And another thing, I've been wondering, lately

And another thing
I’ve been wondering lately
Am I crazy
To believe in ideals?
— Hoodoo Gurus, "What's my scene"
 

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has identified numerous and profound cultural, ethical and management failures.

Wealth management, it appears, is so riven with conflicts, so opaque and so grasping, that vertical dis-integration, Product Intervention Powers, BEAR and the imposition of Principal Integrity Officers is needed to restore trust.

Ignoring current and proposed "regulatory catalysts", I'd suggest that re-defining 'Compliance' is a critical step to restoring trust and creating transparency and accountability.

 

We're 'compliancing' all wrong

Upfront, I'll concede that 'compliancing' isn't a word. 

I'm exploiting your semantic outrage to get your attention but I am convinced that we're approaching compliance all wrong.

And we're engaging the wrong people to guide us.

Let's start by defining our subject.

I suspect that, if pushed, you'd explain to me that compliance should be defined as:

compliance /kəmˈplʌɪəns/ (noun): The state or fact of according with or meeting rules or standards.

This is a workable definition from a reputable source (OED) but, in my opinion, it's wrong. It defines 'compliance' as passive, reactive and limited in scope. It's a functional definition focused on satisfying (externalised) requirements imposed on a person or business.

It seems to be a practical definition, but it's seriously flawed. It's not just problematic, it's wrong. To be clear, the definition masks substantive issues including the intrinsic value of the discipline and its broader application. 

Worse, we use this definition without thinking about it. Worse still, the definition influences our perspectives of the capabilities and competencies of those well-suited for this field.

READ: You're right, compliance is the problem

This is a significant problem. 

In my experience, one of the key obstacles to Licensees’ capacity to act efficiently, honestly and fairly is often the capability, competence and courage of their own compliance function. 


The need for redefinition

minimal or technical compliance with the law has, at times, been allowed to override fairness and good customer outcomes.
— Peter Kell, ASIC (2018)

It's time to reclaim "Compliance".

Compliance is, or in my opinion should be, a strategic management function that’s critical to the sustainability of the business in which it’s located. It's a creative discipline. Not an administrative one.

Compliance should be less about satisfying imposed obligations than exceeding internal requirements and market expectations. The core purpose of a Compliance function should be to better reconcile returns with risk and do so with an unwavering focus on sustainability, ethics and transparency.

Unfortunately, most Licensees (and advisers) can't conceive of Compliance as anything more than an insurance policy. They accept it's required, talk about its value but try to minimise its direct and indirect costs to their business.

Accordingly, their compliance functions reflect their theory of value and are characterised by underinvestment, poor-recruitment and ineffective leadership.

As a result, their compliance staff often lack the capacity to appropriately influence and advise the businesses in which they exist.

This may be a positive consequence for some businesses given the quality of their compliance function, but it cripples their ability to adapt to environments of uncertainty, ambiguity and change.

As Dubner & Levitt argue, if we reframe the problem, we'll get a better result. 

compliance /kəmˈplʌɪəns/ (noun): A strategic business discipline that has continued sustainability, rather than short-term profit or security, as its primary aim.

If you struggle to conceive of your Compliance function as either strategic or commercial, take a less iconoclastic approach. Instead of thinking about 'Compliance', follow the example set by Madison CEO Annick Donat, and focus on 'Care'.

Care and Compliance both involve "serious attention or consideration applied to doing something correctly or to avoid damage or risk".

Some advisers may struggle to appreciate the caring nature of their compliance team, but they should try harder to recognise the sense of purpose that drives people working in this discipline.

Compliance's focus on coaching, education and continuous improvement proves their commitment. Their unwillingness to promote individual interests before collective interests is, like their focus on customers and ethics, further proof that they deeply care about the sustainability of the businesses on whose behalf they act. 


An active and capable function

They said you’d never get anywhere,
Well they don’t care and it’s just not fair
That you know, and I know better.
— The Screaming Jets, "Better"

Definition, and redefinition, is critical if we're to transform our discipline into a valued strategic management management.

But redefinition is not enough. It needs to be supported by rigorous testing and assessment and a capability framework that's useful and appropriate.

Our Capability Framework is based on three foundation elements;

  1. Capability - the combination of processes, tools, skills and behaviours that lead to the specified outcome;
  2. Competency - the knowledge, skills, behaviour and attitude that enable effectiveness;
  3. Courage - the resilience, ethics and determination to act effectively in challenging environments. 

Courage is a particularly under-appreciated aspect of effectiveness and one not traditionally associated with compliance.

If it helps, substitute 'conscientiousness' or 'conduct'. The effect will be the same. 

Institutional focus on employees’ capability, competence and courage will only increase as the Regulators and Associations identify the learning and performance gaps that have contributed to the failures identified by ASIC, the media and the Royal Commission.

In my view, the role of competent employer is to understand the role of compliance and equip their team with the realisations and insights they need to achieve operational excellence.

Redefine their function, give them a mandate to care and emphasise their need to explore, invent, experiment and adapt. It may well be the best investment you'll ever make.

 

 

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