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A Compliance Officer will go to Jail in 2016

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5 February 2016
London, United Kingdom

No Passing Go

Regulation, regulation, regulation.

In the property market there is a saying: “location is everything.”  In capital markets in 2016 the saying will be: “regulation is everything.”

The backlash from risky derivatives, the credit crisis, crooked high frequency trading (HFT), murky dark pools, insider trading and money laundering over the past few years has sent global regulators into hyper-drive. Everywhere you look there are more rules to obey. From the Volcker Rule to MiFID II, MAD II, MAR, BCBS 239 and CFTC rules, capital markets participants are being buried in regulatory paperwork.

MAR (Market Abuse Regulation), MAD II  (Market Abuse Directive) and AML (anti-money laundering) rules are the ones giving compliance officials nightmares; holding them responsible if anyone in their company breaks the law, which means criminal sanctions. It could be a rogue trader or a wild algorithm, but whatever it is that breaches one of the new regulations will be considered the compliance officer’s fault. So, in 2016, a compliance officer could pay the ultimate penalty and go to jail for not stopping an illegal act executed by one of his colleagues.

Regulatory, compliance and anti-money laundering staff are all rightfully concerned about this, according to a study from the British Bankers’ Association and LexisNexis Risk Solutions, and 54 percent of those surveyed said they would leave the industry if an opportunity arose. In an already tight recruitment environment, this could be disastrous for banks and other financial institutions trying to stay on top of a mountain of regulations.

The past few years have been difficult enough on financial institutions trying to clear up the mess after the credit crisis. Plus, trading activities have been hampered after regulations such as the Volcker Rule mandated keeping speculative trading ring-fenced away from client trading. HFT, algorithmic trading and dark pools are also more highly scrutinized, meaning extra layers of monitoring and risk controls.

Efforts to curtail insider trading and money laundering have skyrocketed, requiring super-powered monitoring capabilities with ultra-fast response times. Compliance departments are now expected to track down and stop any illegal activities such as these before they a) leave the bank and b) impact markets.

Although much of this demand is being driven by regulations such as BCBS239 and MiFID II, there are also some very valid business reasons why banks are exploring how to achieve greater real-time visibility into their exposures. After all, the sooner you are aware of a risk, the more efficiently you can manage it. And being able to manage risk effectively is one of the cornerstones of successful banking practice.

The new, regulation-heavy landscape means that financial institutions have to get more creative to address new competition while still remaining in compliance. The task is daunting, and losing compliance personnel will not make it any easier. If one goes to jail, all bets are off. 

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