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Finance & related services

More regulation – better control?

By Marzena Richter ACA, Staniszewski & Richter, Polish Registered Auditors, BPCC Board Member
Header staniszewski and richter


The last 20 to 30 years have seen a host of spectacular corporate and financial failures worldwide, mostly in developed economies.

Nevertheless from each financial disaster or scandal, governments, legislators and regulators try to learn from their mistakes and provide the general public with solutions to rebuild trust and confidence in the particular system which has just failed. These have included pension schemes, investment funds, retail or investment banking, rigged money-markets, stock-exchange suspensions or de-listings and even tax systems! Each outrageous situation breeds a new acronym or codeword, new procedures and a whole new department of technological bureaucrats. For some of you not so familiar with this language, I intend to offer insight into the provenance of these schemes in the US, UK and EU.

COSO from 1985 – Committee of Sponsoring Organisations of the Treadway Commission – US

The Treadway Commission was established in the US in the mid-80s as a general reaction to fraud and corruption reported within financial information and the private-business sector. As a result of the commission’s report, the Committee of Sponsoring Organisations (COSO) was formed. The purpose was to analyse internal control systems and provide models and benchmarks for their evaluation and improvement. The objective of this organisation is to provide thought -eadership in three areas: enterprise risk management, internal controls and fraud deterrence. COSO models have developed over time and addressed new technology.

These US-style compliance requirements have influenced EU professionals and standards.

TPR or The Pensions Regulator - UK

From Maxwell to Carillion via BHS, these are all very familiar pension scandals in the UK. It is impossible to ignore the Maxwell pension funds abuse given the scale of the fraud. Over time, all these cases have resulted in a series of statutory pension oversight reforms from 1995 and several changes to name, responsibilities and structure of the regulator.

Cadbury Report 1992 - UK

In the wake of spectacular failures at Maxwell’s Mirror Group, the Bank of Credit and Commerce International (BCCI) and Polly Peck on the London Stock Exchange in the80s and early 90s, the Cadbury report focused on tightening up corporate governance and accounting systems.

Sarbanes Oxley (SOX) Law 2002 -US

As a reaction to a string of further corporate scandals such as Enron and WorldCom, the objective of SOX legislation was to focus on financial information rather than internal control. Regulations concerned the two parties most involved with the financial statements: boards (including their corporate governance) and the auditors. Rigorous rules regarding the independence of auditors were introduced (such as auditor rotation), as well as additional corporate-board responsibilities with criminal penalties.

SOX is integrated with COSO particularly in areas of internal control and risk management. For example, an additional report of management on internal control authorised by external auditors is a requirement.

Global Financial Crisis – EMIR, MIFID II,- EU; BASEL 3 - Global

Following the collapse of Lehman Brothers and the ensuing global financial crisis global organisations such as the G-20 and the EU implemented a range of regulations as preventative measures. This included the mandatory central clearing of all derivatives under EMIR (European Market Infrastructure Regulation) through authorised repositories. The purpose is to prevent the collapse of the financial system. MIFID (Markets in Financial Instruments Directive) standardises regulation and disclosure of financial instruments and was implemented in 2007 replacing weaker EU Directives. BASEL 3 protects the liquidity of banks.

Dodd-Frank 2010 - US

The Dodd-Frank law was enacted in the US following the aftermath of the financial crisis (triggered by Lehman Brothers Investment Bank) and further investment industry scandals such as former NASDAQ chairman Bernie Madoff’s investment fund swindling investors of billions of funds whilst faking returns. Amongst the changes introduced in regulating financial services, Dodd-Frank implemented new reporting requirements and gave the Securities Exchange Commission (US stock exchange regulator) the authority to monitor financial firms.

FSA, now FCA and PRA (2013) – UK

In response to the banking crisis in the UK which resulted in the collapse of Northern Rock and severely affecting The Royal Bank of Scotland and HBOS, the UK overhauled its financial regulatory structure, dividing the old Financial Services Authority into the Prudential Regulatory Authority and the Financial Conduct Authority. The PRA is closely associated with the Bank of England and monitors the major financial institutions and focuses on financial stability. The FCA registers all financial institutions and addresses the consumers of financial services.

The restructuring of the FSA (2013) took place shortly after the mis-selling of interest rate swaps was reported (2012) resulting in the major banks compensating their clients.

I hope the above explains some of the jargon that is influencing legislation worldwide. Compliance functions within financial institutions and corporations or outsourced to professional firms continue to grow. Increasing reporting is now also covering detailed transactions whether for tax or money laundering regulations. Compliance now seems endless, while ever-expanding IT systems, conversion files and data transmission combine to form a RegTech world.

Does all this regulation ensure financial stability, prevent fraud and improve corporate governance? Only those charged with the relevant responsibility can answer this question. Ethics and the integrity of the individuals so charged will always be the most important qualification!

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