Wall Street Journal

Wall Street Journal Risk and Compliance Journal asks: Does Trump Spell End of ‘Era of Compliance’?

In an article dated November 21, 2016, the WSJ’s Risk and Compliance Journal’s Ben DiPietro posed these questions to several risk and compliance experts:

  • Does Donald Trump’s victory – and Republican promises to rescind and reduce the number and scope of regulations – spell the end to the “age of compliance?”
  • Is it safe to assume there will be fewer compliance people needed, and less money spent on compliance, as there will likely be fewer rules for them to track?
  • What role can compliance play in an era of reduced regulation?
  • How can compliance remain relevant to the C-suite and board?
  • Will companies continue to invest in artificial intelligence and other regulatory technology or will they curtail spending because of what could be a lack of emphasis on compliance and enforcement? 

Although I suspect we will see major changes in specific areas, for example the possible rollback of the DOL fiduciary standard regulation, my opinion is that we will see little change in the overall scope of regulatory compliance.

Roy Snell, Chief Executive of the Society of Corporate Compliance and Ethics, leads off with what is the general tone of all of the interviewees, which is not so different from my own take on this question: “Enforcement is a for-profit industry and anyone who thinks there is going to be a material change, I would say good luck with that.” A very immediate example of this is the $7 million fine that the California Insurance Department just levied on Zenefits, Inc. for using unlicensed insurance producers. California indicated it is "one of the largest penalties for licensing violations ever assessed in the department's history.”

Donna Boehme of Compliance Strategists LLC states: “Not in the least. This notion reflects flawed thinking by “experts” without compliance subject matter expertise. They view the work of compliance as nothing but check-the-box activity driven by regulations. The reduction of regulations will have a direct effect on the activities of certain relevant risk areas like financial services and the environment, but changes in those areas will probably create even more work for compliance, which will have to work closely with its subject matter experts in those areas to respond to the changes.” On the question of compliance staff reductions, she adds: “Compliance will be just as important as ever, and those companies that unilaterally reduce their compliance resources and budgets will live to regret it. That’s because compliance has a much broader mandate than just managing the company’s response to specific regulations. Compliance is the necessary management tool and partner that helps the organization—through its employees, managers and partners—to govern itself and to find, fix, and prevent misconduct or other big problems before they explode unexpectedly in media headlines, with terrible results.”

Alison Taylor, director of advisory services at BSR, a consulting firm that focuses on sustainability, offered another interesting opinion: “Perhaps what we will see rather is the end of the “age of compliance” and the birth of the “age of ethics,” by which I mean compliance will no longer be undertaken as a process for its own sake, to meet regulatory obligations. It will need to consider—and respond to—political and reputational risk, and stakeholder opinion, far more directly.” She also brings her company’s more unique perspective into focus when she further states: “There has been a recent trend to separate out ethics and values from compliance, and embrace sustainability and social responsibility as a strategic issue. And there is debate in the compliance profession whether it is appropriate for compliance officers to consider wider questions of ethics beyond legal compliance and corporate social responsibility more broadly. There is a strong argument to putting compliance with the law, and keeping deck chairs in a row, to one team, while wider risk and reputation questions are considered at a more strategic level under a variety of organizational approaches, but necessitating senior oversight. Whatever happens to the funding and resources available to compliance officers, the need to consider corporate reputation, values, and purpose will continue and accelerate. All this speaks to the need to stop obsessing over compliance for its own sake, and start to consider how to survive and thrive over the long term.”

There are additional thoughtful and insightful comments from others in compliance in the article and I recommend it for all who are interested in this field going forward.

Let us know your thoughts!

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.

Department of Financial Regulation in Bigger Governmental Context

More and more discussion of the proposed Department of Financial Regulation is focusing on the overlap of regulatory authority with the Attorney General’s office, rather than any cost-savings impact it might have on future budgets. I found this article by Jacob Gershman from the Wall Street Journal, Cuomo Reaches for Power, interesting in that it puts this proposed agency into a larger context about the role of the Executive in NY. There isn’t anything new on the DFR here, but I think it is always a good exercise to see any new development in a larger context, in this case, a possible reallocation of power between the Executive and Legislative branches of government.