Regulatory compliance: burden or opportunity

Regulatory compliance is a serious issue for professional services organisations, as recent high profile cases, including Jonathan Duff’s conviction, Enron and WorldCom, have illustrated. Asomi Ithia, a marketing communications manager at Perceptive Technology, examines why firms and their clients cannot afford to ignore the pressures to comply and how they can make an opportunity out of a burden.

Professional services firms are under constant pressure to comply with regulations and must clearly demonstrate that they have done everything possible to deliver good and honest services, as individuals, regulatory bodies and the state have real powers to punish those who transgress.

Although firms must comply, to date there has never been any real business benefits to be gained from adhering to the rules and regulations created by the various bodies and legislation. In many instances this is due to a lack of policing (internally and externally) and/or limited use of regulatory powers by the authorities.

However, there is a sea change taking place, and a litigious society is evolving. There are implied and explicit benefits to be gained from addressing compliance as a serious issue such as providing clients with confidence in the service delivery, being a good corporate citizen, developing best practice and avoiding fines and prison.

For example, when opening a new client matter, the onus is on the lawyer to identify any illegal activity the client is planning to conduct, through the transaction. Failure to do so can lead to imprisonment and/or a fine. As has happened to Jonathan Duff, who is currently serving a prison sentence for not realising that a client was using his practice to sell assets acquired through criminal activity.

In the future, professional services organisations can expect regulatory compliance to be a major area of focus in all transactions. And, like Jonathan Duff, those who choose to ignore or overlook them, could be subject to severe penalties, including fines, criminal actions, claims for compensation, increased insurance costs and suspension or withdrawal of their certificates to practice. But is this a burden or an opportunity? And, what can you do to eliminate the burden and/or exploit the opportunity?

Burden

Regulations from industry bodies, such as the law society and legal statute, such as the Solicitors Act 1974, the Financial Services & Markets Act 2000 (which now also governs financial transactions undertaken by law firms), the Data Protection Act 1998, the UK Competition Act 1998 and the Health and Safety at Work Act 1974, all create a burden on resources. But, they cannot be disregarded and all businesses must maintain a level of awareness of their responsibilities and act accordingly, or face the consequences.

Opportunity

On a more positive note, with all these rules and regulations, in areas such as new client matter inception, money laundering and conflict checking, and the current focus on business liability, there is now an opportunity for firms to:

Proactively mitigate their risks;
Achieve high corporate governance standards;
Raise internal awareness of regulatory compliance;
Use regulatory compliance to generate client confidence, market the firm and build competitive advantage.

Also, for those firms that are successful at managing regulatory compliance, it represents an additional opportunity to deliver high value services and advice to clients. In an area that can be a legal minefield of rules and regulations, from industry regulators and local, national and European governments, experience has shown that good advice can save a client thousands, even millions in fines.

Avoiding the penalties

In most organisations a situation exists whereby constant pressure to perform leaves important issues, like regulatory compliance, unattended or forgotten, which is where the problems begin. This is further exacerbated by the ever-changing regulations that leave firms hoping that the latest round of changes do not affect them. In these circumstances, firms can either sit and hope for the best or proactively defend their position, by creating processes to manage and ensure compliance.

For example, new client matter processing can be a long and arduous task that involves numerous people and mounds of paper, to perform conflict of interest and money laundering checks. It is a process that wastes valuable time, while the lawyer manually checks and cross-references four, five or six different information sources. More importantly, it may keep a new client waiting, before they can begin working on their matter.

On the client services side, take a law firm’s client that operates in a heavily regulated industry, and has 30,000 employees, who must all comply with a raft of legal requirements. That client is challenged with keeping 30,000 people up-to-date with the latest regulations, in an environment where one oversight could lead to a heavy fine and recriminations for the company and the individual. It is a situation that has traditionally seen the in-house counsel try to manage the regulations, using haphazard training courses and internal networks to disseminate important documents and information.

These two scenarios could be avoided and/or dramatically improved if the processes used to achieve the end results were automated and the manual elements removed or minimised.

Compliance solutions

For lawyers and their clients, automating regulatory compliance helps breakdown and simplify complex and labour intensive tasks, so they are easy to understand and adhere to, as good everyday working practices. Once in place, automated processes will also give employees confidence when completing regulatory tasks, so they can happily spend more time on the other elements of their job.

Compliance manuals and the staff handbook are a good starting point, to take the risk out of existing processes in the quickest and most cost-effective way possible; that will stop non-compliance, by making it harder to not comply. There are three steps that firms can take immediately to make a difference, whether addressing your internal needs or advising clients.

First, to ensure that everyone is aware of the relevant compliance issues that affect their specific role, compliance manuals and the staff handbook should be broken down into role-based components, so that each individual is aware of their specific responsibilities. Also, tests or quizzes should be linked to compliance documents to ensure that employees achieve a minimum level of understanding before performing certain tasks, such as audit or tax advice.

Second, to stop people from opting out of the compliance programme and to encourage timely testing, automatic triggers should be used to escalate non-compliance issues to management and compliance officers, if the prescribed service levels are not adhered to. A full audit trail of all user actions, test results and escalations, should be maintained, and reports produced, as required, to verify any aspect of the compliance programme, and to provide evidence to regulatory bodies.

Third, as regulations are modified, new people join and existing staff members change roles or become involved in additional service offerings, automatic updates should be used to notify employees of their new obligations and if appropriate, re-test them. This greatly simplifies the management of the compliance programme and avoids potentially expensive oversights, due to the constantly changing nature of the business.

Once the firm has automated the fundamental compliance processes, or in parallel to that development, the next logical step, is to put strategies in place to automate business processes, in such a way that regulatory compliance issues are inherent within the process. The firm can then apply this to critical areas, such as new client matter inception, conflict searching and money laundering.

Here, the objective is to take all the component parts of the regulation and build a process around it, which requires minimum input from the user. For example, in a law firm, new client matter inception should become an automated process that takes the lawyer through the stages of checking for conflicts of interest, searching for previous matters and any unpaid bills, and checking their details against a money-laundering database. All of which should be completed in minutes, rather than hours or days, so the matter is not held up and the lawyer can begin to service the client.

In addition, of paramount importance to the user, is ease of use and availability, so they can maximise the effectiveness of the compliance programme. This can be achieved by ensuring that the process integrates all the necessary systems and is delivered via the key users’ desktop.

Conclusion

Regulatory compliance is not new, but it is now being heavily scrutinised, and firms that want to avoid the wrath of the authorities must protect themselves and their clients from the penalties that non-compliance brings. In the past, tools to help firms effectively manage regulatory processes have not been available, but with the introduction of business process automation, firms can start to maximise the opportunity to reduce their exposure to risk and improve the range of services they are able to offer clients.

These advances will not stop those who want to be dishonest, but it will stop accidental breaches and quickly demonstrate that the firm has made efforts to comply with the regulations.

Asomi Ithia is a marketing communications manager at Perceptive Technology. He can be contacted at ani@perceptivetechnology.com.