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Five Governance, Risk and Compliance Predictions for 2015

by: (UK Head of Governance, Risk and Compliance) on

Now that we are a full three weeks into 2015 we should have a good idea of the what the year ahead might contain for those of us lucky enough to work in the field of Governance, Risk and Compliance…. OK, maybe not, but that is not going to stop me having a go!

Here are my five predictions for the year ahead in GRC. If any of them come to pass I shall remind you of them; if not, well this blog never happened right?

1) Increased culture/behaviour focus by FCA

OK, I am starting with a bit of a banker here, but this is critical for financial services regulation in the UK in 2015. On the 2nd December 2014 both Martin Wheatley and Tracey McDermott made speeches that represented a step change in the FCA’s focus upon culture. If you have not read them then you had better do so, and watch out for the FCA’s Risk Outlook in February and Business Plan in March for further details. We know that the FCA have been talking the Principles, Outcomes, Judgement Lead regulatory game since they came into existence, but with the revised Approved Persons regime they have now begun to put tis into effect and the current talk suggests that this is only the beginning.

2) Insider trading convictions overturned in US and fewer prosecutions in short term

On the 12th December 2014 the United States Court of Appeals in Manhattan overturned two of the government’s key insider dealing convictions. The case in question was against former hedge fund traders Todd Newman and Anthony Chiasson. What is particularly critical is that the appeals judges cited the trial judges’ “erroneous” instructions to jurors, and the court not only reversed the convictions but threw out the case altogether!

Effectively the appeal judges said that the ‘burden of proof’ for conviction was set far too low by the trial judge, and due to the US legal system (which is a confusing/amusing mix of legislation and precedent) the ruling has effectively now increased the burden of proof required for future convictions, and of course increased the probability of more successful appeals. Or to put it more simply;

  • more cases will be overturned,
  • there will be fewer successful prosecutions (and fewer prosecutions brought) and
  • consequently there is likely to be more ‘insider trading’ on Wall Street!

One of the ongoing implications will be the fact that the ruling appears to widen the gap between the US and Europe when it comes to defining insider dealing. Consequently the relationship between Wall Street and London may be strained by this decision.

3) Enforcement powers to be removed from UK regulators

Would the Treasury have consulted on the removal of enforcement from the regulator last summer, and the creation of a separate enforcement body, if this was not the final intention? I think not. Of course there is the possibility of the consultancy process heading off this eventuality, but if anything the industry has been calling on curbing the regulators powers, and at a superficial level at least, this move appears to meet those calls.

crystal ballHowever, be careful what you wish for. Over the last 12 months leading industry figures have become more vocal in their criticism of enforcement activity, particularly the increasing size of the fines. The rationale is solid enough from a legal point of view; should one body be judge and jury is the fundamental question here; but is the creation of a separate enforcement body the answer? Consider this. If your organisation’s only purpose was enforcement I suggest that the focus and level of intervention/investigation would increase, and subsequently the impact upon the industry’s ability to carry on its core business as usual will increase along with this (albeit necessary) regulatory burden.

This issue requires careful consideration, and perhaps the industry bodies should be encouraging individual firms to think beyond short-term concerns and take a longer, industry wide, view on the full impact this will have on the existing regulatory environment.

4) Massive cyber-crime case comes to light prompting refocus of legislation

OK, here’s the doom and gloom prediction. So much of our business activity is now wholly reliant upon technology it can surely only be a matter of time before the global financial services system comes under a significant and sustained attack. The threats come from many different sources such as terrorism, anti-capitalist groups and criminal organisations. Thanks to the credit crisis we have already seen how the globalisation of our industry means that significant economic events now have a contagious global impact, and this will not have escaped the notice of those groups who want to bring about the biggest possible disruption to firms, industries and even economies.

IT systems are vulnerable. A significant (and surprising?) outcome a of a recent issue where the Royal Bank of Scotland’s transaction systems failed was their admission that even their own IT people did not really understand exactly how many of their IT systems worked due to acquisitions, legacy systems and constant upgrades over the last 30 years! And of course the internet provides a readymade delivery system for viruses and other harmful software.

The knock on effect of such an incident will of course be a regulatory response with new and greater reaching technology protection requirements.

5) Impact of the election in the UK in May 2015

The government has changed only three times in the UK in the last 36 years, 1979, 1997 and 2010. And each time the financial services regulatory environment has undergone a fundamental restructure.

The outcome of this election is far from predictable and only if the Conservatives win, or form another coalition where they are the dominant partner, can we expect no change. But what if we do have a new (Labour) government? The last change is effectively only a couple of years old, and the FCA and PRA have only just begun to really assert themselves. Surely the new system must be given time to establish itself? But that is forgetting the role that politics (and political machinations) have to play. If Labour had won the 2010 election I am in no doubt that the FSA would still exist, let us not forget who’s idea a single regulator originally was (Gordon Brown to save you looking it up). Would Labour want to remove the ‘Conservative’ model to replace it with their own in a ‘tit for tat’ move?

Watch the build up to the election carefully for political statements on the financial services industry. They will be being made as simplistic sound bites to win votes, but they may then significantly impact our industry for years to come.

You can also see a videoblog version of this on our YouTube Channel. If you have any predictions you’d like to share, please get in touch with us through our social media channels.

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