Compliance function moves to centre stage

Compliance used to be the dead-end branch in the investment industry. Usually it was somebody whose career was stuttering elsewhere in the company. The compliance officer was an annoyance, someone often obstructive in the day to day operations of the company and also the one who often held up any new developments.

That has changed considerably over the past 10 years. Compliance has become almost the epicentre of company operations and is an all-powerful position in an investment house. So what has changed?

The word compliance is bandied about too easily and in many cases ill defined. Many do not understand that there are two major aspects to compliance that actually can require totally different skills.

Firstly there is regulatory compliance, and that is to ensure that the company operates within the regulatory framework. This is not an easy task with regulations being piled on almost weekly. To add to this, regulations are coming from different directions and even different bodies. They are voluminous and need to be interpreted. The volume of regulation and often lack of clarity leads to different interpretation. Just deal with different banks and you will see how differently they interpret the anti money laundering regulations!

To understand all this mountain of regulation the person needs to have a legal background, and even more tricky, often a cross jurisdictional legal knowledge.

Secondly, there is portfolio monitoring and mandate compliance. In a perfect world, all transactions should be approved before placed. But time and a lack of knowledge of all types of instruments makes this near impossible other than for broad oversight. Therefore it is done in arrears and any potential damage can be identified too late.

To be able to carry mandate compliance out fully the skills required are that of an investment manager, not a legal person, and it is highly unlikely that the compliance officer responsible for both functions will have these combined skills.

The regulatory imposition of compliance functions makes for a growing industry. Regulatory compliance can be outsourced to an extent to a compliance company. This is often the best solution as a compliance company will have a team of experts that can keep up to date with ever-changing regulations. This does not remove the need to have an internal compliance officer, but at least the employee need not be at such a high level of skill.

Mandate compliance can also be assisted by the myriad of software flooding the market, although none of these programmes are a full solution. Someone still has to take the responsibility of signing off mandate compliance. The skillset is that of an investment analyst or even fund manager. These are different qualifications to that required for regulatory compliance.

So investment managers, treat your compliance officers or directors with respect. They are a necessary evil. They are not all dragons that want to put obstacles in front of every procedure, service or product.  Good regulatory compliance officers add value in guiding the managers and company through the minefields.

My advice to those wanting to enter the investment industry is: Think compliance. Good compliance officers are very valuable. There is nothing to stop the career path moving from compliance to investment management. It is no longer the end of a career in the investment world; it can now be the start.

Ian Hamilton is the founder of IDS Group, which provides fund administration services in Africa and Europe through Malta. He is also the founder of Scotstone Investments, a company that has fund structures and services for global emerging new managers. The views expressed in this column are his own.

This article was first published in Opalesque’s New Managers monthly publication.