Tracy Harvey-Bussell, a Director and Fellow of the Compliance Institute, with over 30 years of financial services industry compliance experience, takes a look at the changing role of compliance consultancy in this evermore tightly regulated sector and highlights the need for all practitioners to accept the reality of principle based regulation.
Regulation of Financial Services in the UK is increasing
Regulation in financial services has remained a hot topic in recent months with the Northern Rock crisis being followed by growing concerns that tighter economic conditions will increase the amount of financial crime and fraud being uncovered in the UK.
This has been followed by a succession of negative media reports relating to issues including a growth in fraudulent mortgage applications and the continued misselling by financial of controversial products including Payment Protection Insurance (PPI). The issue has even spread to Europe with the trading scandal which has recently affected Société Générale.
Against this background the latest Financial Risk Outlook report produced by the principal industry regulator, the Financial Services Authority (FSA), warned of a significant risk of consumers losing confidence in both financial regulators and market participants. In order to maintain consumer confidence, therefore, the regulatory burden placed upon the financial services sector is likely to increase further.
The Advent of Principle Based Regulation
This operating environment is driving a growth in demand for specialist compliance, risk and corporate governance consultancy support, a demand which is currently not being met due amidst a shortage of suitably qualified and experienced consultants.
This situation owes at least in part to the advent of 'principle based regulation' (PBR), which has in recent years seen the FSA move away from prescriptive rules and forced regulated financial services firms to think for themselves and make informed decisions based upon what they consider to be best and most appropriate practice. This approach is yet to be seen outside the financial services sector.
Therefore, whilst in 2002 an FSA rule might have stated that a specific form "must be printed on 80 gsm white paper in black ink, contain the following 130 points and be supplied to the customer"; the new PBR based guideline might simply read "Customers must be appropriately informed of the terms of their policy."
PBR therefore demands that firms adopt a more mature and evolved approach towards regulation: instead of slavishly following one rule irrespective of the size of the firm, its risk profile, market sector or specific needs, each firm will have to consider the principle involved and determine what is appropriate and proportionate for their business - and be able to justify their decision to the FSA should they be called up so to do.
Driving Demand for Consultancy
The upshot of this is highly significant for both in-house compliance officers and consultants. For in-house teams the demands made by PBR in terms of required human resource and time can be considerable; and whilst there has been in an increase in the number of available in-house role, PBR has also created a natural demand for specialist consultancy.
The latter demand is being fuelled also by the provisions of Section 166 of the Financial Services and Markets Act (2000); which demands that suitably "skilled persons'" are involved in financial institutions' management of relationships with the FSA and encourages objective external consultants to be included as part of this mix.
The FSA onus on senior management responsibility for determining the systems and controls exercised by the firm is a further driver. With members of the Board of an insitutions being most likely to face action by the FSA for serious compliance breaches, requests from in-house compliance officers for additional resource are likely to be met positively by senior management.
Evolving Skill Sets
Given the evident demand for specialist consultancy it seems strange that filling consultancy vacancies in the field has become a challenge for firms. The key to understanding this lies in the bare fact that from a consultant's perspective, PBR means that understanding the 'rule book' is simply no longer enough.
An understanding of the wider market and the ability to base assessments and recommendations on how PBR has been implemented elsewhere in the sector has become imperative.
This evolution of the consultancy role of compelling many experienced practitioners to radically review and refresh their skills and expertise but it is arguably acting also as a deterrent to younger consultants considering entry to the field, all the more so given that a track record of strong performance in a PBR environment outside financial services is currently impossible to obtain.
Beyond Financial Services
There is a strong possibility, however, that the landscape will shift further, with industries such as gaming and telecoms likely to move towards a PBR approach in the coming years. This creates the possibility that experience of PBR in a financial services environment will provide compliance and corporate governance consultants with a highly transferable skills in years to come and provides at least a little food for thought for those considering their career options.
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Tracy Harvey-Bussell has over 30 years experience in the financial services industry, having been Compliance Officer at Sun Alliance Group, Director of Compliance at Hogg Robinson plc and Head of Corporate Governance at Equity Insurance Group. Since 2001, she has been involved in recruitment of fellow compliance, risk, regulatory and corporate governance professionals. Tracy is a Director and Fellow of the Compliance Institute, and a Partner in TCC Recruitment LLP.
