Economy & Business
Regulatory relationship management
Global regulatory relationships matter and should be managed carefully
By Paul Shelton
All financial institutions will naturally say how important it is to maintain a proper relationship with the regulator in their jurisdiction. Taiwanese banks will insist how important it is to maintain their relationship with the Financial Services Commission (FSC).
But today, with global financial institutions maintaining offshore branches, subsidiaries, and representative offices, the responsibility for regulatory relationship management is effectively multiplied by the extent of a financial institution’s global footprint. Financial institutions must ensure that they keep the foreign regulator satisfied. I once noted to a group of Taiwanese bankers, on the cusp of potential offshore postings, that they were in fact, in these circumstances, “ambassadors” for Taiwan. I reminded them of the need to constantly prove their credentials with all regulators and, for a bit of dramatic effect told them, in very direct English slang – You need to keep your nose clean!
A senior banker, representing any country must have good judgment, service orientation and the ability to cope well under stressful circumstances. Organizational skills, time management and a strong work ethic are also essential for this role. And being placed in an offshore location only amplifies the needs for this skill set, especially with respect to regulatory oversight, regardless of your role in the offshore location.
Some may counter that their role is internal and doesn’t involve dealing with regulators. However, if you are a senior banker in an offshore location, there is a very strong likelihood that you will interact with the regulators in conjunction with legal and compliance staff (your role may even require registration with the offshore regulator). And the extent to which you do this well and provide your head office with detailed updates on the activities occurring in the offshore location, the better your performance will be viewed. Detailed and regular management reports and information are part of the lifeblood risk management in today’s financial markets.
I’ve worked, sat with, negotiated, and interacted with regulators in some 14 jurisdictions in the Asia Pacific region (from Japan to New Zealand and most places in between) (sometimes with multiple regulators in the same country) and dealt extensively with US regulators and with some of the Middle East’s regulators as well. The US is particularly challenging given its sheer multiplicity of regulators and the financial risk of getting something badly wrong – a lesson learned by at least one leading Taiwanese banking institution some years ago.
Most of these interactions are simply because of “business as usual” enquiries but, on occasion, some of these interactions were the result of infractions (perceived or real) by financial institutions and the regulatory implications that flow from those infractions. Regulators have a very important role to play in their jurisdictions and I always approach them with the respect and professional politeness they deserve – no differently, I think, from how I approach customers or clients.
I think it is important to also understand how particular regulators see themselves. Each regulator has its masters, whether it be its political masters or indeed the populace of their country. Regulators are very sensitive to the situations in which average investors lose their savings. This does not go down well with the populace and is particularly aggravating to the politicians.
To understand how regulators see themselves, it is quite easy to access their web pages and review their “mission statements” to get more understanding.
Taiwan’s Financial Services Commission – (FSC)
The FSC conducts a comprehensive review of the development, supervision, management and examination of the financial market and services, and aims to achieve its objectives by improving the operation of financial institutions, maintaining stability, and promoting the development of the financial market. Since the FSC was established, it has committed to the development of a sound, fair, efficient, and internationalized financial environment, and to ensure the interests of financial consumers and investors, sustainability of the financial industry and industrial development.
Hong Kong’s – Hong Kong Monetary Authority (HKMA)
The Hong Kong Monetary Authority (HKMA) is Hong Kong’s central banking institution. It was established on 1 April 1993 by merging the Office of the Exchange Fund and the Office of the Commissioner of Banking. The HKMA's four main functions are:
- maintaining currency stability within the framework of the Linked Exchange Rate System;
- promoting the stability and integrity of the financial system, including the banking system;
- helping to maintain Hong Kong's status as an international financial centre, including the maintenance and development of Hong Kong's financial infrastructure; and
- managing the Exchange Fund.
Singapore’s – Monetary Authority of Singapore (MAS)
MAS' values and code of conduct support our mission of promoting sustained non-inflationary economic growth, and a sound and progressive financial centre.
To promote sustained non-inflationary economic growth, and a sound and progressive financial centre.
- Integrity: We are trustworthy and professional.
- Commitment: We do our best for MAS and Singapore.
- Enterprise: We set high standards and innovate continually.
- Teamwork: We achieve more together.
In line with our values, we support and foster a culture of zero tolerance towards fraud and other misconduct. We will look into all feedback received on such matters involving MAS staff.
Our code of conduct includes the following:
Personal and professional behaviour
We uphold the highest standards of conduct and behaviour in and outside MAS to safeguard MAS' reputation and interests. In all our dealings, we are guided by the principles of fairness, integrity, and professionalism.
Duty of confidentiality
We safeguard, at all times, the confidentiality of documents and information obtained during the course of our employment with MAS and even after we leave MAS.
Conflicts of interest
We avoid situations that may give rise to actual, potential, or perceived conflicts of interest. We take appropriate steps to mitigate potential conflicts of interest where such conflicts are unavoidable.
Use of MAS' resources
We use all MAS' resources, including financial, intellectual and electronic assets, in a responsible and appropriate manner.
Malaysia’s – Bank Negara
Bank Negara Malaysia, as the Central Bank, is committed to excellence in promoting monetary and financial system stability and fostering a sound and progressive financial sector, to achieve sustainable economic growth for the benefit of the nation.
This will be achieved through:
- Promoting a work culture which emphasises the highest standards of professionalism and integrity, prudence, teamwork and innovation;
- Developing and maintaining a committed workforce which is highly competent and proactive, sensitive to the changing needs of the industry;
- Adopting a collaborative approach in everything we do;
- Promoting the effective use of technology and good work practices to enhance productivity, efficiency and quality;
- Adopting policies and practices to enhance the competitiveness of local financial institutions to face international competition; and
- Having the necessary financial resources and financial instruments to effectively manage monetary stability.
The Philippines – Bangko Sentral ng Pilipinas (BSP)
Vision - The BSP aims to be recognized globally as the monetary authority and primary financial system supervisor that supports a strong economy and promotes a high quality of life for all Filipinos.
Mission - To promote and maintain price stability, a strong financial system, and a safe and efficient payments and settlements system conducive to a sustainable and inclusive growth of the economy.
- Excellence – Consistently doing our best to master our craft, continually improving our competencies and learning new things in pursuit of the organizational goals, comparably to the best practices of other central banks
- Patriotism – Selfless commitment to the service of the Filipino people and the country
- Integrity – Performing mandate with sincerity, honesty, and uprightness, worthy of respect and emulation of others
- Solidarity – Performing with team spirit – acting and thinking as one in the pursuit if common goals and perspectives
- Accountability – Taking full responsibility for one’s or group’s actions
Summary of the mission statements
The wording of each regulator’s mission statement may differ slightly, but they have common the themes of stability, supporting economic growth, integrity, professionalism and even patriotism. Fine words indeed and I do believe that each regulator takes their mission statements and their missions seriously.
Managing regulatory relationships
The management of the regulatory relationship within a financial institution certainly starts from the top – the CEO, the chief executive, the board of directors, but on a day-to-day basis, it is most likely to be found within the job description of the head of legal, the head of compliance (or the head of legal & compliance) and the Money Laundering Reporting Officer (MLRO) also often getting a look in.
But the role applies to every employee of the financial institution. Some writers say that the best relationship is one that creates no surprises for your institution and your regulator, and I totally agree with that common sense attitude. Some may even see an effective regulatory relationship management as dull. I think “dull” is a sign of success since it implies being seen as low maintenance by the regulator. If your financial institution is always creating issues and problems which result in firefighting and chaos, then you will quickly earn an unwanted reputation from your regulator.
In my career as a Head of Legal & Compliance (and MLRO) I’ve always advised my own team that the thing I hate most is “surprises”. Issues will always occur. They are inevitable, but I prefer to know about them immediately so that measures can be taken to stop or mitigate damage to the financial institution (either financially or reputationally or both and to ensure timely reporting, where necessary to the regulator. I believe the same applies to regulatory relationship management. Effective communication (internally and externally) are vital elements to a successful relationship.
Let’s look at some components that are important in an effective strategy to maintain good relations with your regulator:
Accepting regulation – Mention the word regulator and you will often hear negative opinions on the levels of regulation, and it is possible, on occasion, to be frustrated by regulatory walls (dig a bit deeper and you’ll probably find why they are there). But if you want to play in the financial institution “sandpit” then you must accept and understand the need for regulation in that jurisdiction.
Regulations help protect the public and even financial institutions from those that would seek to undermine countries, economies, and the assets of everyday investors. Membership of the financial industry comes with real benefits, but it also comes with a price and that price does involve the highest levels of integrity, probity, and complete trustworthiness. Perhaps these sentiments also help us to better understand why regulators so frequently prefer to adopt risk based regulatory frameworks - freedom with boundaries. But for this to work, it is necessary that everyone in the financial institution understands not only their duties to their business but also to the industry.
Understand the law and regulations – This may seem obvious (and it should be) but the laws and regulations relating to financial institutions in each jurisdiction are substantial. There are reams of regulation and for a financial institution to be successful it must ensure adherence to the law and regulatory compliance standards, and professional duties.
Laws and regulations are not carved in stone. They are constantly evolving and, accordingly, the relationship with a regulator is the same. Resources are needed to keep up to date and financially successful, particularly in these turbulent times. This does create challenges, but it also creates opportunities. Regulators themselves often sound out their industries for new ideas and potential opportunities for their markets. Financial institutions should avail themselves of these opportunities to put their ideas forward and work with their regulators to help shape the integrity but also the opportunities within the market.
Infrastructure – This can often be dictated by the regulators themselves. They will indicate what they expect to see in terms of senior management and risk and compliance infrastructure. But a word of caution here. Failure to fill essential roles or a revolving door of personnel in those roles will inevitably lead to regulatory scrutiny. Questions will be asked such as why can’t the financial institution fill a role? Why the turnover? How is the financial institution ensuring oversight when roles are not filled?
Being accountable – Actions speak louder than words. Financial institutions must not only talk the talk, but they must also be able to demonstrate to their regulators why they deserve to maintain either their high rating with the regulator or, in a worst-case scenario, why they even deserve to maintain their license.
There are a couple of ways of demonstrating this to a regulator. One is training, and the caveat here is that whilst training from a head office perspective is great, if a financial institution has offshore locations, then the training must also include specific training to meet the requirements of that offshore jurisdiction. Training must be tracked and recorded and tested to ensure the right culture is maintained in the institution. The second is supervision and oversight internally. This can range from periodic reviews of telephone conversations between sales and trading staff and clients through to specific transaction reviews to ensure that the financial institution’s policies and procedures are being followed carefully. The onboarding process and its detailed Know Your Client procedures is an excellent example of the type of activity that benefits from internal supervision and oversight.
In some of my earlier articles I have provided details of where the FSC has fined local financial institutions. These details are summarized on their website. In those reports you will often see these words repeated “…revealed a failure to properly establish and sufficiently implement internal controls and constituted a violation of.. .” Easy pickings for the regulators if a financial institution fails in its internal supervisory obligations.
Be open and transparent – Nothing guarantees severe sanctions and regulator opprobrium quicker than trying to hide a problem. Senior management and compliance in all its forms must know what is happening within the financial institution and if there are problems then they must not be hidden. All employees of a financial institution must understand this and must not feel that their institution functions on a blame and shame culture. This is also where the importance of “whistle-blowers” comes into play. Whistle-blowers must be protected and their issues appropriately investigated and actioned (if necessary).
In conclusion, when I was presenting to a large group of Taiwanese bankers some months ago, I left them with a few practical tips for maintaining good regulatory relationships (particularly offshore):
- Interact at the appropriate level with foreign regulators on behalf of your bank.
- Join local banking associations (if possible).
- Manage data and documentation related to regulatory compliance – even if your role is not compliance. Make sure you know the compliance landscape in your offshore location.
- Ensure you provide new information and data on regulatory issues in a timely manner to your head office (and make sure you cascade that information as broadly as needed).
- Maintain a process of obtaining information from external sources (not just the offshore regulator) and ensure that information is disseminated properly (just a word of caution – it should be publicly available information and nothing that might be regarded as confidential by a foreign country or regulator).
- Communicate with team members (both offshore and at head office) about actions they should take to meet the offshore regulatory standards.
- Observe company operations to ensure team members are following standards – particularly the offshore standards.
What not to do:
- Give the impression that you only follow Taiwan standards.
- Never keep a regulator (from anywhere) “waiting” for a response to a regulatory enquiry.
- Never say “I don’t have that answer here”, I need to ask head office.
- Never assume. Ask for further details if you don’t understand.
I wish you all well in your relationship with your regulators!
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.