Guernsey: Compliance, Corporate Governance And The Illusion Of Perfection

Last Updated: 6 November 2017
Article by Wayne Atkinson

Most Read Contributor in Guernsey, November 2017

Wayne Atkinson of Collas Crill looks at the quest for perfection in relation to compliance and corporate governance in financial services and what regulators can reasonably expect.



Cars have bumpers for a reason and pencils have bits of rubber on the end for a reason too. As someone more eloquent than I once said: "to err is human." In the world of financial regulation however, regulators are increasingly seeing errors not as human failings but as evidence of corporate ones. The buck stops more and more with the board of directors. This line of reasoning, put simply, goes something like this.

"Mistake A happened because proper procedures were not in place to stop it and because nobody was overseeing things. This is, in itself, Mistake B and is far more serious than the isolated instance of Mistake A."

We shall think about how to combat such reasoning shortly but we must first admit that in some instances it is accurate to some degree. For example, if a school leaver with no anti-money-laundering training joins a firm and is put in a position in which his lack of training results in a failure to report an obviously suspicious transaction properly, then it is clearly more appropriate to blame the firm rather than the hapless employee.

At the opposite end of the spectrum, there is the rogue employee who has actively set out to deceive his employer and is deliberately circumventing operating controls that were put in place to help the firm comply with its regulatory obligations. Again, in that situation it is very easy to see where a regulator should place the blame.

What concerns me, as always, are those shades of grey that dwell between the two extremes. Increasingly it feels as though anything less than perfection is viewed as indicative (or at the very least potentially indicative) of not only an isolated failing but a broader procedural or 'governance' issue.

In this vein, regulatory regimes often require boards, directors and compliance teams to make subjective judgements when assessing AML risks or gauging the adequacy of protective measures and procedures in the case of cyber or data protection. A subjective judgement can look entirely reasonable the day before disaster strikes. The day afterwards, the same judgement can look rather different. It is exceptionally easy to conclude that a company did not have appropriate cyber security procedures the day after a huge "data breach." That does not, however, mean that such a conclusion is correct.

That said, it can be very beneficial to organise a compliance function in a way that can combat such an assumption. Such a structure not only helps to show the regulator that one's firm has good corporate and compliance governance; it also promotes those things.

Courts are reluctant to substitute their own commercial views for those of directors. Moreover, they do not necessarily require directors to behave perfectly, or even to strive for "best practice," to avoid liability. The standard they require is that of a 'reasonable' director in the context of his particular company (see, for example, Re D'Jan of London Ltd [1993] BCC 64; Madoff Securities International Limited (In Liquidation) v Raven and others [2013] EWHC 3147 (Comm)).

In essence, the courts ask themselves not if a decision was a correct one but if it was one that a reasonable director could have made in the circumstances, with their attention focused firmly on the decision-making process rather than the end-result.

When questioning the boards of companies (and their compliance teams), regulators should perhaps more often ask "was this decision reasonable?" and "was this decision based on an appropriate decision-making process?" rather than simply "was this decision right or wrong?" These questions differ greatly from one another.

Allied to this issue is one of collective responsibility. Increasingly, in my experience, regulators judge the boards of financial firms (and find them wanting collectively) notwithstanding the possibility that this-or-that company may have delegated the responsibility for the area in which a specific failing exists to a specific director. By contrast, in the aforementioned case of Madoff Securities International Limited (In Liquidation) v Raven and others, the court made it clear that a director is entitled, in discharging his duty, to rely upon the judgment, information and advice of a fellow director whose integrity, skill and competence he has no reason to suspect.

One may argue, with some justification, that regulated companies are by definition subject to a higher standard than other companies and that in this context a different approach makes perfect sense. My response to such an argument is that in the absence of specific and suitably precise regulatory obligations, the regulator should not take a very different approach. It might prescribe different and perhaps more specific duties, but surely the objective application of its standards must ultimately be the same. Even though people often believe that regulations impose a higher standard than the common law, that standard must still be a minimum standard and cannot be set so high as to demand perfection. To do so would impose an impossible burden on the directors of regulated companies and would act as a massive disincentive to people who would otherwise be perfect candidates for directorships.

So how can a board avoid an allegation of poor oversight or corporate governance when and if an error occurs?

It is of course possible for procedures to break down in the face of unique or unusual scenarios. I would submit that it is often the response of the board and/or their delegates to such a breakdown rather than the existence of the breakdown in the first place which is indicative of good or bad governance. The first subject for discussion when an issue arises should be about the remediation of that issue. For a number of modern regulatory regimes, crisis planning or disaster planning is a required part of a firm's processes. It is essential for the firm to be able to respond quickly and appropriately. If it takes the time to install the necessary plans and resources to deal with potential crises before they happen, it will send the regulator a clear message about how seriously its board takes such problems.

Secondarily, to avoid any implication that an error has caught the board napping, its members can help themselves by approving a clear-cut process by which people oversee compliance procedures. Such a process can set out times for regular reviews and procedural updates, also doling out jobs to internal audit functions and making contingency arrangements to call in external consultants to test things.   If a board has delegated jobs to various experts in money-laundering control, data protection/management and cyber/IT, it should also run a feedback and oversight regime of some sort, with the experts talking to it. It may choose to rely on one of its number to do this, but it cannot simply dump responsibility for an issue onto one man's shoulders and wash its hands of it.

In essence, the best way for a firm to convince a regulator that its corporate governance in relation to its obligations to comply with regulations is appropriate is, as my maths teacher used to say, to show its working. If it has clear, written-down structures such as the ones described above and is able to provide minutes and board packs (i.e. board papers and other things that boards have to read to prepare for a meeting) at which the results of those processes are assessed and considered satisfactory, it will be able to prove that its board is paying attention to the right details.

Lastly, the existence of a robust and attentive compliance culture throughout a firm is essential. If the board demonstrates leadership on the subject of compliance by investing in and promoting a culture of good practice amongst staff - from top to bottom - this should lead to a largely unblemished regulatory history with demonstrable examples of 'best practice' whenever problems arise. A firm that is able to point to such a track record (as opposed to a more spotty history) will be able to show that any incident is an isolated one.

In conclusion, I think it is at best a questionable proposition to suggest that a financial firm's compliance failings are inextricably linked to poor corporate governance. In assessing the board's oversight of compliance issues, and the decisions it takes as a result, regulators should take the same approach as the courts and expect not perfection but reasonableness.

There is, in any case, much that directors can do to protect themselves against such an assumption and much that a compliance team can do to help them do it. Well-documented decision making and well-documented polices and procedures for updating and assessing the firm's compliance function are essential. It is far more difficult for a regulator to question a firm's commitment to its regulatory responsibilities if the board takes these steps and truly embraces its duty to lead culturally.

Remember: corporate governance is not a question of being perfect, but rather of striving to create an environment where perfection (or something close to it) is a possibility.

An original version of this article was first published by Compliance Matters, September 2017.



For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions