Questions and Answers
What is a key principle for a firm's dealings with its regulator?
What can a firm gain from seeking guidance from its regulator?
What is a benefit of responding to consultation papers issued by a regulator?
Why might a regulator conduct cost-benefit analysis?
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What is a potential advantage of responding to consultations through a trade association?
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What is a key aspect of an effective relationship between a firm and its regulator?
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What might a regulator seek from firms regarding regulatory issues?
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What is a potential benefit of a constructive relationship with a regulator?
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What is the primary focus of compliance in reviewing new product initiatives?
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What is the purpose of a wider risk assessment in introducing new products or services?
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What is the role of regulators in managing their relationship with authorised firms?
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What is an example of an effective regulatory relationship?
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What is the purpose of verifying marketing communications and regulatory submissions during new product initiatives?
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What is an important aspect of an effective regulatory relationship?
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What is the purpose of reviewing operational readiness and system test output during new product initiatives?
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What is an example of a strategic importance of an effective regulatory relationship to a firm?
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What is the primary purpose of a planned ongoing schedule of visits to high-impact firms?
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How does the regulator monitor low-impact firms?
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Why does the regulator collect information from small firms?
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What is the purpose of thematic exercises in low-impact firm monitoring?
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How does the regulator respond to risks identified in low-impact firms?
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What is the outcome of the regulator's information collection from small firms?
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Why do small firms not have individual relationship managers?
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What is the purpose of the regulator's communication of research results to the industry?
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When responding to a consultation paper, what is the typical structure of the response?
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What is typically required when making a formal application for authorisation to the regulator?
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What is the purpose of a regulatory visit to a firm?
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What is the typical process after a regulator refuses an application or initiates enforcement action?
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What type of visit can a medium-sized business expect from its regulator?
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What is the purpose of a forecast closing balance sheet in an application for authorisation?
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Who typically hears representations from a firm in response to a regulator's decision?
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What is the purpose of a professional indemnity insurance quotation in an application for authorisation?
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What is the primary concern of the regulator when taking action against a firm that has failed to operate at the required standards?
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What is the purpose of a cooperative working relationship between the compliance function and business units?
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What is the consequence of the regulator revoking a firm's authorisation?
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What is the role of senior management in relation to the regulator?
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What is the implication of a firm incurring substantial additional expense in managing a period of regulatory investigation?
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What is the purpose of Principle 5 of the BCBS' principles for compliance and the compliance function in banks?
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What is the relationship between the compliance function and other departments in a firm?
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What is the 'three lines of defence' concept related to in the context of compliance?
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State two objectives of regulation.
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State the main differences between rules-based and principles-based approaches to regulation.
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What is the mission of the Islamic Financial Services Board (IFSB)?
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What are the penalties for breach of the General Data Protection Regulation (GDPR)?
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List the data subject rights.
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State the objective of the Dodd-Frank Act.
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Name three investment services that can be subject to passporting under the Markets in Financial Instruments Directive (MiFID).
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What does Section 404 of the Sarbanes-Oxley (SOX) Act require publicly registered US companies to do?
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What is the definition of payment services?
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How often should a company produce an 'internal controls report' as required in SOX?
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Why does regulation require that firms have adequate capital standards?
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Explain the difference between home and host state regulations.
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State the two responsibilities of an effective compliance function, irrespective of the organizational structure.
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Who is responsible for establishing a written compliance policy containing the basic principles followed by management and staff?
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What does the Bank for International Settlements (BIS) Principle 6 require of a firm's compliance function?
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What is the purpose of the compliance manual?
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What are the three key stages involved in a risk-based approach to a monitoring program?
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What are the most common methods used to monitor whether a business is in compliance with regulations, internal policies, and procedures?
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To which types of people might compliance staff provide individual training?
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What role might compliance play in the development of new business?
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What is the role of the IMF's trust fund for AML/CFT?
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How do financial institutions detect money laundering activities?
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What are some indicators of potential money laundering?
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What is a politically exposed person (PEP)?
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How does the FATF assess compliance with its recommendations?
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What is the purpose of the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances?
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How do international standards on customer identification help prevent money laundering?
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What is the IMF's Financial Sector Assessment Program (FSAP)?
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What is the impact of tax crimes being included as predicate offences?
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How does the FATF promote global AML/CFT standards?
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What is the role of due diligence in AML efforts?
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What are the consequences of non-compliance with FATF recommendations?
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How do financial institutions manage the risk of terrorist financing?
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What is the significance of international cooperation in AML efforts?
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Study Notes
Building the Relationship
- Building a good relationship with the regulator is crucial for compliance staff, based on mutual trust and open communication.
- A good relationship enables seeking opinions on issues, discussing resolutions, and obtaining guidance from the regulator.
- Responding to consultation papers allows firms to express opinions on forthcoming regulations and provide information on practical implications.
Managing Regulatory Relationships
- Regulators supervise firms according to the risks they present to the regulator's objectives.
- High-impact firms have specific programmes of core work to assess prudential and conduct risks.
- Low-impact firms are monitored through baseline monitoring, thematic exercises, and sector-wide reviews.
Applications
- Obtaining authorization requires a formal application to the regulator, including information such as:
- Staff organizational chart
- Business plan information
- Compliance procedures
- Details of professional advisers
- Financial statements and forecasts
Representations
- Firms can make representations to regulators in response to refusal of an application or enforcement, which may be in writing or oral.
Regulatory Visits
- Scheduled visits are undertaken periodically to assess risks or as part of thematic research and investigation.
- Unscheduled visits ('dawn raids') may occur, and firms should be prepared to respond to regulatory or law enforcement visits.
Independence of the Compliance Function
- The compliance function should be independent, as stated in BCBS Principle 5.
- Independence does not mean complete separation from management and staff, but rather a cooperative working relationship to identify and manage compliance risks early on.
International Regulatory Environment
- The objectives of regulation include protecting investors and maintaining confidence in the financial system, and reducing financial crime and ensuring that markets are fair, efficient, and transparent.
- There are two approaches to regulation: rules-based and principles-based. Rules-based regulation relies on detailed rules and regulations that prescribe specific behaviors and outcomes, while principles-based regulation relies on broader principles that set out high-level standards for firms to achieve.
- The Islamic Financial Services Board (IFSB) promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles.
Data Protection and GDPR
- The General Data Protection Regulation (GDPR) imposes severe penalties for breach, including fines of up to 4% of annual global turnover or €20 million (whichever is greater) for serious infringements, and up to 2% of annual global turnover or €10 million (whichever is greater) for lesser infringements.
- Data subjects have several rights, including the right to be informed, the right of access, the right to rectification, the right to erasure, the right to restrict processing, the right to data portability, the right to object, and rights in relation to automated decision-making and profiling.
US Regulatory Environment
- The Dodd-Frank Act aims to promote the financial stability of the United States by improving accountability and transparency in the financial system, ending "too big to fail," protecting consumers from abusive financial services practices, and ending bailouts.
- Section 404 of the Sarbanes-Oxley Act requires management to assess and report on the effectiveness of the company's internal control over financial reporting, and the company's external auditor to audit and report on management's assessment.
Payment Services and Counterparty Risk
- Payment services are defined as services that enable cash to be placed on a payment account and all operations required for operating a payment account, including cash withdrawals and payment transactions.
- Counterparty risk is the risk that the other party in a financial transaction may default on their obligations, and can lead to significant financial losses if the counterparty fails to meet their commitments.
Fintech and Artificial Intelligence
- Regulators approach Fintech by promoting innovation while ensuring consumer protection, financial stability, and market integrity. They may implement regulatory sandboxes, provide guidance on compliance, and establish frameworks that support the growth of Fintech while mitigating potential risks.
- Artificial intelligence (AI) has several applications in financial services, including fraud detection and prevention, risk management, customer service, algorithmic trading, and credit scoring and underwriting.
Securities Regulation
- The International Organization of Securities Commissions (IOSCO) has three objectives: protecting investors, ensuring that markets are fair, efficient, and transparent, and reducing systemic risk.
- The US Securities and Exchange Commission (SEC) is responsible for protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.
- The SEC enforces securities laws, oversees securities exchanges and other market participants, and works to prevent fraud and abuse in the securities markets.
Compliance Function
- An effective compliance function has two responsibilities: assisting senior management in managing the firm's compliance risk, and supporting the business areas to help them comply with applicable rules and regulations.
- The compliance function should be independent, adequately resourced, and have access to the board of directors.
- A compliance manual provides guidance on compliance policies and procedures, and outlines the responsibilities of employees in ensuring that the firm adheres to applicable laws and regulations.
Risk-Based Approach
- A risk-based approach to monitoring involves identifying risks, assessing the likelihood and impact of these risks, and implementing controls to mitigate the identified risks.
- Compliance staff should provide training to employees, new and existing, and members of the board of directors.
- The compliance function plays a role in the development of new business by advising on regulatory requirements and ensuring that new products and services comply with applicable laws and regulations.
Money Laundering and Terrorist Financing
- Money laundering involves turning money derived from criminal activities ("dirty money") into money that appears to have been legitimately acquired ("clean money").
- Terrorist financing relates to the financial support of organizations or groups that perform terrorist acts and includes any financial transactions undertaken to facilitate such acts.
- The Financial Action Task Force (FATF) issues recommendations to set minimum standards for action in different countries to ensure consistent international efforts against money laundering and terrorist financing.
- The three stages of the money laundering process are placement, layering, and integration.
- The layering stage is considered the biggest risk for financial services firms because any transaction that exchanges one asset for another or changes the registered owners of an asset could be part of layering.### Anti-Money Laundering (AML) Efforts
- Enhanced due diligence measures involve more rigorous checks for high-risk customers, including politically exposed persons (PEPs).
- The cross-border nature of money laundering necessitates international coordination to ensure countries have legislation and regulatory processes in place to identify and prosecute those involved.
International Bodies Involved in AML Efforts
- The Financial Action Task Force (FATF), United Nations (UN), and the European Union (EU) are key international bodies involved in AML efforts.
- The FATF conducts studies of money laundering and terrorist financing methods, trends, and techniques and responds to these threats.
Customer Due Diligence (CDD)
- Customer due diligence (CDD) helps financial institutions verify the identity of their customers and assess the risk they may pose in terms of money laundering or terrorist financing.
Key Concepts
- Proliferation financing refers to providing funds or financial services used for the manufacture, acquisition, or use of nuclear, chemical, or biological weapons.
- Transaction laundering involves processing illicit funds through the merchant accounts of legitimate businesses, often through the sale of goods and services.
- Beneficial ownership refers to the true ownership or control of an entity, often concealed through layers of legal entities or arrangements.
FATF Recommendations
- Recommendation 21 of the FATF advises financial institutions to give special attention to business relationships and transactions with persons from countries that do not comply with FATF recommendations.
- The FATF sets international standards, assesses compliance, and provides guidance on combating money laundering and terrorist financing.
Challenges in AML Efforts
- The challenge of jurisdictional differences in AML efforts arises from different countries having varying levels of compliance and enforcement, complicating international AML/CFT efforts.
- Technology raises new challenges, such as the use of electronic currencies, but also provides tools for detecting suspicious activities through data analysis.
Detection and Prevention of Money Laundering
- Financial institutions detect money laundering activities through systems and procedures that look for patterns or unusual activities within transactional data.
- Indicators of potential money laundering include large cash transactions, frequent international transfers, and complex company structures.
- Due diligence plays a crucial role in AML efforts, verifying the identity of customers, assessing their risk level, and monitoring their activities for suspicious transactions.
International Cooperation
- International cooperation is essential in AML efforts, ensuring a coordinated approach to combat money laundering and terrorist financing.
- The IMF supports AML/CFT regimes through technical assistance, training, and assessments to help countries improve their AML/CFT frameworks.
- The FATF promotes global AML/CFT standards by issuing recommendations, monitoring compliance, and providing guidance and best practices.
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Description
Learn about the importance of building a good relationship with regulators in the compliance industry. Understand the principles of mutual trust, open discussion, and cooperation.