So, Who is Taking Care of Business? The Compliance Officer in Times of Economic Distress
It is not a startling revelation to observe that a principal side-effect of the current tribulations affecting the financial services industry is a marked shrinkage in revenues. Inevitably, there is a domino effect to the diminution in revenues and profits, and the financial services community, which potentially encompasses a wide array of businesses, including securities brokerage, investment advisory services, insurance, and banking, are under pressure to dramatically cut costs and reduce expenses, which often is interpreted to mean reduce headcount. This article will focus on one of the dangers faced by the brokerage/advisory industry if the reduction of costs includes the downsizing of compliance departments.
In the past, management often used numbers creatively, and reductions in staff levels at many entities historically have come in the form of the elimination of open but unfilled spots on the roster. By not filling the open spot, it may be argued that the group or department is down in head count, hereby meeting the corporate mandate to reduce or eliminate costs. Today, the cuts are deeper and closer to the bone, and they are across the organization. No segment of the business is immune or inured, including compliance staff.
To appreciate its value to the entity, one must first define the role played by the compliance department. When it is functioning at its best, compliance is a pro-active body, anticipating areas of potential concern when a new product or business line is introduced, or formulating measures that are both practical and effective when regulatory rules change. The compliance arm is often vested with responsibility for identifying issues before they become problems or fester too long, working toward practical and therapeutic solutions and not just treating the side effects. This ability often comes from an innate knowledge of the firm, how it does business, and the standards posed by the regulatory agencies and the world at large on the conduct of firms operating in a highly regulated environment. The seasoned compliance officer develops a sixth sense for problems, recognizing the unusual from the pedestrian, creating his/her own “watch list” of potential sources of problems (e.g. know your broker), and generally being the eyes and ears, and maybe even the conscience, of the organization.
Unlike the role often assumed by a firm’s legal department, which is frequently reactive and saddled with addressing actual or perceived sales practice violations or probing and demanding regulatory inquiries, compliance is vested with the responsibility to “prevent, avoid, and detect,” and to address in timely fashion procedural weaknesses or ethical shortcomings.
Wall Street today is a broken and battered remnant of a once proud pillar of U.S. economic strength. While it’s convenient to blame greedy bankers and brokers for this unfortunate turn of events, its difficult to argue that compliance performed exceptionally well or with remarkable effectiveness in the recent past either. History has taught that even when fully staffed, the compliance task is difficult and success often ephemeral. Unfortunately, the short term cost benefits associated with a reduction of compliance personnel may prove illusory, increasing the likelihood that the company will pay later, perhaps at a significantly higher price, for problems that may have been avoided or detected earlier. Unless the organization is prepared to treat these later, magnified problems as simply a deferred cost of doing business, termination decisions should not be made capriciously or without careful and deliberate consideration of the repercussions and ramifications.
This is not to propose that compliance personnel not share in the vicissitudes of the organization, especially if they hope and expect to share in the firm’s fortunes. However, deep and non-surgical efforts to trim compliance staff may not bode well for the future of the firm, and should be exercised prudently and shrewdly. While computerized systems are invaluable tools and allow for extraordinarily creative techniques to aid in the management of the business, they may not universally fulfill the role of a seasoned compliance officer who is armed with the ability to see behind the superficial or the “logical.” Computer systems are beneficial as a tool, but they cannot provide a substitute for experience, perspective, or those intuitive vital skills developed by the compliance officer over years of trial, error, and observation.
If the ax must fall, a significant component of the firm’s planning must address how the compliance function is to be carried out with minimal disruption to the oversight capabilities of its compliance staff. Perhaps a new model must be developed for effective compliance. Perhaps technology can fill some of the gaps. Perhaps it is incumbent on management of the compliance function to cross-train the staff so that the disruptions caused by reduced headcount are minimalized. Perhaps people with fresh ideas must be identified, deputized, and given the opportunity introduce untraditional and innovative approaches. But the answer is probably not to impose on another existing and functional arm of the firm duties beyond the capabilities or experience of its personnel. The effort to impose compliance responsibility on personnel with lesser pure compliance expertise, such as staff assigned to the financial or operations sides of the business, may be superficially appealing since they are all “back-office,” non-revenue producing divisions, and work in the arcane world of rules and regulations. But such an approach may be a recipe for failure, as over-burdened, under-trained staff in accord with the Peter Principle and similar truisms prove incapable of ultimately performing either job to appropriate standards.
Even if regulatory mandate did not impose on firms the obligation to establish and maintain an effective compliance presence, sound business practices would dictate it. The mantra “good compliance is good for business” still rings true today, and those firms which will not only survive the present economic malaise but will flourish when times are better will be those that strike the appropriate balance between business objectives and oversight necessity.
