Chapter 2 - International Best Practice

Question 1

What is compliance risk?

Answer 1

The risk of legal or regulatory sanctions, material financial loss, or loss to reputation from a failure to comply with laws, regulations, rules, SRO standards and firm codes of conduct.

Question 2

What are the responsibilities of the compliance function?

Answer 2

1. Regularly assess and monitor the adequacy and effectiveness of the measures and procedures put in place and the actions taken to address any deficiencies in the firm’s compliance with its obligations.
2. Advise and assist the relevant persons responsible for carrying out regulated activities to comply with the firm’s obligations under the regulatory system.

Question 3

What is the first principle of the BCBS with regards to compliance?

Answer 3

The Board is responsible for overseeing the management of the firm’s compliance risk. They must review the compliance risk effectively.

Question 4

How does the BCBS apply its principles to senior management and their compliance responsibilities?

Answer 4

1. Establishing, communicating and ensuring adherence to the compliance policy.
2. Taking remedial or disciplinary action when breaches are identified.
3. Identify and assess the main compliance risks and address shortfalls in policy, procedures, implementation or execution.

Question 5

What should the senior management do to give oversight to the Board?

Answer 5

• Annually report to the Board or a committee of the board on the firm’s management of its compliance risk, in such a manner as to assist board members to make an informed judgement on whether compliance risk is being managed effectively.
• Report promptly to the Board on material compliance failures.

Question 6

What does Principle 6 of BCBS principles say?

Answer 6

The bank’s compliance function should have the necessary resources to carry out its responsibilities effectively.

Question 7

What does Principle 6 of the BCBS principles say in relation to compliance function staff?

Answer 7

• Qualified, experienced, professional staff.

- Understanding of compliance laws, rules and standards and their practical impact on the firm’s operations.

Question 8

What is the purpose of the compliance manual?

Answer 8

To formally document the standards to be followed by all employees in their personal conduct and in conducting business with customers and counterparties. It also expands on the legal and regulatory obligations of employees, the policies and procedures that apply to the business, personal conduct of employees.

Question 9

What is the scope of the compliance manual?

Answer 9

• High level overview of rules and regulations
• Information for staff to stay compliant
• Living document that evolves with regulatory changes.

Question 10

What kind of status must the compliance function have?

Answer 10

It should have a formal status and be independent with all of this documented.

Question 11

What should the compliance manual detail with regard to the compliance function?

Answer 11

• Roles and responsibilities
• Measures to ensure independence
• Relationship with other risk management functions and internal audit.
• Allocation of responsibilities
• Right to access information
• Right to conduct investigations of breaches and to appoint outside experts.
• Freedom to approach the board.
• Formal reporting responsibilities to senior management.

Question 12

What activities can the compliance function perform in an advisory capacity?

Answer 12

• Advising operational areas when reviewing procedures and policies to ensure that underlying regulatory requirements are correctly incorporated. Allows 1LOD to prevent problems.
• Advise on product development, new business practices.

Question 13

What would the compliance function do in relation to regulators?

Answer 13

• Maintain good relations
• Ensure regulatory returns are made accurately
• Applying for authorisation and permission/VOP from the regulator
• Getting regulatory approval for senior managers.

Question 14

How can the compliance function measure compliance risk?

Answer 14

• Performance indicators

- Aggregating and filtering data

Question 15

What would the Head of Compliance report to Senior Management?

Answer 15

• Compliance risk assessment for the relevant reporting period.
• Changes to the compliance risk profile.
• Summary of identified breaches.
• Deficiencies and corrective measures recommended to address them.