In recent years, the financial sector has undergone a significant ethical revolution that has transformed the industry. Measures promoting market integrity and respect for ethical principles are repeatedly mentioned in the media, with a particular emphasis on the fight against money laundering and terrorist financing. This growing movement has highlighted the important for effective internal compliance.

The compliance function is an independent unit within a given firm that identifies, evaluates, and controls the firm’s risk of financial loss, reputational damage and judicial reprimand. In several countries it has become a mandatory function in financial institutions. Why is there an increased demand for compliance now? It can be explained by three reasons.

First, many financial and corporate scandals (such as Hollinger Int’l, Enron, Barings Bank, BRE-X and Madoff Investment Securities) have been widely reported in the media. The events we have experienced in recent years have led legislators to toughen the requirements for internal control. This is one reason why compliance has become increasingly important.

Second, in the midst of recent economic turmoil, the need for transparency has been underscored—whether in connection with CDS (Credit Default Swap), MBS (Mortgage Back-Securities), ABCP (Asset-Backed Commercial Paper) or other complex, structured financial products. The dangers of uncontrolled leverage and under or non-capitalized positions in terms of systemic risk are now evident. The complexity and risks of these complex products are not fully understood. Statistical computer modeling is an important tool but needs to be coupled with human intervention and sound judgment, thereby explains another reason why organizations are focused on compliance.

Third, the general regulatory environment continues to grow more complex as offenders are being pursued more aggressively than ever. Self-regulation, backed by industry and trade associations, has played a vital role in regulation in Canada and the United States. Compliance professionals are working today in an environment of rapidly evolving marketplaces and sophisticated and innovative products. The next years will involve a lot of challenges. The current system needs transparency and timely information. Thus, there is increased demand for compliance within the financial industry.

It is only logical, therefore, that self-regulatory organizations (SRO) are growing at an exponential rate. However, despite the generally held view that there is never enough regulation, some regulatory organizations are becoming too big and risk going out of control. Some agencies may exaggerate the need for their presence and create unneeded regulations in order to “feel” useful. Rather than be costly, ineffective, and distorting, regulation should encourage proper behaviour without imposing an unnecessary burden on participants through high compliance costs.

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