Directive 2014/65/EU of the European Parliament and the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (hereinafter only the “MiFID II“) requires security traders to introduce and implement numerous systems and controls [1] to secure robust management structure having a transparent organisational structure, a clear division of responsibility, efficient risk management, and strong compliance measures. Entities must develop and implement policies and procedures to ensure compliance with regulations and secure permanent, independent, and efficient compliance functions. [2] Compliance is an integral part of every security trader´s management and control system and its seamless performance, primarily compliance of the security trader´s conduct with capital market regulations, is an important prerequisite for efficient prevention of private or public law litigations resulting from security traders malperformance, but also serve as means to gain customers´ trust and protect the business reputation. The first compliance units in business entities´ organisational charts emerged in the USA in the second half of the 20th century [3]. Soon, the US practice rolled out to the rest of the world and compliance officers soon entered other fields, especially those, where violation of responsibilities threatened to have a serious impact on society (e.g. public procurement, financial sector, or health care). Prior to that, compliance had been a part of business entities’ legal departments. Compliance became a separate issue and compliance officers formed newly established compliance departments primarily in reaction to the growing demands on businesses in respect of growing pressure on corporate responsibility for the everyday performance of the business as well as the newly introduced principles and standards to enforce compliance with relevant rules and regulations. Compliance has traditionally been responsible primarily for consultancy and control: it has no management functions and stands independent of the economic results of the security trader. The reason behind this setup is simple – it is more likely that a piece of independent advice would come from a financial market regulation professional than from a person who is motivated by financial results or holds direct responsibility for the entity’s decision making. Compliance is primarily about providing support and consultancy to other business departments of the given entity and its top management, especially in respect of regulatory requirements and setting up of security trader´s compliance programmes. At the same time, compliance officers exercise control through many monitoring tools and testing exercises. Requirements on compliance officers have been developing gradually as security traders must be able to respond to ever-increasing regulatory requirements, changes in their business practice as well as changing needs of their customers. To answer the question of whether a security trader has established its compliance according to the regulatory requirements, we must take into consideration its size, nature of its business, and scope of its activities. Especially with regards to small security traders, operations of which are rather limited, we should expect less strict compliance requirements than in respect of bigger traders. It´s highly probable that the increasing pressure on even stricter financial market regulation, new technology, and related services and products as well as newly evolving business models will make well-managed compliance departments into increasingly indispensable stakeholders in the process of constructing effective and robust compliance programs capable of reliably identifying and addressing risks. Are you ready for this challenge? Should you need better orientation in this dynamically developing field, we highly recommend subscribing to the “Compliance & Ethics” section.
[1] Proportionately to the nature, extent, and complexity of the business, as well as the scope of investment services and respective activities of the business entity.
[2] Compliance means conformity, agreement, acquiescence, or consent. Compliance is commonly referred to as agreement with rules or legal regulations as such. In practice, compliance is a set of internal rules, tools, procedures, processes, and measures to protect the legal and other interests of the respective business entity and to prevent non-compliant conduct and violations in the entity.
[3] O. Ray Vass, The Compliance Officer in Today’s Regulatory Environment, Practicing Law Institute: Corporate Law and Practice Course Handbook Series, Broker-Dealer Institute, 49, 55 (Nov. 12, 1987)
Filip Novák specializes in capital markets, fintech, compliance and money laundering prevention. In the area of capital markets, it focuses on the legal and regulatory aspects of the provision of financial services and collective investment, the supply of securities and admission to trading on public markets. In the area of fintech, compliance and money laundering prevention, it focuses primarily on crowdfunding, wealthtech, financial institution compliance and AML threats associated with cryptoactive activities and the use of new technologies. He currently works at the CNB as an expert in the field of financial market regulation and international cooperation. Prior to joining the CNB, he held the position of Head of Compliance and Legal Department of a Licensed Securities Dealer and previously at the law firm HAVEL & PARTNERS.