Nobody likes surprises.
The latest headline compliance story in the public domain “Providence Collapse”, provides a timely reminder to all compliance professionals as to the importance of asking the big dumb questions. I know, I do tend to labour this point and I also start far too many sentences with “when I was a regulator” however, when I was a regulator… following a review of a Licensees’ submission prior to an on-site visit, the first things I would ask a Board of directors at an opening meeting would be: –
1. Describe your business in two sentences.
2. How many clients do you have?
3. What are the three main risks to your business?
Very often the response from the Board would be a clear indication as to the nature of the visit. Of course the vast majority of Board members are fully conversant with the big picture of their business. My point is we can’t purposefully analyse details of procedures and controls if the back drop to the business is not fully understood.
For me, the recent disclosures regarding the Providence case throw the spotlight on the importance of effective regular monitoring, accurate risk assessment and meaningful reporting. A robust and effective compliance culture is made up of several essential components, managerial and operational. We need to keep reminding ourselves of the importance of the big picture, high level view of the business. Getting embroiled in the operational detail at the risk of missing high level control indicators has been shown to be catastrophic to investors and service providers alike. Without being in possession of all the details of the case in question, it appears that failings were evident in all aspects of the compliance control environment at Board level.
Then there is the ethical question. Where is the money? How are investors profiting from the scheme? Are the risk warnings on the product accurate? …and possibly most crucial of all, who is actually in control? The case sees the directors resigning en-masse amidst an environment of confusion as to who is actually in control of the scheme and the flow of investor funds. Follow the money. The directors hold the responsibility but responsibility without control is not a sustainable environment.
Another one of my favourite big dumb questions is…Why is this so complicated? Every component of an investment or ownership structure must have rationale behind it. For a business to demonstrate adequate control it must be in a position to demonstrate understanding of such arrangements and the logic behind the ownership structure. This is really important when interacting with the regulator, really important.
If regular monitoring and reporting is effective, there will be ample opportunity for a Licensee to discover any irregularities in the operational process. This will result in all relevant information being supplied to the Board who can then take strong action to remediate such findings and thus protect the interests of investors and other stakeholders alike. Not forgetting Principle 10 which requires disclosure of any circumstances to the Commission which they may reasonably be expected to know. In my experience, the regulator will take a favourable view of a licensee which demonstrates a pro- active approach to discovery of irregularities, demonstrating that the control processes actually work and the initiative to implement a remediation programme. Often this will involve regular progress reports to the regulator. Of course this may not preclude the imposition of conditions but it is evidence of a collaborative approach, which is in the interest of all parties.
It appears, from the information currently available that serious failings in compliance culture were evident in the case. The evidence suggests that the Board had responsibility without control. Control was retained by one individual with little or no platform for challenge, indeed the reports suggest that the individual named continues to be reticent to engage in dialogue with the authorities. Funds from investors were misdirected. Many high risk indicators here.
The circumstances here are self-evidently unsustainable. It will come to an inevitable and undoubtedly expensive conclusion and all the indications are that the investors will lose. Hindsight is a privileged viewpoint. But where were the big dumb questions when they were needed? …Let’s not be afraid to ask them.