What is Compliance?

· · · · · · | Investment Wisdom

In short – the term compliance describes the ability to act according to an order, set of rules or request.

In the context of financial services businesses compliance operates at two levels.

Level 1 – compliance with the external rules that are imposed upon an organisation as a whole
Level 2 – compliance with internal systems of control that are imposed to achieve compliance with the externally imposed rules.

The financial services industry has become increasingly regulated over the years, resulting in a multitude of legislative requirements that financial services providers (FSPs) are required to meet. Salvo Capital makes use of Masthead – a registered compliance company that interacts with the Financial Sector Conduct Authority (FSCA) on all industry matters, they assist independent financial advisors (IFAs) and larger FSPs to anticipate and meet these regulatory requirements. Focusing on process, quality and consistency, their goal is not only for their clients to attain full compliance and remain compliant into the future, but also to prosper.

Salvo Capital & Masthead Compliance meeting

Salvo Capital & Masthead Compliance meeting

There are five key functions of a Compliance Department –

  1. To identify the risks that an organisation faces and advise on them (identification)
  2. To design and implement controls to protect an organisation from those risks (prevention)
  3. To monitor and report on the effectiveness of those controls in the management of an organisations exposure to risks (monitoring and detection)
  4. To resolve compliance difficulties as they occur (resolution)
  5. To advise the business on rules and controls (advisory)

The Compliance Officer has a duty to his employer to work with management and staff to identify and manage regulatory risk and the overriding objectives of a compliance officer should be to ensure that an organization has systems of internal control that adequately measure and manage the risks that it faces.

Masthead believes it is not regulation that will put financial advisors out of business, but rather the inability to adapt to change.

Although there is no unified theory for financial services, the key objectives of the regulation is as follows :

  1. The protection of investors/consumers
  2. Ensuring that the markets are fair, efficient and transparent
  3. The reduction of systemic risk
  4. The reduction of financial crime
  5. The maintenance of consumer confidence in the financial system

Fit and Proper

The Financial Services Board, now called the Financial Sector Conduct Authority (FSCA), published Board Notice 194 of 2017 in December 2017, introducing several amended Fit and Proper requirements that Financial Services Providers (FSPs), Key Individuals and Representatives must meet. These requirements came into effect on 1 April 2018, with certain provisions being delayed until later dates.

Along with the FAIS Act, which aims to protect the consumer and professionalise the financial services industry, the new Fit and Proper requirements establish a higher level of professionalism and compliance in the industry. This new legislation has far-reaching effects for the entire industry, but it must be welcomed as it is aimed at bringing about professionalism.

The Fit and Proper requirements also aim to establish increased competence within the industry. Most elements of Fit and Proper hinges on the fact that competence will take centre stage. If there is an increased focus on competence and compliance, elements such as honesty and integrity, good standing, operational ability and financial soundness will all fall into place.

FSPs therefore need to continuously review their business processes and plan accordingly to ensure that they are managing their compliance and meet all Fit and Proper requirements.

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