Compliance Programmes and CAPs
Are you realising their value?
It has been almost 10 years since Public Trust was licenced under the Financial Markets Supervisors Act 2011, becoming one of the inaugural licenced supervisors and one of the first market participants to be subject to a licencing regime overseen and administered by the Financial Markets Authority (FMA).
During this time, we have witnessed significant change in the regulation of the investment management industry. We have also seen positive change in the long-term prospects for the investment management industry. This change has been supported, in part, by KiwiSaver and increasing confidence and awareness of managed investment schemes as an effective and trusted means to diversify and grow wealth.
Despite this regulatory change, licenced managers, and by extension licenced supervisors, continue to navigate their way through an increasingly multi-layered world of regulatory compliance, conduct and disclosure obligations (along with regulatory guidance notes).
The stakes for directors, senior managers and shareholders of licensed managers are significantly higher than they were 10 years ago. Compliance obligations and risks are increasing, and customers and regulators are becoming increasingly intolerant of compliance failures and conduct that does not consider and address customer needs and expectations.
With this in mind, Public Trust has considered how we can better help licenced managers navigate the multi-layered world of compliance obligations and minimise the likelihood and impact of compliance failures on their customers (investors) and ultimately their business.
This has led us to focus in on a business tool that can be underappreciated and underutilised; Compliance Programmes and their associated Compliance Assurance Programmes (CAPs).
Compliance Programmes and CAPs, properly implemented and embedded within a licenced manager’s business, are a key tool in enabling licenced managers to create and sustain investor trust and confidence in their business and their managed investment schemes.
As the licenced supervisor to the largest number of KiwiSaver providers in the New Zealand market, Public Trust supports our licenced managers to improve and evolve their Compliance Programmes, CAP, and where appropriate, ensure our supervision activity supports and complements each licenced manager’s compliance, control and assurance environment.
This will be a focus for Public Trust over the next 12 months. Below are some themes that we think need to be considered, understood and addressed before a Compliance Programme and CAP can become a dynamic and embedded business tool within a licenced manager business.
Address any Compliance Plan and CAP perception problems
Compliance Programmes and CAPs are themselves a compliance requirement for a licenced manager; there are several regulatory guidance notes available on this topic. For example, one of the minimum standards that licenced managers must meet is to have adequate and effective arrangements to challenge and test the design and operation of their processes and controls, and the adequacy of their governance and management information.
The fact that Compliance Programmes and CAPs are a specific compliance requirement can create a perception problem. Sometimes licenced managers see Compliance Programmes and CAPs as an ‘off the shelf’ compliance requirement rather than an effective means to help ensure and create a dynamic culture of compliance at all levels within their business.
Boards and senior management must take the lead to ensure that Compliance Programmes and CAPs are seen as a dynamic and essential business tool that helps to ensure and assure Boards and senior management that they are compliant with all of their issuer obligations under the Financial Markets Conduct Act 2013 (FMCA).
By the time the value of your Compliance Programme has been realised, it is probably too late
The value that a robust and dynamic Compliance Programme and CAP can add to the overall financial success of a Licenced Manager’s business is somewhat intangible. Often it is not until compliance standards have not been met that the destroyed financial value associated with the loss of customers, the loss of confidence, trust, along with lasting personal and business reputational damage is then realised. It is something that we all witnessed from afar during Australia’s Hayne Royal Commission.
While mistakes will likely occur from time to time, if the mistake is significant, the robustness of the licenced manager’s Compliance Programme and CAP will likely become important in the outcome of any regulatory response. Deficiencies in Compliance Programmes, including the nature of the controls in place to prevent and swiftly detect the errors and the effectiveness of the CAP testing, will likely result in a less forgiving response from regulators, customers and the market generally.
Allocate sufficient time, people (including directors and senior management) and system resources to your Compliance Programme and CAP. Do not underestimate the ‘destroyed value’ that an ineffective Compliance Programme and CAP could have on your business, your customers and your reputation.
Compliance Programmes puts the customer first; risk management programmes put the business first
For licenced managers, understanding the difference between Compliance Programmes and risk management programmes in the context of their managed investment schemes is important.
A risk management programme is based on a licenced manager’s own risk appetite in relation to their strategic commercial objectives and initiatives. This allows a licenced manager to operate their business whilst accepting varying degrees of residual risk in the pursuit of their commercial objectives.
A licenced manager accepting noncompliance with their issuer obligations under a Compliance Programme and CAP is not an option. Issuer obligations stem from society’s desire to ensure that people (investors) are treated fairly and transparently, and their interests are considered and protected.
Licenced managers should have a low tolerance for accepting compliance risk relating to their issuer obligations. Any higher level of tolerance could expose their investors to unacceptable risks, bringing into question whether the licenced manager has been acting in the best interests of investors with a professional standard of care and diligence.
Compliance Programmes and CAPs should be designed, implemented and reviewed through the lens of the investor
In order for Compliance Programmes and CAPs to be effective, it is important to identify and prioritise issuer obligations that have a high impact on investors. This must be done in a way that takes into account the nature and complexity of each managed investment scheme and the licenced manager’s business model.
Outlined below is what we consider could be a useful lens to help design, prioritise and link the processes, controls (both preventative and detective), along with the frequency of assurance testing and reporting needed for each specific issuer obligation:
The extent to which the issuer obligation, if not performed correctly, is likely to result in a prudent but non-expert investor making a decision to invest (or to remain invested) in that managed investment scheme on the basis of incorrect or missing information about that managed investment scheme; and/or
The extent to which the issuer obligation, if not performed correctly, is likely to result in investors in that managed investment scheme suffering a financial loss or an investment outcome (before any remediation) which is inconsistent with the governing documents and/or the investment policy and objectives for that managed investment scheme.
While the above assessment requires sound judgement and should be reviewed on a regular basis with input and guidance from the Board, in our view, applying an impact assessment (that takes the perspective of the investor) to each specific issuer obligation ensures an appropriate degree of prioritisation, focus and clarity is applied to each licenced manager’s Compliance Programme and CAP.
This will provide the Board and senior management comfort that the licenced manager’s processes and controls are preventing, detecting and mitigating the risk of compliance failure that could cause material investor harm thereby helping to avoid ‘realising destroyed value’ as a result of an ineffective Compliance Programme.
We hope you find the above useful as you consider the extent to which your Compliance Programme and CAP is an embedded and dynamic business tool within your Licenced Manager business and we look forward to discussing these themes with you in more detail in the year ahead.
For more information on this topic or about our products and services in general, please get in touch with Public Trust's General Manager, Corporate Trustee Services David Callanan or Public Trust's CTS Head of Operations Rob Kingston.
