It is important for all Authorized Persons to be in full compliance for the benefits of the markets and investors. In general, when market players conduct their businesses according to rules and regulations, it creates harmony and confidence in the capital market. Investor feels safe and protected, and not being victimized or exploited. Specifically we may say that compliance will lead to the following:
1. Transparency in the market. Existence of adequate rules and regulations that cover various aspects of the securities business, and these rules and regulations are implemented and enforced in a strict and fairly manner to all the licensed Authorized Persons. Any breaches and violations are subject to legal actions provided by the law.
2. Transparency in the Authorized Persons organizations. There exist complete and clear processes, standards and procedures that cover all aspects of functions and operations of the APs. All managers, staff and employees understand these processes, standards and procedures and the consequences of not complying with them. This will create well- functioning intermediaries securities business.
3. Investor confidence. A high degree of market compliance among the market players will lead to investor confidence in the market. Investors will quickly lose confidence in the market if laws and regulations are not properly enforced. Lack of enforcement will open doors to manipulations and unfair practices of big market players at the expense of small investors. In this time of globalization and on-line trading, if investors lose confidence in the local market, they will turn to other competing markets.
4. Market stability. This is very much related to investor confidence as investor confidence will lead to market stability. When investors feel safe, confidence and protected, they can focus their efforts on investment activities; these include gathering information on the economy, market and securities, conducting research and constructing effective investment portfolios. These activities will help towards contributing to an orderly market that is conducive to market development that will lead to an efficient allocation of resources in the economy. 5. Avoid costly mistakes. We have seen many cases of con-compliance and mismanagement in
the international market. These events led to tremendous loss and complete catastrophes, not only to the non-compliant organizations but also to the markets in general. (Interested readers
16.3 COMPLIANCE AND CONTROL FUNCTIONS
Learning objective 16.3 – Understand the relationship of the compliance function to the internal control function
Compliance is closely related to internal control. A compliance program within the organization is the formal measures taken by the management to ensure that it meets the requirements of the laws and regulations, and acts as an insurance against breach of these rules. Internal control refers to a set of standards, policies and procedures that define the conduct of the organization, managers and employees. They define the boundaries within which conduct of business will take place. Going beyond the boundaries will constitute breach of conduct. These standards and polices are established in accordance with the relevant laws and regulations. Hence complying with the companies‟ standard operating procedures ensures compliance with the Authority‟s rules and regulation.
Authorized Persons are required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk. A compliance and control program should have the following objectives:
1. To prevent breach of the laws, rules and regulations, code of conduct, internal policies 2. To be able to quickly identify any deviations or breaches of the rules and regulations 3. To be able to implement an effective corrective action in cases of deviations and breaches 4. To promote a culture of compliance within the organization
To be effective in carrying out the function of compliance and control, APs have to be mindful of the constant and rapid changes in the environment that is influencing and affected the business securities. These include:
1. The use of information and communication technology 2. Liberalization and globalization of the market
3. On-line trading, electronic banking, cross-border trading and listing 4. Evolving needs of investors and increased sophistication of their trading To establish an internal control system, the following steps may be taken:
1. Establish an appropriate organization structure. This sets out the hierarchical structure, division of functions and managerial levels within the organization. The organization structure should clearly indicate (1) which department is responsible for each business function, and (2) make clear the lines of authority and accountability, and responsibility and reporting.
2. Segregation of duties. This involves allocating tasks among employees in a manner that one employee‟s tasks act as a “check and balance” over another employee‟s tasks. In APs, the
usual examples of segregation would be between: procurement of client and credit analysis; trading activities and settlement; daily maintenance of general ledger balance and validation of general ledger balance; and maintenance of account and custody of collateral.
3. Authorization and approval: All transactions should require approval by an appropriately authorized official. Approval limits should be commensurate with the level of authority. All transactions need to be properly documented for compliance and audit review.
4. Accounting control. This is necessary for checking the accuracy of information contained in the accounting records and books of the company on daily basis. Checking must be made on the accuracy of entries, calculations, account balances, trial balances, etc.
5. Security and safe-keeping. This relates to the custody and safeguarding of physical assets, accounting records, data, and placing access restriction to business premises and security areas within the premises.
16.4 DEVELOPING THE COMPLIANCE CULTURE
Learning objective 16.4. – Understand the process of requirements and developing a compliance culture within the authorized person‟s organizations
A compliance culture refers to the environment in the Authorized Persons organizations where all managers and employees are aware of, understand and comply to the internal standards and procedures (developed and adopted by the organization) and the external rules and regulations (from the Authority). When this is present in the day-to-day conduct of the activities, it becomes a part of the work culture of the organization.
While many of the internal procedures need full commitment of the Compliance Officer for its implementation, the ultimate responsibility for establishing a compliance culture rests with the Board of Directors and the CEO. One of the good strategies to achieve this is through a mission statement that incorporates the ethics and compliance elements in it. The following may be used as guidelines to establish an effective compliance culture in an organization:
1. Incorporate ethics and compliance in the mission statement of the Authorized Person. 2. Have a well-documented operations manual incorporating practices that ensure compliance.
The operations manual should include practical procedures and contain explanations on the reasons behind each requirement and the consequences if the requirement is violated. The manual should also contain explanations of individual‟s responsibilities for each function. 3. Have a proper system for record-keeping. This is essential to demonstrate and prove
compliance.
6. Include work ethics and compliance in performance evaluation of staff.
7. Have the Compliance Officer to advise on the regulated business areas on key matters on compliance.
8. Have a regular compliance reporting to the board 9. Have an effective internal control system.
16.5 COSTS AND BENEFITS OF COMPLIANCE
To achieve a fully compliant organization, an AP must incur costs. However, these costs will be far outweighed by the benefits as we discussed in the following sections. This discussion is giving an understanding that the AP must be ready with the necessary budget in order to cover the necessary expenses, directly or indirectly related to the compliance function, and that these costs are worth spending to prevent far bigger calamities.
16.5.1 THE COSTS OF COMPLIANCE
Learning objective 16.5.1 – Understand the costs incurred by Authorized persons to create a compliant organization
1. Employing a specialized staff as a Compliance Officer for the AP means additional costs in terms of remuneration and facilities. For bigger organizations, a full Compliance Department need to be set up, complete with the required personnel and facilities. This would require a larger budget for the AP.
2. Staff development budget will also increase because the Compliance Officer and other employees in the Compliance Department need to be trained with specialized compliance- related courses.
3. Costs may also be incurred in the form of administrative expenses related to the compliance function, such as paperwork, generating reports, fees and fines, etc.
4. In addition there are hidden costs in relation to compliance functions. These include, human resources devoted to meetings, reviewing performance, reporting.
16.5.2 THE BENEFITS OF COMPLIANCE
Learning objective 16.5.2 – Understand the benefits gained by the authorized persons from compliance
1. One of the major benefits of compliance is better risk management. Along with the existence of a compliance culture in the organization, risk management will also be in place. These include having appropriate standard operating procedures and systems, clear and non- overlapping roles of the functions and departments, clear demarcation of duties and responsibilities.
2. Another form of benefits is in the form of avoiding fines and litigation due to non-compliance or actions of employees or staff that are perceived to be non-compliance to the rules and regulations.