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For banks, keeping compliant with the vast amounts of new regulation that has followed in the wake of the global financial crisis has become a new front in their battles with rivals.
Banks that get compliance right can safely take on riskier, and hence more profitable clients. They can also carry out the necessary checks more quickly and cheaply than their rivals.
Since 2007, the world’s top 50 banks have spent US$173 billion on new staff and putting in place systems to make sure that they are compliant with global regulations, according to financial services consultancy Quinlan & Associates. In spite of these investments, however these financial institutions have racked up about US$342 billion in fines, according to the consultancy.
At its simplest level, having the right compliance procedures in place means that a bank faces fewer financial penalties than its competitors.
“I don’t think we’ve seen the end of the billion US dollar fines,” said Sven Stumbauer, the US-based head of consultancy AlixPartners’ anti money laundering and sanctions practice.
“There are some big fines coming up, and I wouldn’t be surprised if there will be other fines over a billion US dollars for issues of which regulators aren’t yet aware.”
“Recently I’ve seen some examples of behaviour that was clamped down on seven or eight years ago coming back.”
In addition, having the right systems in place also allows banks to take on potentially riskier and more profitable clients.
This is particularly important if banks want to start growing again. In Asia, where global banks are starting to talk about taking on more risk, and regional banks are also making a push for business, competition is fierce.
“I wouldn’t say that not getting fined as much as your competitors is a competitive edge, that’s what everyone should be doing. But if you are able to take on riskier clients in a safe way, that’s an advantage,” said Stumbauer.
Large global banks in Hong Kong have been criticised by industry bodies for not taking on potential clients because of the risks they pose, even as these decisions have hurt their revenue.
“When the big global banks started de-risking after the financial crisis they off-boarded between 20-40 per cent of their clients, who were snapped up by large regional banks and the Chinese banks,” said Ben Quinlan, CEO of financial services consultancy Quinlan & Associates. “What remains to be seen is whether those banks’ procedures are as robust as the global banks that got rid of the clients.”
There is also a cost saving angle to getting compliance right.
“After the global financial crisis, banks set out to improve the effectiveness of their risk controls, and were less concerned about doing so cost effectively. The go-to solution was to add headcount, which could be done relatively quickly,” said David Scott, a financial services partner at EY.
HSBC, the largest bank in Europe and Hong Kong, invested US$1.6 billion in regulatory and compliance programmes in the first half, reflecting an increase of US$168 million from the same period last year. However, Scott said that for most banks, spending was slowing down.
“Now banks are concentrating on rationalising their risk functions. This is partly about cost efficiencies, but also about making systems efficient and sustainable,” he said.
These issues are as pertinent for the global banks with a Hong Kong presence as they are for any other institution, with the large international banks in Hong Kong still subject to a number of regulatory probes.
Standard Chartered is awaiting the outcome of the US Department of Justice investigation into its dealings with Iran. Chirantan Barua, a banking analyst at Bernstein, wrote in a report earlier this year that the bank is likely to face a penalty of about US$2 billion payment.
Meanwhile, HSBC said in its interim statement that it is under investigation by regulators in a number of areas, including the hiring of employees linked to officials, malpractices linked to Fifa, its ties to law firm Mossack Fonseker as well as other benchmark and foreign exchange rigging scandals.
Hong Kong regulators are also getting taking a firmer approach, though the fines that have been levied on local banks have been dwarfed by those levied by US and European regulators.
“In this region, the focus is on banks remaining compliant with anti-money-laundering rules and sanctions,” said Etelka Bogardi, a partner at law firm Norton Rose Fullbright. “Every time the US adjusts its policy on North Korea, banks need to reassess their exposure.”
Hong Kong’s regulators have also made changes.
“The Securities and Futures Commission has shown itself willing to investigate larger cases since the appointment of Tom Atkinson as director of enforcement,” Bogardi said.
She added that other rules in effect from Tuesday, which require institutions to name members of staff responsible for particular activities, will allow regulators to apportion blame in the event of wrongdoing.
Atkinson said earlier this month that the SFC was investigating 15 financial institutions for failing in their duties as listing sponsors.
Analysts say that there is more work to be done before banks can get to a stage where their streamlined compliance procedures provide advantages over their competitors.
“All the banks are still early on in the process of making their procedures more sustainable,” said EY’s Scott. “But I think the next three to five years will be quite exciting. Technology will play an important role.”
Stumbauer said that banks also need to make structural changes to make their compliance procedures more efficient.
“One thing that would make a difference would be if the person responsible for compliance at a bank reported directly to the bank’s board,” said Stumbauer. “There are many cases where board members do not have the right information to allow them to make the right decisions about which markets and lines of business to operate.”
“At the moment, compliance is seen by many banks as a cost centre, and not much more.”
This also hints at a broader cultural problem.
“Most of the changes banks made after the global financial crisis were to their second and third lines of defence [risk and compliance and internal audit],” said Quinlan
“However, the vast majority of issues stemmed from what could only be described as bad behaviour from within the business, the first line of defence. Since cultural changes have not been made to stop this, I see the fines continuing.”
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