part, HSBC — on the heels of a $1.92 billion settlement with U.S. regulators over money-laundering failures and the departure of its CCO in November last year — segmented its compliance department by specific functions. It gave each function more autonomy rather than keeping them all subjected to a single central authority as had been the practice. The bank, furthermore, elevated the stature of its CCO to rank among the top 50 officers within the organization, and increased its compliance budget tenfold.

The Accenture report, which was based on surveys with compliance officers at 100 banking and capital-markets firms globally, indicates that there has been a significant shift in internal reporting lines for bank compliance departments. While 70 percent of respondents could not chart their compliance programs as recently as 2009, about the same percentage of respondents surveyed in the United States (64 percent), now state that their compliance departments report either to the board of directors or to the company CEO.

“Aside from offering increasingly more compensation over the years, leaders in compliance departments are now focused on building a more meaningful career path for many as an additional incentive for retention,” Culp said.

Banks have also grown active in providing training and rotational programs across departments to expose their compliance officers to different aspects of risk management. They keep hiring through headhunters, referrals in the industry for senior-level positions, as well as on campuses for junior level staff. Only 14 percent of U.S. banks expressed that they do not have any skill gaps to fill.

The study also underscores that the trend in investment in compliance programs is set to continue in the near future, with 92 percent of the U.S. banks expecting an increase in 2014, compared to 2013, especially in the area of analytics and risk modeling. In January this year, Goldman Sachs announced that in 2013 it had set aside $962 million for legal and regulatory expenses, more than double the 2012 amount of $448 million.

Driving demand

U.S. banks have identified the following three aspects of compliance risk management as driving the greatest demand for more resources, the report found:

  • Changing regulatory environment (26 percent);
  • Building of compliance risk management models and their periodic validation (24 percent);
  • Monitoring and maintenance of compliance risk within acceptable limits (22 percent).

An increasing number of banks have also been relying on shared services, namely for bankwide compliance-standards setting, according to the report.

This trend of internal shared services is echoed externally by cooperation among banks as well. In early March this year, six banks (JPMorgan, Citigroup, Bank of America, Commerzbank, Standard Charter, and Societe Generale) agreed to develop a central register with Swift, a Brussels-based group used by thousands of banks to exchange financial messages and to collect and share standard information they require as part of their due-diligence processes.

This agreement aims to markedly improve know-your-customer’ policies and bolster protections against money laundering and fraud.

Seen as a mere “cost center” with a wary eye until quite recently, compliance departments are now essential to banks’ success in protecting their reputation and the bottom line.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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