compliance-finance-sector

What does ‘compliance’ mean in the finance sector?

The term compliance is gaining strength in all types of companies, acting as a shield against serious legal problems, especially those that belong to the financial sector, which are more strictly regulated.

What is ‘’compliance’’? 

We live in an increasingly complex business environment with stronger regulations aimed at protecting all parties involved in business activities. That is why companies need to be extremely careful to ensure that their activities are strictly adhered to all the legal requirements of their industry.

This is far from being a minor issue, since legal compliance frees companies from legal problems that could lead to costly monetary penalties. Compliance will allow us to anticipate and prevent many disputes.

The expression compliance was first introduced by the Basel Committee on Banking Supervision in 2005, and was defined as:

‘’the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its banking activities (together, “compliance laws, rules and standards”). ‘’

However, compliance should not be understood exactly as the risk, but as the degree of regulatory compliance, which is inversely proportional to the legal risk. According to Deloitte:

“Regulatory compliance consists of setting up appropriate policies and procedures to ensure that a company carries out their business activities under current regulations and internal policies and procedures, promoting a compliance culture among employees, managers and related agents”.

Through compliance, companies can establish policies and actions to detect and manage the risks derived from non-compliance with legal obligations.

Compliance not only increases legal security, but also prevents vulnerabilities that could be used by criminals, such as cyber-criminals, which could lead to great financial losses. Neither should we underestimate the potential loss of reputation that will surely affect business results.

Compliance in the financial sector

By its very nature, the financial industry is one of the industries where compliance plays a bigger role, due to its strict regulations. This tight regulation results from the many crimes that can be committed, such as money laundering or the illegal financing of both criminal or terrorist organizations.

Out of all the initiatives that have been put in place for risk assessment, let’s start by reviewing the main international standards, namely ISO 31000 and ISO 19600.

  • ISO 31000 for Risk Management: provides guidelines on managing risk faced by organizations, including Financial Risks.
  • ISO 19600. Compliance management systems: introducing the term compliance. The new ISO 19600 standard has been published as an international guideline to provide organizations with a Compliance Management System.
Compliance

From a regulatory standpoint, in recent years several laws affecting financial compliance have also been passed and are worth mentioning.

Let’s start with The Markets in Financial Instruments Directive (MiFID). It aims to create a single market for financial services and to promote transparency, investor protection and competition in financial markets.

Secondly, Regulation (EU) No 596/2014 on market abuse. A common legal framework at European level for insider trading is created, including illegal disclosure of financial information and consequent market manipulation. Its purpose is to protect the integrity of EU financial markets, to protect their users and to increase investor confidence.

Complementing the above regulation is Directive 2014/57 EU, which details the criminal sanctions related to market abuse.

Finally, we will mention the European General Data Protection Regulation (GDPR), which of course applies to the financial sector. The GDPR forbids, for example, sharing personal data with non-EU countries that do not have adequate protection measures.

Using digital signatures for financial compliance 

When talking about electronic signatures, and if we are more or less informed about their basics, one of their features that will come to mind first is the level of security they provide from a legal perspective.

To be even more aware of what digital signatures can provide through compliance, we must introduce the term compliance officer, that is, the person responsible for the organization’s adherence to all legal requirements. Therefore, it is his/her obligation to know in detail the regulations that affect the business, along with the related documentation, and to establish internal control procedures. 

As a result of all this, by using electronic signatures in business activities, we will greatly simplify the work of the compliance officer, as digital signatures are evidence that administrative procedures were indeed carried out in compliance with the law.

On the other hand, electronic signatures will also directly help the compliance officer in his/her daily tasks on internal document management and when dealing with other companies and/or public and regulatory entities at both national and international levels.

Compliance is gradually becoming more important in the Spanish business world. In fact, according to Deloitte, 78% of companies with over 5,000 employees rely on compliance, as well as 38% of companies with less than 5,000 employees.

In addition, more steps are being taken to improve compliance, like the proposal by the Spanish Supreme Court judge, Vicente Magro, to create a regulatory statute and a Registry of Compliance Experts.

It is clear that this is a growing issue to which electronic signatures are indeed very helpful. Therefore, implementing these types of solutions, like those offered by Viafirma, must be seriously considered by company managers from the financial sector.