Compromising your compliance checks in favour of revenue can have serious consequences. Consider the latest example of doing exactly that. An “elephant deal” (the bank’s internal classification for a deal worth at least £20m), just resulted in the FCA fining Barclays £72m. While the deal in question provided £52.3m in fees, factoring in the FCA fine, the transaction actually generated a net loss of £19.7m. That makes very little business sense. Yet the fines represent just one small piece of the story.
Reputational Risk and Declining Stock Prices
In a research paper recently published by John Armour, Colin Mayer and Andrea Polo, the authors found that firms investigated and fined by the FCA suffered a significant drop in stock price immediately after regulatory violations and fines were made publicly.
While the factors influencing each company’s situation are unique, the research paper found that companies that receive an FCA fine run the very real risk of experiencing a significant reduction in their market capitalisation. Again, this is not the way to run your business.
Lack of Compliance attracts Risky Clientele
While inconsistent compliance measures increase your operational risk, it also has the potential to attract risky clients. In turn, it often places your organisation’s commercial team in conflict with your compliance teams and attracts further scrutiny from regulators.
Yet in a deal-driven environment, businesses don’t have the time to evolve and police suitable compliance programs. That’s why the appropriate compliance mechanisms must be in place before your business needs them. Aligning your people, processes, and technology to manage compliance risk takes time and in the rush to close a deal, newly-created or modified compliance efforts will not receive the resources needed to ensure a successful deployment.
Hard to defend the Indefensible – as determined by Regulators
In the Barclays' investigation, the FCA included the following statements within their press release announcing the fine.
Note the use of “may be used to facilitate financial crime." The FCA didn’t find evidence of an illegal act. They fined Barclays for fostering an environment where crime could flourish. Specifically, the FCA’s press release notes that the clients associated with the deal included politically exposed persons. According to the FCA, on that basis alone, the deal presented a greater degree of risk and required Barclays to “adhere to a higher level of due skill, care and diligence but Barclays failed to do this.”
Regulators under Pressure
The Barclays investigation provides a clear example of the compelling need to ensure compliance, across all sectors, regardless of the revenue a deal might generate. Regulators within the financial sector in particular face unrelenting pressure to deliver on mandates. As a result, the fines keep mounting. Further, in today’s environment, a problem with one regulator often attracts additional regulatory bodies all jockeying for another “bite” at the apple.
As regulatory activity continues to intensify across all sectors and achieving compliance becomes more complex, there’s only one answer to the challenge facing your business – you must increase the effectiveness of your compliance-related efforts. In fact, that’s what’s taking place throughout the financial sector today. As the Barclays' case shows, an illegal act need not result under the bank’s watch, only the potential for one must exist in order to trigger fines and penalties.
What can we learn from Barclays’ FCA fine?
Before regulators and investors punish your institution for taking short cuts, invest the time and resources needed to ensure that compliance happens. It’s not an optional, “nice to have," it’s mandatory.