It may be an essential element of a well-functioning society, but for most captains of industry regulation is at best a necessary evil and at worst a thorn in their side.
Over the years, the barrage of red tape from Whitehall, Brussels and beyond – and the inspections and bureaucracy that accompany it – have continued to pile up. General counsel now spend on average 67 per cent of their time on regulatory issues compared with 5 per cent just five years ago, according to research by Legal Week.
Amid calls to reduce the regulatory burden, the onus is on businesses to have effective governance, risk and compliance (GR&C) practices in place to minimise exposure to the increasing and varied risks they face.
The implications of falling foul of the rules are not to be sniffed at. The then City watchdog, the Financial Services Authority (FSA), doled out a record £312 million in fines in 2012, including the two largest fines in its history to UBS and Barclays as it made good on promises to hold big-name companies to account for the Libor rate-setting scandal and other compliance failings that put client and investor money at risk.
As a European Commission investigation into suspected price-rigging at BP, Shell and Statoil rages on, experts foresee increased regulatory activity to tackle anti-competitive behaviour. Corrupt practices are also under the regulatory spotlight after Prime Minister David Cameron said tackling corruption in developing countries would be a priority of the UK’s presidency of the G8.
“There’s also a growing focus on the transparency and simplicity with which regulated industries sell products to customers,” says Stephen Allen, head of global legal services transformation at PricewaterhouseCoopers (PwC) Legal.
Compliance may, historically, have been deemed the graveyard for legal careers, but despite widespread corporate belt-tightening, investments in governance, risk and compliance are growing as the cost of regulatory failings – not just fines, but also reputational damage – propels GR&C to the boardroom agenda.
“Whereas companies may have had a compliance officer, now they have a whole floor of them and a director on the board with responsibility for compliance,” says Tony Woodcock, a commercial litigation partner at law firm Stephenson Harwood, who has advised parties in FSA investigations, including Tijane Thiam, Prudential global chief executive, and John Pottage, chief executive of the UBS wealth management function.
Experts foresee increased regulatory activity to tackle anti-competitive behaviour
Compliance has also shifted up a gear from box-ticking and reams of dusty compliance manuals. “It’s no longer sufficient to observe the spirit of the rule. The regulator will test how the business in complying with the regulation and look at documentary evidence that policies and procedures are in place, and are being adhered to. There’s also a much greater self-reporting requirement if there’s a breach or suspected breach,” PwC Legal’s Mr Allen adds.
Staff training as well as ongoing monitoring and review of compliance strategies are, experts urge, key to success. “You also need sanctions in instances where basic procedures are not being adhered to,” Mr Woodcock warns.
However, Professor Michael Power, director of the Centre for the Analysis of Risk and Regulation at the London School of Economics, believes that highly formalised governance in response to regulation can actually be counterproductive. “It can create new risks as it distracts key actors from what matters,” he says.
REGULATION
RESPONDING TO RISE OF FINANCIAL REGULATION
These are difficult times for the UK’s legal financial services industry, writes Ben Rigby. Whether through regulatory interventions following investigations into product mis-selling or inter-bank rate fixing, the industry funds itself in the spotlight.
A 2012 PwC survey found that among the issues handled by in-house legal teams, the number of regulatory disputes was expected to increase the most over the next five years worldwide.
One solution, it seems, would be to increase staff numbers. A recent survey by recruiters, Laurence Simons and the Association of Corporate Counsel (ACC), showed there was greater emphasis on dealing with finance and regulatory issues in-house rather than using external firms. Just over 51 per cent of legal departments said they would be bringing regulatory issues in-house this year compared with 31 per cent in 2012.
In-house legal departments are also increasingly integrated; most respondent companies now have dedicated compliance and regulatory functions (67 per cent) or see the requirement to create the capability.
Dispute resolution and regulatory cases have risen in significance over the past year, and most areas are seeing a greater focus on in-house capability, fostering what ACC president Veta Richardson calls “an aggressive regulatory and changing business environment”.
The ACC survey suggested this reflected the continuing implementation of new legislation and regulation, including banking and capital adequacy requirements, as well as the UK Bribery Act.
However, Ms Richardson says, given the economic pressures facing European companies, in-house lawyers report they must do more with less. This places the emphasis on the growing use of technology to take up the slack.
Nina Barakzai, an in-house lawyer and chairman of Commerce & Industry Group, says the more mature an organisation, the more likely it is to have embedded quality corporate governance controls and procedures, which furnish the right checks and balances to underpin good behaviour.
Advances in legal and compliance training could help assist in ensuring better regulatory outcomes, along with using mobile technology or interactive websites, more informal means of delivering key messages via social media, or mentoring; the more interactive the better.
