Written by Gaon Hart on Monday 17 April, 2023
Last week, I discussed some of the key events and developments likely to engage compliance professionals as we begin the second quarter of 2023. Below, I continue this discussion with a look at some of the other important trends about which compliance professionals should be aware.
Encouraging investment
Recently, there has been a significant drive for investors to focus on ethics and compliance. Although some argue that ethical investing will reduce in significance during an economic downturn,[1] there is still considerable interest in ESG[2] and ethical investing. The sector was valued at more than $31 trillion in a 2018 study and in the year to February 2020, ESG-focused funds attracted more than $70 billion in assets. Indeed, direct ethical investing in the UK topped £17 billion in 2022.
This provides a significant opportunity for compliance professionals to support their firms’ ethical promotion, assuring investors directly that robust policies, processes and systems, and efficacious ethics training, have a significant focus internally. This can demonstrate a firm’s credentials, but it also emphasises the potential reduction in risk from high-value fines and enforcement.
In one of the organisations I worked with, a concern raised by investors of over $2 billion led to the in-house compliance staff being asked to explain the programme and its approach in order to satisfy the investors that their investments were secure, and that their reputation was assured.
Compliance by design
Large-scale infrastructure financing or engagement carries significant compliance risks, particularly if undertaken in high-risk jurisdictions or when connected to high-risk firms. Ensuring that compliance is incorporated into the initial project design is one means of securing a project. This reduces the risk of later exposure and can even be used as a differentiator in project bids.
Globally, more than $2.5 trillion a year on infrastructure and it is estimated that $3.7 trillion a year will be needed by 2035, just to keep pace with projected GDP growth.[3] The European Commission has unveiled a major infrastructure investment strategy aimed at mobilising up to €300 billion of investments in global development by 2027. The strategy is values-driven, meaning projects that are invested in will have to meet rule of law, human rights and international norms. They will also need to be environmentally friendly, demonstrate good governance and transparency, and be security focused.[4]
Engineering failures due to unethical practices are not new. From the Johnstown Flood in 1889 to the Fukushima Daiichi nuclear disaster in 2011, such failures have been caused by problems in design, construction and safety protocol. Ethical lapses by managers or employees can cause severe damage to a firm’s reputation. This can lead to the collapse of the project and, in some cases, can cause the firm’s demise – just ask a millennial whether they have heard of one of the ‘big five’ global accounting firms, Arthur Anderson! If a manager or staff breach laws, it can lead to criminal prosecution and prison for those in responsible positions.
The direction of travel suggests that successful bids for large-scale projects may in the future require greater input from compliance professionals, assuring good governance within the company as well as within the project. By demonstrating good corporate procedures by design in any project bid, such as risk-based third-party assessments and ethical control mechanisms, a firm can differentiate itself from other bidders.
In another firm I assisted, a large-scale infrastructure financing project was rejected by other firms because of potential bribery risks, due to a high-risk jurisdiction and risks around construction firms being used who had previous bribery enforcement. The project was secured due to the efforts of compliance professionals who implemented robust third-party controls, such as isolated payments to ensure financing was used appropriately, and rejecting potential third-party intermediaries through direct financing controls and payment ring-fencing.
These ethical trends provide a new potential role for compliance professionals: revealing the positive impact ‘good’ compliance can have on large-scale infrastructure financing or projects, and demonstrating that it can be instrumental in generating profit.
Consumer Duty
The Financial Conduct Authority (FCA) has confirmed that it will introduce a new Consumer Duty for organisations with an implementation deadline of 31 July 2024.[5] It will require firms to assure that outcomes from their products and services are considered with regard to what consumers expect, and that these firms act to enable, rather than hinder, these outcomes. Firms will also need to assess the effectiveness of their actions.
Moreover, firms will have to apply a ‘consumer principle’ demonstrating standards of behaviour that ensure that the firm acts in the best interests of retail clients or delivers good outcomes. Cross-cutting rules will require three key behaviours: taking all reasonable steps to avoid foreseeable harm to customers; taking all reasonable steps to enable customers to pursue their financial objectives; and acting in good faith. These will be underpinned by a suite of rules and guidance that set more detailed expectations for a firm’s conduct in relation to four specific outcomes – communications, products and services, customer service, and price and value.[6]
The FCA has confirmed that it wants firms to ensure risk, compliance and internal audit are fully involved in implementation planning, including getting their views on timing and planning of assurance work – and note that there are references also to planned assurance work for after the implementation deadline.[7]
Compliance professionals could be instrumental in their firms in demonstrating that good governance is aligned to strong financial conduct. I expect that, over time, the two will merge as regulators develop an approach where anti money laundering, anti-corruption, human rights supply chain due diligence, counter-fraud, and sanctions-busting prevention are all aligned to the best outcomes for consumers.
Whether you agree with these opportunities, or indeed have any time to devote to them or accept more work, compliance professionals are going to be stretched during the cost-based financial crisis. There will be pressure on budgets, staff resources and workload. In order to protect budgets and staff, and enable good corporate compliance, it may become essential for compliance professionals to consider new profit-related ways to validate their engagement and protect their essential roles.
I hope the above has provided some new ideas for you to reflect upon, or, more likely, confirmed your existing thoughts. If you have any difficulty in selling these principles to others, as Arthur C. Clarke said, ‘new ideas pass through three periods: 1) It can't be done, 2) It probably can be done, but it's not worth doing, and 3) I knew it was a good idea all along!’
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References:
[1] Madison Darbyshire, ‘Investors row back on ethical principles, research shows’, Financial Times, 7 May 2020: https://www.ft.com/content/07224893-aa3c-4a9d-a3e2-5ce64b432b4e – accessed April 2023
[2] Melissa Horton, ‘Are Business Ethics Important for Profitability?’, Investopedia, 28 December 2022: https://www.investopedia.com/ask/answers/040715/how-important-are-business-ethics-running-profitable-business.asp – accessed April 2023
[3] McKinsey & Company, ‘Four ways to get more from government infrastructure projects’, 6 January 2020: https://www.mckinsey.com/industries/public-and-social-sector/our-insights/four-ways-governments-can-get-the-most-out-of-their-infrastructure-projects – accessed April 2023
[4] Pinsent Masons, ‘EU launches major infrastructure investment strategy to underpin global recovery’, 8 December 2021: https://www.pinsentmasons.com/out-law/news/eu-launches-major-infrastructure-investment-strategy-to-underpin-global-recovery – accessed April 2023
[5] FCA, ‘Consumer Duty’: https://www.fca.org.uk/firms/consumer-duty – accessed April 2023
[6] Sonia Rach ‘Firms to have until April 2023 to implement FCA's consumer duty’, FT Adviser, 7 December 2021: https://www.ftadviser.com/regulation/2021/12/07/firms-to-have-until-april-2023-to-implement-fca-s-consumer-duty/ – accessed April 2023
[7] Simmons + Simmons, ‘Consumer Duty View: FCA update - 25 January 2023’, 26 January 2023: https://www.simmons-simmons.com/en/publications/cldd7dx3g00auu7l03ztunh29/consumer-duty-view-fca-update-25-january-2023 – accessed April 2023
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