Volume 7 (2022-23)

Each volume of Journal of Financial Compliance consists of four 100-page issues published both in print and online. 

The Articles published in Volume 7 include:

Volume 7 Number 1

  • Editorial
    Mario J. Difiore
  • Practice paper
    Why and how to embrace entity resolution and contextual monitoring
    Aaron Wolf, Deutsche Bank

    Criminal activity is an unfortunate constant in life. Some criminals are highly sophisticated, others not so much. The common objective of each criminal, regardless of the level of sophistication, is to stay at least one step ahead of the system of controls in place to prevent, detect and report their illicit activity. From a transaction monitoring perspective, criminals had a significant advantage for some time with the ineffective rules-based transaction monitoring (RBTM) that most banks utilise. The scale is beginning to tip back in our favour with the advent of new and improved technologies, such as entity resolution and contextual monitoring (ER/CM). The purpose of this paper is to demonstrate the clear advantages of ER/CM and what you as practitioners should consider when deciding if you should make the switch and what to consider when implementing the technology.
    Keywords: regulatory technology (RegTech); entity resolution; contextual monitoring; risk-based approach; risk appetite

  • The case for self-regulation for the digital assets industry
    Alma Angotti, Tracy Angulo, and Gene Bolton, Director, Guidehouse, and Gabriella Kusz, Global Digital Asset & Cryptocurrency Association

    The concept of self-regulation and the use of self-regulatory organisations (SROs) as a feature of legal and regulatory frameworks has been adopted to support effective and efficient capital market development in a number of countries around the world. Most notably, the International Organization of Securities Commissions (IOSCO) set forth through its SRO Consultative Committee a ‘model for effective self-regulation’, the general principles for self-regulation and why self-regulation should be incorporated into regulatory frameworks. Since 2000, this has served as the outline for SRO development. Today, many countries are struggling with the question of how to regulate cryptocurrency and digital assets — including the US. The rapid evolution, high degree of expertise and understanding needed, and decentralised, cross-border nature of digital assets presents unique challenges for regulators. In the wake of the failure of the centralised finance (CeFi) digital asset exchange FTX, this research explores whether an SRO may be suited to the nature of the digital asset industry and how it may provide a strong complement to formal US government regulation. Such a complementary relationship may offer United States regulators and legislators a mechanism for providing a high degree of regulatory coverage which balances the need for consumer protection and market integrity with the need for innovation. In exploring this subject, researchers undertook desk study on the IOSCO Framework for Effective Self-regulation and explored existing and emerging national SROs in the digital asset space. Desk study was coupled with individual one-on-one interviews with global digital asset industry leadership and public roundtable forums. This research concludes that an SRO may serve to provide the US legal and regulatory framework with a high-quality solution to the challenges of legislating and regulating in the ever-changing environment of digital assets.
    Keywords: self-regulation; digital assets; crypto; cryptocurrency; regulation; the International Organization of Securities Commissions (IOSCO); National Futures Association (NFA); Japan Financial Services Agency (JFSA); Japan; Switzerland; USA; securities; commodities; Commodities Futures Trading Commission (CFTC)

  • The resolution plan for insurers in France: Being prepared in case of a failure
    Frédéric Visnovsky, French Prudential Supervision and Resolution Authority

    The failure of an insurer may affect policyholders as well as the broader economy. This explains why a resolution regime is useful, with the objective of making it feasible to maintain vital economic functions and activities, which are needed, without disruption and without exposing taxpayers to loss. The resolution regime is a core element of the policy measures adopted by the G20 in the wake of the global financial crisis and applies to banks in most countries, with France being one of the first EU member states to adopt a regime for the recovery and resolution of insurance undertakings. The work undertaken to prepare resolution plans consists of first identifying the functions deemed to be critical which should be maintained. For the resolution to be effective, this work needs to be complemented with analysis of the level of separability of these critical functions from the rest of the undertaking or group, as this is necessary to ensure operational continuity in the event that a resolution action is applied. The next step consists of specifying resolution strategies that could be applied to groups or bodies performing critical functions, in accordance with different possible crisis scenarios and taking into account different resolution tools used separately or in combination. Based on these elements, Autorité de Contrôle Prudentiel et de Résolution has adopted the first resolution plan for 13 insurers, but this needs to be complemented by additional analyses and additional information in order to cover all the topics needed to operationalise resolution strategies and ensure the resolvability of undertakings.
    Keywords: recovery; resolution; insurers; critical functions; separability; interconnection

  • Best practices when handling whistleblower complaints
    Tracey Salmon-Smith. Sandra D. Grannum, Jesse Linebaugh, and Vijayasri G. Aryama, Faegre Drinker

    This paper is intended to serve as an initial guide for members of public companies on creating company whistleblower policies and procedures for the investigation of employee whistleblower complaints. Companies should establish clear internal policies for how employees can make whistleblower complaints, who should receive those complaints, how to investigate those complaints (whether internally or externally) and how the results of the investigation should be reported or shared with others.
    Keywords: whistleblower; whistleblower complaint; regulatory; regulatory investigation; internal investigation; internal complaint; compliance

  • The crypto frontier: How US policymakers and investment advisers can address digital assets
    William Nelson, Investment Adviser Association

    This paper focuses on prominent issues surrounding digital assets. The lack of a comprehensive federal digital asset law has recently raised several issues for Securities and Exchange Commission (SEC)-registered investment advisers as they try to navigate new markets and new industry practices. As such, this paper addresses the current US regulatory landscape, provides a comparison of non-US approaches to digital assets and provides US policymakers with key principles they can consider for potential digital asset legislation and/or regulation. The paper also provides compliance considerations for investment advisers who currently manage digital assets, to address the evolving obligations under the US securities laws.
    Keywords: Securities and Exchange Commission (SEC); investment adviser; compliance; digital assets; cryptocurrency; crypto-assets

  • Consumer protection and good customer outcomes in an evolving financial services ecosystem
    Donna Turner, Shapes First

    Consumer protection and the conduct of financial services firms has been a focal point and priority since statutory obligations on the financial services sector became law in 1986 with the introduction of the Financial Services Act. However, that has not prevented the continuous stream of scandals hitting the financial services industry and the consumers they serve or the never-ending battle to fight against criminal activity and strategies. This paper describes the evolution of standards in relation to financial services consumer protection, the new and evolving risks that consumers face and considers why regulation is needed that requires firms to put their customer needs first.
    Keywords: treating customers fairly; payment protection insurance; consumer duty; Senior Managers and Certification Regime (SM&CR)

  • Simplifying US state-level obligations to help achieve compliance certainty
    Kris Stewart and Elaine F. Duffus, Wolters Kluwer

    This paper provides key insights into how expert augmented intelligence helps simplify and refine state compliance obligation management with dynamic technology. Learn strategies to help financial institutions overcome four unique pain points of achieving complete compliance confidence. Readers will learn how top banks are able to reduce reliance on third-party legal firms, connect various components of regulatory change management together and gain a strategic perspective on how that impact is realised.
    Keywords: state obligation management; regulatory change; regulatory compliance; artificial intelligence; state-level legal and regulatory compliance

  • Is employees’ understanding of conduct risk aligned with values espoused in their employers’ public statements?
    Alexander Culley, C & G Regulatory Solutions

    The purpose of this paper is to examine whether there is any correlation between the values expressed in the published statements of investment firms and their employees' understanding of conduct risk. A qualitative examination of: (a) 20 semi-structured interviews, comprising 17 with employees from nine UK firms engaged in brokerage and trading activities, and three interviews with consultants specialising in conduct risk who regularly assist such firms; and (b) the publicly available statements issued by nine UK firms engaged in brokerage and trading activities. The paper finds much alignment between firms' publicly stated values and their employees' understanding of conduct risk. However, some themes that are currently high on the UK Financial Conduct Authority's (FCA) agenda, such as non-financial misconduct and transparency, receive little to no attention in either. The study's findings are limited to the insights of the interviewees who took part. These insights may not represent ‘what actually happens' on the trading floor. For this, an ethnographic study would be required. The findings imply that current conduct-related initiatives led by the FCA are not making a significant impact on brokerage and trading firms. This paper builds on a previous study that examines possible relationships between banks' corporate value statements and incidences of misconduct. Furthermore, it proposes the piloting of a conduct risk awareness programme that utilises the experiences of former miscreants to help embed cultural change.
    Keywords: conduct risk; Financial Conduct Authority; corporate values; corporate culture; business ethics; investment firms