Chapter 2 - Compliance Monitoring Programme

Question 1

What is the purpose of the compliance monitoring programme?

Answer 1

To provide an independent review of the operational work performed by the firm.

Question 2

What are the two elements that the compliance monitoring programme will focus on?

Answer 2

1. confirm whether operational tasks are being performed in line with operational procedures.
2. confirm whether operational procedures continue to reflect current regulatory requirements.

Question 3

In larger compliance monitoring programmes, what might be produced to provide the Board with a view of compliance and operational risk?

Answer 3

Risk Mitigation Plan

Question 4

What are the 3 stages of a compliance monitoring review?

Answer 4

1. Information Gathering
2. Scoring
3. Weightings

Question 5

As part of stage 2, what are the 3 aspects of scoring that will be considered?

Answer 5

Financial impact, exposure and probability

Question 6

What is financial impact?

Answer 6

The magnitude of financial cost were an adverse event to crystallise.

Question 7

What sort of measure is used to measure financial impact?

Answer 7

A relative measure (1 - event could threaten the company’s existence etc.)

Question 8

What sort of costs might a firm need to consider when assessing financial impact in the event of a regulatory transgression?

Answer 8

• Investigation costs (inc. 3rd party review)
• Customer compensation costs
• Legal costs
• Potential regulatory fines

Question 9

What additional cost must be mentioned although difficult to specify when assessing financial impact?

Answer 9

The impact to loss of goodwill and/or reputation due to the event.

Question 10

Who in the organisation might be able to help identify the costs of a potential financial impact?

Answer 10

Finance director / financial controller

Question 11

What is exposure frequency?

Answer 11

How often the activity occurs that could give rise to an adverse event.

Question 12

What needs to be avoided when developing an exposure frequency score?

Answer 12

Developing a scoring system that exaggerates or understates the events. E.g. Extreme financial impact but low frequency.

Question 13

What is a probability weight?

Answer 13

A weighting that considers the strength of the procedures and controls in within the review area.

Question 14

How might a probability weighting be expressed?

Answer 14

PORC factor - probability of risk crystallising

Question 15

What is a PORC factor?

Answer 15

Probability of risk crystallising - the annual likelihood of an event occurring given the management controls e.g.

Low - <30%
Medium - 30% to 70%
High - >70%

Question 16

What are the types of weightings that can be applied?`

Answer 16

Anxiety weightings; perspective; days since last tested

Question 17

What are anxiety weightings?

Answer 17

What is currently worrying the compliance officer about industry/regulator expressed concerns - the regulatory might be undertaking a thematic review on a specific area.

Question 18

What is perspective in relation to weightings?

Answer 18

Potential areas for high business volume, new business areas, magnitude of implications to existing operations.

Question 19

What is days since last tested in relation to weightings?

Answer 19

A weighting might be applied to bring to the top of the list, an area that hasn’t been reviewed in a while.

Question 20

How might a compliance monitoring programme schedule be planned?

Answer 20

1. Fixed at a point in time - plan determined for the next year. Risks not reviewing emerging areas of concern.
2. Dynamic - Complete a review of all areas within an 18 month timeframe and do specific reviews in high risk areas on a quarterly basis.