Compliance Norms in Financial Institutions

Measures, Case Studies and Best Practices

Tomasz Braun

• Verlag: Palgrave Macmillan
• Jahr: 2019
• ISBN:
  9783030249663
• Thema: Business
• Thema: Financial Services

Initially, introducing compliance functions within the financial industry had been forced by regulatory scrutiny. Later, it started to spread to other regulated companies, in particular those publicly listed. Now, compliance has become an asset of corporates that want to build their reliability among clients, shareholders, employees and business partners. This book looks at the efficiency of the compliance measures introduced and the best practices of building compliance norms.

This recently observed practice of compliance was triggered by the expectation of regulators, shareholders, clients, business partners and the public for robust compliance mechanisms. This book looks at the vast interest in this topic among business people who strive to introduce the systems and the mechanisms of non-compliance risk management in their companies and at the uncountable difficulties and obstacles they meet. The book fills the gap of thorough analysis of this subject by pointing out the solutions successfully introduced in global financial organizations, and would be of interest to academics, researchers and practitioners in corporate finance, corporate governance and risk management.

© The Author(s) 2019

T. BraunCompliance Norms in Financial Institutionshttps://doi.org/10.1007/978-3-030-24966-3_1

Begin Abstract

1. Introduction

Tomasz Braun¹

(1)

Lazarski University, Warsaw, Poland

Tomasz Braun

Email: [email protected]

End Abstract

1 Aim of the Book

The aim of this book is to present a theoretical legal analysis of the nature and function of contemporary compliance norms in corporations from the perspective of a general theory of norms based on the example of financial institutions. The term ‘Compliance norms‘ is understood as a set of interrelated norms introduced in corporations, which impose on their addressees the obligation of specific ways of behaving, whose aim is to ensure the operation of these corporations in accordance with binding laws, the administrative regulations of supervisory authorities, and other rules of conduct specified in internal normative acts of these corporations.¹ Compliance norms are, therefore, all those norms created within the framework of global business institutions, addressed to their employees, statutory authorities and shareholders, as well as to entities entering into economic relations with them. The purpose of these compliance norms are to ensure that they act in conformity with the norms binding in the territories in which these financial institutions operate, as well as with other normative recommendations, which, due to their administrative, social, economic, ethical or cultural nature, have been included by these organisations to a catalogue of binding obligations, prohibitions and empowerments.²

This book also aims to analyse the conceptual apparatus used by corporations and in particular by the financial institutions, relating to compliance norms from the point of view of the theory of norms.³ The aim of the study is also to characterise the specific properties of particular types of compliance norms. The book describes the scope of these norms together with examples and practical complications resulting from their global reach.⁴ What is also important is the real impact that these norms have on financial institutions activity today, and indirectly also on much broader global economic relations.⁵

The research described in this book covers the phenomenon of norm-setting by financial institutions corporations.⁶ As a result of it, entire sets of norms are created for entities, who have different degrees of connection with these corporations.⁷ Such activities also take place in non-financial institutions corporations, i.e. large international business institutions, that carry out other types of activities.⁸ Their common feature is that these institutions issue different types of internal regulations, the scope of which varies depending on many factors, such as the type of economic activity conducted by them, the jurisdictions in which corporates’ activities are conducted, and the various legal cultures resulting from these differences, as well as because of the place of particular norms in the internal hierarchy of those organisations.⁹

One of the reasons why all corporations, including financial institutions, create their own global norms is the need to ensure consistency across their activities, despite the differences that characterise individual markets.¹⁰ All corporations, including large financial institutions, strive to create conditions for the uniform and therefore coherent development for their operations, among others, in the area of corporate governance and compliance.¹¹ The latter area is especially worthy of attention due to its growing importance and dynamic development, and it is the subject of analyses carried out in this book.

Compliance risk management is understood as the management of risk, due to a corporation not entirety conforming its activities to the binding norms in their environment.¹² It has developed mostly in companies operating in the regulated sectors (finance, financial institutions, insurance, pharmaceuticals, energy). It is noteworthy that the development of compliance in other areas (automotive industry, biotechnology, passenger transport, environmental industries) has also become more and more noticeable in recent years. Each of these areas is characterised by the need to take action to ensure compliance of their operations with the requirements resulting from their respective normative environment.¹³ Legislators have a duty to take this new dynamic phenomenon into account and the theory of law, including the theory of norms, to examine it and their impact on the effectiveness of the law.

The normative environment of financial institutions consists both of legal regulations resulting from the law-making activity of states, and the international organisations empowered to issue the regulations, which define the formal framework of their activity, as well as non-legal norms, including in particular the regulations of administrative supervisory authorities. The normative environment of financial institutions, as understood in this book, are also administrative decisions resulting from the proceedings against them, self-regulations issued by the industry organisations of which they are members, and other norms resulting from self-regulatory activity of financial institutions.¹⁴

The complexity resulting from their legal and regulatory environment, as well as from the different weight of issues in the area of compliance, and from different scopes of regulations concerning the activity of financial institutions, results in the creation of their own meta-norms. The nature of them differs from each other. These differences, taken together with the place these norms occupy in the hierarchy, and the objectives they are intended to serve, constitute the basic criteria for distinguishing the different types of norms.¹⁵

According to these criteria, four basic types of compliance norms can be distinguished, with the proviso that their nature may differ from one financial institution to another and that, apart from the basic types listed here, there are also other types of norms, more broadly characterised in the following part of this book. It should be noted here that the division listed below concern the types of compliance norms and not normative acts that may contain such norms. Apart from specifying individual types of compliance norms, the same notions are also used to designate internal normative acts, which may include both compliance norms and other types of statements, including statements that are not of a directive nature.¹⁶ These four types of compliance norms are principles, rules, recommendations and guidelines.

1. a.
   Principles are understood as binding internal norms within the compliance system of a given corporation, which in this system occupy an overriding, directional position in relation to other norms, and play a role of setting the framework for all actions that should be taken.
2. b.
   Rules, on the other hand, set out the desired behaviour in such a way that the addressees can only either fulfil the obligation imposed on them or breach it if a situation other than that indicated takes place.
3. c.
   Recommendations are the compliance norms, most often formulated as a result of controls, reviews or audits, which require actions to be taken, as a result of which the state of compliance with the applicable law or supervisory regulations is restored.
4. d.
   Guidelines indicate the desired pattern of conduct, determined as a result of the way in which corporations interpret and apply applicable laws or supervisory regulations.

There are eleven basic ways of grouping compliance norms, which can be distinguished based on the criterion of weight and object matter regulated. These are: norms, principles, rules, policies, strategies, codes of conduct, manuals, instructions, recommendations, guidelines and regulations for direct application. As a result, the extent that they act as a binding force on the entities to which they are addressed also varies. The creation of compliance norms takes place in a dynamic legal, regulatory and economic environment and in areas of very different jurisdictions, i.e. the legal cultures in which international financial institutions corporations operate.¹⁷ What is more, the expectations of financial institutions expressed by their own stakeholders other than legislators and regulators, such as shareholders, employees, customers, the general public, non-governmental interest groups, etc., are also different.

Compliance norms created in such complex circumstances, which at the same time take into account the dynamics of changes in the environment and the expectations formulated towards the financial institution, are characterised by t...