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 of which compliance professionals should be aware.
Encouraging Ethical 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.
Ethical Investment and Compliance Professionals
This trend provides a significant opportunity for compliance professionals to support their firms’ ethical promotion, assuring investors that robust policies, processes, and systems, and efficacious ethics training, have a significant focus internally. This action can demonstrate a firm’s credentials, but it also emphasizes the potential reduction in risk from high-value fines and enforcement.
In one of the organizations I worked with, a concern raised by investors of over $2 billion led to the in-house compliance staff being asked to explain the program and its approach 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 connected to high-risk firms. Ensuring compliance is incorporated into the initial project design is one means of securing a project. This reduces the risk of later exposure and can be 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 mobilizing up to €300 billion of investments in global development by 2027.
The strategy is values-driven, meaning projects must meet the 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 breaches laws, it can lead to criminal prosecution and prison for those in responsible positions.
More Input From the Compliance Department
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 organizations with an implementation deadline of 31 July 2024.[5] It will require firms to ensure 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 behavior that ensure that the firm acts in the best interests of retail clients or delivers good outcomes.
Cross-cutting rules will require three key behaviors: 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 Intentions of the FCA
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 with 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 with 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.
Moving Forward
I hope the above has provided some new ideas for you to reflect upon or, more likely, confirm 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!’
This article was first published by the International Compliance Association (ICA), the leading professional body for the global regulatory and financial crime compliance community. For more information on the benefits of becoming an ICA member, including access to the ICA’s complete content library of articles, videos, podcasts, blogs, and e-books, visit: Become an ICA Member – Application Form (int-comp.org)
About the author
Gaon Hart is experienced in developing Parliamentary and regulatory relationships as a renowned expert in designing, developing, and implementing global corporate compliance programs. He has recently been Head of Public Policy in the economic crime arena for Amazon, covering UK & Ireland, and prior to that, he was Head of Global Anti-Bribery & Corruption Advisory, Policy & Training for HSBC Bank, designing and implementing a global anti-corruption program from scratch covering 64 countries and 230,000 staff. These roles led from his experience as a Senior Crown Advocate with the Special Crime & Counterterrorism Division of the CPS, where he was seconded to the Attorney-General’s Office, acting as Lead Solicitor for the Government’s 2006 Fraud Review change program, developing the UK counter-fraud architecture that still exists today.
Publicly, he represented the UK at GRECO, UNCAC, and at an EU Mission to Romania, was Co-Chair of the UK Finance Anti-Bribery & Corruption Committee, advised the UN on their report, ‘Bankrupting the Business of Human Trafficking,’ co-authored the UK Finance definitive guide to the ‘Definition of Public Official’ and undertook multiple public engagements including appearing before a Parliamentary Treasury Select Committee on behalf of Amazon.
Gaon is currently also a Non-Executive Director for the NHS Counter-Fraud Authority and Managing Director of Legal Advisory Worldwide (a boutique legal consultancy company).
References
[1] Madison Darbyshire, ‘Investors row back on ethical principles, research shows’, Financial Times, 7 May 2020
[2] Melissa Horton, ‘Are Business Ethics Important for Profitability?’, Investopedia, 28 December 2022
[3] McKinsey & Company, ‘Four ways to get more from government infrastructure projects’, 6 January 2020
[4] Pinsent Masons, ‘EU launches major infrastructure investment strategy to underpin global recovery’, 8 December 2021
[5] FCA, ‘Consumer Duty’
[6] Sonia Rach ‘Firms to have until April 2023 to implement FCA’s consumer duty’, FT Adviser, 7 December 2021
[7] Simmons + Simmons, ‘Consumer Duty View: FCA update – 25 January 2023’, 26 January 2023