A couple of weeks ago, I placed an online equity trade via my discount broker’s Web portal. In this particular situation there was information that I needed to retrieve that required me to also call their office. I was then prompted as to whether I would agree to answer some security questions. « Sure », I said.
« Do you have any other accounts with our institution? » This was a straightforward question – check. « Name me one security that you hold in your account? » Also straightforward – check, check. « Does someone have Trading Authority on your account? » No one does – check, check, check. Upon my response to this seemingly clear-cut third question I was informed that according to their records a person that I do not know in fact has had Trading Authority on my account for the past three years. I was completely blown away and had to pinch myself. It were as if I were being transported to the Twilight Zone. Or, at the very least to the surreal bar scene from Star Wars Episode IV.
Executives Must Ensure Proper Compliance Policies and Procedures are in Place
How can it be that a reputable financial institution could make such a large gaffe? If I were to guess, the Chief Compliance Officer and his team probably had several internal discussions about putting in place the proper controls to ensure against incorrect Trading Authorities being placed on accounts. They may have even come to the conclusion that such a breach would not occur given the initiatives put in place to guard against this. In the case of the Trading Authority breach on my account, the financial institution in question is a public company that is presently posting record quarterly profits partly on the back of recent stock market highs. The pressure to deliver higher shareholder value as compared to its peers is fierce. Furthermore, many view compliance as a source of cost-cutting that can directly go to propping up the bottom line. In reality, we live in an ever-increasing complex world and just as the front-office contributes to creating a product and the sales department is focused on driving revenue higher, compliance has become the necessity that keeps investment firms viable. This is today’s reality.
Working within the investment industry is serious business. When my investment account had an incorrect Trading Authority associated with it, it put the wealth associated with my account at risk. More importantly, it put my identity at risk, too, that could cause great personal damage. Whether misappropriation occured matters little. The key question is whether the firm’s executives acted prudently to protect their clients wealth and identity through by putting in place a sound compliance program.
As a whole, the industry needs to work to minimize compliance department turnover by increasing compensation given to many mid-and-junior level positions. In addition, firms need to provide employee recognition, which can take the form of promotions even those without compensation excalation. Looking at the compliance department as a source of organizational cost-cutting represents an obsolete mindset. In fact, investors deserve better and most institutional investors know what questions to ask in order to gauge firms’ commitment to compliance best practices. The problem is that retail investors have wide-ranging investment acumen. Suffice to say, the vast majority do not perform proper screening. Education is key to bringing them up the learning curve.
My Italian mother-in-law always tells me while preparing to have family over for supper: « If you’re gonna do something, do it right or else don’t do it at all ». Thank goodness I enjoy her meatballs…Within the very same spirit, if you are a financial institution or a manager, demonstrate the pride that you have for your entire business. For instance, make certain to put in place the proper compliance policies, procedures and controls. If you fail to do so your compliance gaps will eventually be uncovered by investor-clients and your firm will simply be challenged to compte for capital. Also, the next regulator audit will likely involve having to address the gaping holes in your compliance program in addition to be placed on watchVersion PDF