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Compliance as the Ounce of Prevention

I have often written here about the reluctance some firms express to spend money (either directly or indirectly on the perception of lost sales) on compliance absent a clear indication that a fine is imminent or very likely to occur. In that context, according to the sources cited in the article in this morning’s Wall Street Journal by Monica Langley and Dan Fitzpatrick (Embattled J.P. Morgan Bulks Up Oversight), the bank “plans to spend an additional $4 billion and commit 5,000 extra employees this year to clean up its risk and compliance problems.” Jaime Dimon is at least paying lip service to what I believe to be true. He is quoted as saying, “This is a huge investment of people, time and money…but it will make us stronger in the long run.”

Also very interesting to me is the business reorganization accompanying these increases: “executives in charge of risk, legal and compliance can no longer be overruled by business heads,” risk and internal control managers have more autonomy and the top compliance officer reports to the chief operating officer not the general counsel. Compliance and control units now have equal power with the business units.

The WSJ piece cites the following control and regulatory problems as being the impetus for these changes: the “London Whale” losses – more than $6 billion, regulatory fines from several agencies – up to $600 million, and legal expenses in excess of $18 billion since 2008. If a $4 billion addition to the compliance efforts would have made the difference JP Morgan suggests, then it would have been a pretty good investment before these losses, fines, and expenses. Only time will tell if these organizational changes are real and will mark a change in corporate culture, or if they are just a paper shuffling of reporting lines. Compliance is the ounce of protection, but all too often it comes only after the pound of cure is also needed.