Coping with compliance risk in a rapidly changing world

A guide for directors and executives

The significant increase in business regulatory activity that began with the Global Financial Crisis and Pike River mine incident, and expanded further with large-scale inquiries into the conduct and culture of banks, insurers and other financial institutions, shows no signs of slowing down.

Recently, regulators such as the Financial Markets Authority and the Reserve Bank have significantly increased their resourcing and set up new enforcement teams. New legislation governing financial advice and privacy, and proposed new laws around climate disclosure have introduced (or will introduce) new penalties, including possible criminal liability for directors. Long-awaited changes to introduce a class action regime appear likely to come to fruition soon, further exposing directors to additional risks.

Most significantly, financial services regulators in many jurisdictions have become increasingly concerned with conduct and culture, leading to the establishment of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia in 2017, and to the Reserve Bank of New Zealand and the Financial Markets Authority launching a series of inquiries into the conduct of financial institutions in New Zealand and bringing court proceedings against those who have made mistakes. As we discussed on pages 4 and 5, financial institutions are now expected to ensure that they invest appropriately in their systems to ensure good customer outcomes, monitor those systems proactively for compliance and demonstrate leadership from the board to ensure that the institution’s culture encourages good customer outcomes. While issues are often self-reported, action is increasingly taken against entities even where errors were unintentional and self-reported, especially if self-reporting is delayed and the errors could be blamed on insufficient investment in compliance processes or systems. The need to get things right is stronger than ever, and the onus is on boards and senior executives to drive a strong culture of compliance from the top. We are increasingly seeing this view applied by other regulators outside the financial sector.

Boards and executives must also consider a broader range of risks than in days gone by. The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 will shortly require certain entities to identify and report on the impact of climate change on their organisations and disclose their greenhouse gas emissions, with the threat of criminal liability for directors if misleading statements are made. Furthermore, there are heightened business integrity risks such as the criminalisation of cartel conduct and the COVID-19 pandemic has intensified cyber risks.

We discuss each of these risks in the following articles:

The climate-related financial disclosure regime

Cyber threats

Cartel criminalisation

 

 

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