Geoff Cook, Chair, Mourant Consulting & Regulatory partner, Sarah Huelin
Significant and frequent changes on the regulatory front pose increasing challenges to company boards who should reconsider their timeframes. Near term monitoring needs to be accompanied by horizon scanning, anticipating what is coming next, prioritising resources and actions accordingly.
The Global and EU regulatory engine is running with a reset of Global Business Taxation, new terms of reference for the EU Code of Conduct Group, new proposals for blacklisting criteria, AMLD6 and an AIFMD Review, all in train.
So significant is the raft of regulation coming down the line that the Thomson Reuters ‘Cost of Compliance 2021: Shaping the Future report’, suggests 50% of finance firms are expecting greater cost in compliance with international regulatory initiatives. An astounding 78% expect an increased flow of regulatory information, and elsewhere in the report cite a lack of appropriately skilled resources as a critical challenge.
Shaping the regulatory landscape
Our engagement with governments and international standard setters through Mourant Consulting, points to a substantive pipeline of regulatory projects that will shape the landscape over the coming months and years - transparency measures around beneficial ownership, technology adoption and cyber security, scrutiny of tax arrangements, ESG and new regulation prompted by Brexit and COVID-19.
Beyond financial services regulation, secondary legislation may not appear to be so directly relevant. Still, it could significantly impact the operations of financial services companies in such critical areas as health and safety in the aftermath of the pandemic.
The Jersey Financial Services Commission's latest annual report reveals that the regulator needs to be on the front foot, anticipating change and raising standards from Jersey's perspective. These are critical actions if the jurisdiction is to mitigate and preferably avoid being drawn into any black or grey list debates.
The impending visit of the Council of Europe-backed MONEYVAL will be a critical juncture in Jersey and Guernsey, so far as evidencing delivery on its promises of sound regulation and fighting financial crime are concerned. Steps such as the National Risk Assessment and recent high-value asset repatriations will be fundamental to illustrating this commitment and journey.
The regulatory world moves fast, and the fact that a jurisdiction might have scored well in a previous assessment is by no means a guarantee of good marks in future reviews. Not least because assessments are increasingly focussed on effectiveness rather than technical compliance with global standards. The clear message is that demonstrating a theoretical ability to fight financial crime is not enough – regulatory oversight bodies will expect to see clear evidence of measures working in practice.
The strategic focus of regulators will be on keeping on top of these requirements, with prevention - not cure, being key to heading off any problems. Firms and their boards will be wise to adopt the same stance.
Anticipation is everything
The focus from regulatory bodies in significant IFCs such as the Channel Islands and Overseas Territories will inevitably transfer to industry. Accordingly, firms and board directors should assess how good they are at anticipating what is coming down the track whilst ensuring they remain on top of current obligations and undertakings.
How fit for purpose is their financial crime horizon scanning? Do they know what is coming down the track in six months? A year? Two years? Five? What are the jurisdictional nuances in the interpretation of rules if a firm is to be future-proofed?
There are hefty fines for non-compliance – we've seen a rise in the number of financial penalties for AML failures, both in Europe (Danske Bank) and within the IFC world.
And boards are right in the thick of it – particularly when you consider that rules now carry personal liability for individual directors, not just boards as a collective. As a result, directors and CEOs are now personally vulnerable, fully exposed to reputational and financial risk.
Consequently, board directors must be right at the top of their horizon scanning game to develop their financial crime strategy and ensure appropriate resource prioritisation.
Boards will need to continually self-assess and take an ever more rigorous look at the firm's financial crime and business risk assessments. Likewise, conducting a thorough Board Effectiveness review that factors in all aspects of governance arrangements in light of business activities and risk profiles is a clear no-regret move, with external validation providing additional regulatory comfort. The days of a quick 'check the box' internal survey being seen as sufficient are numbered.
The effective use of data is a case in point. Voluminous quantities of raw data in board papers often swamps directors, and non-executive directors in particular, who are often without the benefit of detailed operational awareness garnered from working inside the business. Analysing and interpreting jumbo-sized excel spreadsheets and assessing information accurately and effectively to extract critical information and trends can be complex and hugely labour intensive. Without the right analytical tools at their disposal, boards can come to the wrong conclusions, overwhelmed by information and data, and completely missing the wood from the trees. It's about having the right combination of tools at the board's disposal – both digital and skills-based.
To borrow a car analogy, consider the board is the driver, with a high spec engine, a quality trim and all the tools and gadgets displayed on the dashboard - but if the driver looks down at the dashboard too long, the car will crash! On the other hand, the driver can keep their eyes on the road, looking consistently ahead, supported by all the relevant tools available at a glance and without effort, with all appropriate controls at their fingertips. Then driver and car will arrive safely at their destination. Taking cues from new, innovative and digital tools – think Tesla here!
A marriage of evidence and horizon scanning
Looking ahead, evidencing the effectiveness of arrangements to fight financial crime is set to be the critical issue for boards. Adopting a mature, sophisticated approach to financial crime regulation horizon scanning to ensure preparedness and 'match fitness' in passing regulatory scrutiny in a constantly evolving environment will be essential.
There are, of course, other risks - cyber, fraud, ESG and greenwashing, BEPs and substance; the legal and regulatory juggernaut shows few signs of easing. Those boards, supported by their governance and compliance teams, who prioritise a prevention first approach, will be best placed to succeed and guide their organisations safely through a challenging environment. One that is increasingly framed in the context of increased personal risk and accountability for board directors. The time to act is now.