Regulation Risk and Compliance Essay Example

implemented in 2004 and is used when transacting with other banks, industry groups, and supervisory non-member authorities. At the Twentieth Annual Meeting of the Council of the Governors of Arab Central Banks and Monetary Agencies in Beirut, Lebanon in 2005, Andrew Crockett – President of JPMorgan Chase International discussed the economic consequences of Basel II.

According to Crockett (2005), Basel II aims to improve the efficiency of financial capital in order to generate higher investment returns and promote growth in living standards. While some criticize the regulation for potentially disadvantaging smaller firms, Crockett argues that these institutions can offset regulatory costs due to their proximity to customers and specialized nature. Additionally, the regulation's emphasis on risk management may lead to higher borrowing costs for some borrowers. However, Crockett asserts that this approach appropriately prices risk and can ultimately result in higher returns for emerging markets.

The Sarbanes-Oxley Act, introduced in 2002 in the United States and named after Senator Paul Sarbanes and Representative Michael Oxley, impacts corporate governance and financial practice. Public companies and the accounting profession have progressed in meeting its requirements since 2005. Oxley was concerned that firms might become overly risk-averse due to fear of violating the requirements, while Sarbanes believed that it would force firms to "clean up their acts" (Koehn and Vecchio 2004).

In 2003, the most important sections related to compliance were 302, 401, 404, 409, 802, and 906. Under Title III of the act, Section 302 or ‘Corporate Responsibility to Financial Reports' pertains to periodic statutory financial reports. It necessitates that the signing officers review the report and confirm that it complements the financial condition and all results. Additionally,

it requires the signing officers to have evaluated the internal controls ninety days previously and reported their findings inclusive of deficiencies and information on fraud. Significant internal control changes that may impact negatively must also be reported, while institutions are restrained from circumventing these requirements through offshore activities. Under Title IV or ‘Disclosures in Periodic Reports', Section 401 focuses on financial statements. It demands that these reports are accurate and true, inclusive of obligation amounts and transactions that are off-balance sheet liabilities.

In 2003, the Commission will verify and report any inaccurate statements to ensure transparent reporting. Additionally, Section 409 or the 'Real Time Issuer Disclaimer' requires the prompt disclosure of financial information in a clear and graphical manner. Title VIII's Section 802, or 'Criminal Penalties for Altering Documents,' stipulates fines and imprisonment of up to 20 years for altering, destroying, mutilating, concealing, falsifying information, or obstructing an investigation. If found guilty of willfully violating accounting maintenance requirements, accountants could be imprisoned for up to ten years. In their 2004 article 'The Ripple Effects of the Sarbanes-Oxley Act,' accounting and CPA professors Jo Lynne Koehn and Stephen Del Vecchio criticized the Act's weaknesses and negative consequences. Nevertheless, it has been the most significant law since 1934 in restoring investor confidence and preventing fraud.

The implementation of the Act has led to mergers and acquisitions being delayed due to concerns of taking on the financial liabilities of private companies. Additionally, the Act has resulted in increased rigor for audit committees. Results from a survey conducted by Deloitte ; Touche LLP show that these committees are now spending more time in meetings than before the Act was passed.

Meetings are now more frequent and longer, with some lasting for hours compared to less than an hour previously (Koehn and Vecchio 2004).

The cost of registration for accounting firms that provide services to public companies with the Public Company Accounting Oversight Board (PCOAB) has increased due to additional operational costs, higher liability insurance, staff training, and risk. In October 2003, the registration deadline resulted in only 598 out of 1,000 firms able to register. The Act has reduced the competitiveness of the audit market and large firms may face sanctions. Compliance with Section 404 has also increased accounting costs, as firms must assess internal controls equivalent to 1% of earnings or $7 billion annually.

Record management has been affected by the implementation of Sarbanes-Oxley, causing companies to potentially face criminal liability even if record destruction is part of their policy and there is no legal investigation. This has led to an increase in consulting solutions, such as software implementation, and added workload for lawyers. According to a Foley ; Lardner survey in 2004, 60% of 200 senior executives agreed with the reforms brought on by Sarbanes-Oxley. In Europe, legislation aimed at financial markets falls under the E.U.

The Financial Services Action Plan (FSAP) is a priority for the European Union (EU), aimed at creating a unified financial services market through collaboration between the HM Treasury, the Financial Services Authority (FSA), and the Bank of England. This plan focuses on establishing a Single Market for financial services.

This 2003 initiative aims to create a competitive advantage for the financial, corporate, and consumer sectors. However, financial firms are cautious about the costs of compliance. The Investment Services Directive (ISD) was

introduced in 1995, but it was replaced by the Market in Financial Instruments Directive (MiFID). MiFID extends the coverage of ISD and implements additional reforms on business management and internal controls. It expands core investment services, such as personal recommendation upgrade advice, introduces multilateral trading facilities (MTFs), and extends passport coverage for commodity derivatives.

According to Salamero (2006), the MiFID will cover both ISD-regulated and non-regulated investment firms, including investment banks, portfolio managers, stockbrokers and broker dealers, corporate finance firms, and others. To comply with MiFID requirements, companies must ensure transparency in corporate governance and business organization, as well as implement tighter reporting measures. Some companies see the MiFID as a replacement for the failed ISD, but compliance will come at a cost of around ?1 billion, including approximately ?10 million for technology and another ?12 million for new processes. Given the requirement to maintain records for five years, firms must automate systems and communications infrastructure. The FSA has advised companies to be prepared, with some taking the warning seriously while others do not (Ranger and Ferguson 2007).

The liberalization of the market, brought about by the MiFID, has created job opportunities for IT professionals, particularly in firms where technology plays a critical and complex role. However, there are concerns that traditional IT infrastructures may become outdated. Many more venues have emerged for share trading and reporting due to the increased competition in the market. Investment banks have established trading exchanges like Turquoise and Project Rainbow for the London Stock Exchange, as well as MarkitBoat for reporting venues. The new directive came into effect in November 2007, and companies are still waiting to see the full impact

it will have in the future.

Solvency II, a project initiated by the EU, aims to revamp prudential regulation of insurance and address the role of insurance sectors in both risk management and capital allocation. With a unified market for insurance services, the global economy can benefit from enhanced flexibility and dynamism, allowing for efficient capital allocation that benefits both users and providers. Due to the complexity of risk management and appropriate models for measuring risk faced by insurers, there have been changes to the EU's solvency framework since the 1970s. Solvency II was developed in 2006 to support high-quality risk management and ensure proper assessment of regulatory capital.

The implementation of Solvency II is targeted for 2010 in Europe. This approach is based on the three proposed pillars of the Basel II strategy: (1) quantitative capital requirements, (2) qualitative supervisory review, and (3) market discipline. An important aspect of market discipline involves issues related to transparency, disclosures, and risk-based supervision through market mechanisms (Muelders 2008). The effects of Solvency II on firms include significant changes to regulatory capital requirements, governance, and risk and capital management processes. These changes include higher regulatory capital requirements, alterations to how capital is calculated and managed due to required risk-based capital requirements, changes in capital allocation, increased qualifications for analysts, policyholders, and regulators, a greater focus on risk and capital management within regulatory regimes, and an increase in supervision across territories (2008).

The impact of Solvency II is being studied through consultation papers, although its implementation is still years away. In addition to Solvency II, new regulations such as those on money laundering have been introduced in order to increase Europe's

competitiveness and balance. The Third Money Laundering Directive, introduced by the European Union, has particularly significant implications for financial activities. The FSA will now regulate laundering controls in a range of organisations including Authorized Firms, safety deposit box providers, leasing companies, share registrars, and commercial lenders. Authorized Firms are required to notify the FSA if they are money service businesses, trust or company services providers; if they engage in currency exchange; if they transmit money; if they handle cheques; and if they are subject to the EU's Payments Regulation (2008).

Money laundering is a major obstacle for finance directors in various industries. The illegal practice involves concealing the origins of stolen, fraudulent, terror-related or drug-trafficking proceeds and using funds to support illicit arms trades. Illicitly gained money frequently re-enters the financial system via lawful methods as part of money laundering schemes. Money laundering activities can implicate multiple financial entities such as banks, insurance companies and gaming firms as well as professionals like accountants, fund managers, auditors lawyers, stockbrokers and traders.

In order to prevent money laundering and financing of terrorism, several regulations have been implemented worldwide. These include the EU Third Money Laundering Directive, UK FSA Money Laundering Directive 2007, UK Serious Organized Crime and Police Act 2005, US Patriot Act 2001, US Money Laundering Control Act 1996, US Bank Secrecy Act 1970 and Australia's Anti-Money Laundering and Counter-Terrorism Financing 2006 (Abrahami 2008). The global nature of business transactions poses a challenge for CFOs and executive officers in avoiding dealings with such individuals or groups. Despite compliance being costly and effortful for finance directors, adherence is mandatory. To alleviate these difficulties in complying with anti-money laundering laws,

Peach's Integrated-AML-Compliance Solution software has been developed to reduce workload and expenses while providing reliable results that can be utilized in various ways.