Journal of Financial Regulation and Compliance

THE ROLE OF THE COMPLIANCE OFFICER: THE INFLUENCE OF CULTURE AND

COMPANY CONSTITUTION
M. Cruickshanks

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Article information:
To cite this document:
M. Cruickshanks, (1993),"THE ROLE OF THE COMPLIANCE OFFICER: THE INFLUENCE OF
CULTURE AND COMPANY CONSTITUTION", Journal of Financial Regulation and Compliance, Vol. 1
Iss 4 pp. 376 - 384
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THE ROLE OF THE COMPLIANCE OFFICER: THE

INFLUENCE OF CULTURE AND COMPANY CONSTITUTION
Received: 19th May, 1993
M. CRUICKSHANKS

demonstrated by reference to several company or employer-specific constitutional

and cultural constraints.
The paper concludes that, despite the
importance of establishing a detailed
understanding of the compliance function,
assessment of the compliance officer's role
will continue to be based on those elements
of the function which are common to all
and exclude those aspects which are unique
to particular companies or groups.

M. CRUICKSHANKS
HAS BEEN THE COMPLIANCE OFFICER FOR A
FRATERNAL BENEFIT SOCIETY SINCE 1989. HE
PREVIOUSLY WORKED FOR THE SAME
ORGANISATION AS A SALES REPRESENTATIVE
AND DISTRICT SALES MANAGER, UNTIL HE
WAS APPOINTED ASSISTANT DIRECTOR OF
TRAINING IN 1988. HE ATTAINED THE F1C
(FRATERNAL INSURANCE COUNSELLOR)
QUALIFICATION IN 1987 AND IS PRESENTLY
WORKING ON THE DIPLOMA IN COMPLIANCE
STUDIES COURSE AT E X E T E R UNIVERSITY.

INTRODUCTION

ABSTRACT
This paper addresses the paradox that five
years after the implementation of the
Financial Services Act and despite the
apparent mandatory nature of the compliance officer's function, no clear detailed
definition or description of the role has
emerged.
By tracing the origins of the office
through the legislation and regulation, the
paper suggests that the general perception
of the function derives only from the common responsibilities. The difficulty of further refining this perception is
376

Since the implementation of the

Financial Services Act (1986) there
have been and continue to be many
different perceptions of the compliance officer's role in the self-regulatory framework. This difficulty of
definition is not restricted to the
general public but is also demonstrated by compliance officers' own
inability to articulate the role.
'compliance officers do not yet
have a very clear idea of what
their role actually is'1
'You can't really specify what a
compliance officer does, you have

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to think what a compliance officer does in particular circumstances'2

to be compliance officer with

general responsibility for overseeing
the member's compliance procedures'.4
The role thus defined is both
proactive and reactive with the perceived emphasis varying from one
firm to another:

It is suggested that if more general

and constructive definitions of the
function are to be achieved, then not
only is it necessary to understand
the requirements of the regulators,
and the expectations of the investor,
but a fuller appreciation is also
required of the influence which is
exerted by the company's constitution, culture, and policy. To highlight
the significance of this point, the
compliance function in a firm
operating in the life and pensions
market is discussed.

'preventive medicine, a vaccine.

I'm there to give the jab' 5
'Some of them regard me as a
policeman' 6
The proactive regulatory function is
generally achieved by the interpretation of regulation and the simultaneous provision of company-specific
procedures which will accommodate
any changes. The reactive aspect
stems from the need to monitor
practices for compliance and particularly to 'carry out a review of its
compliance procedures to ensure that
they are effective'7 at least once a
year. Of course, an annual check
would be ineffective and most firms
continuously monitor all aspects of
activity. It is from the discharge of
this ongoing monitoring that the
popular misconception of the compliance officer derives; as an administrator whose first loyalty is to the
regulator can have a negative effect
on the commercial activity of his or-er company. This is typically summarised in the opinion of the compliance officer who saw himself 'in
some sense as a law enforcement
agent'.8

LEGAL REQUIREMENTS
A suitable starting point in understanding the compliance officer's
role is to examine how his or her
authority derives from the legislation. In 1986 the Secretary of State
for Trade and Industry delegated his
powers to authorise firms to carry
on business regulated under the Act
to the Securities and Investments
Board (SIB). Individuals or firms
wishing to conduct such business
were required to seek authorisation
either from SIB itself or from organisations recognised by SIB for the
purpose and known as self-regulatory organisations (SROs). SIB's
rules clearly indicate 3 that SROs are
required to supervise the installation
and implementation of procedures
designed, by their member companies, to achieve compliance with the
Act. The SRO, in the case of the Life
Assurance and Unit Trust Regulatory Organisation (LAUTRO) further
clarifies the individual responsibility
by requiring that the member (firm)
'shall appoint one of its officers . . .

COMMERCIAL PRESSURE
The role of the compliance officer is
further complicated by the legitimate self-interest of the industry.
Accepting the integrity of the representative bodies' responses to pro377

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posed
regulatory
changes, an
indication of the pressure that will
certainly be applied to compliance
departments can be gleaned from
the Association of British Insurers'
(ABI) response to the SIB's and
LAUTRO's recent proposals on product and status disclosure.9 The ABI
expresses concern in two areas: that
the new requirements 'would further
erode the competitive position of
life insurance products' 10 and by
inference the competitive position of
the (life insurance) industry; and
'. . . services to policyholders . . . can
be crucially affected by the nature
and extent of regulation'.11
In the event that the new proposals are adopted, it would seem
inevitable that those responsible for
their implementation will be under
considerable pressure to minimise
the consequent costs, creating yet
another conflict between their duty
to implement effective procedures
and their desire to satisfy internal
budgetary constraints.

Organisation (IMRO), perceived as

the embodiment of regulation, provided neither effective protection
nor any compensation for the
aggrieved pensioners
'IMRO was powerless in its regulation of the company'
'Pensioners of Maxwell companies
have found they are not entitled
to payouts from the Investors
Compensation Scheme'.12
At the same time investors are
becoming increasingly aware of the
complaints machinery. This is
demonstrated by the 40 per cent
increase in complaints received by
the
Insurance
Ombudsman
Bureau,13 and the 33 per cent
increase in complaints received by
the Investment Ombudsman.14 As
complaints will in most cases be
directed initially to the compliance
officers,15 the latter must decide
whether they are to mirror an
ombudsman function, and seek to
implement any recommendation
that arises from their investigation of
a complaint, or whether they are to
confine themselves to presenting
recommendations to their board. If
the latter applies then the expectations of the company, which will
include any cultural considerations,
must have an influence. Moreover,
as investors are developing a clearer
idea of what they expect in terms of
consumer protection, they are
becoming more assertive in pursuing
it. The consumer's choice of provider is also influencd more and
more by the standards of service
which are provided by different
insurers:

INVESTORS' INFLUENCE
Of course, the whole structure of
regulation was erected for the benefit of investors and no understanding
of the compliance officer's role is to
be achieved without taking account
of their interests and legitimate
expectations. If compliance officers
are regarded as the embodiment of
regulation, as will be the case when
they are the recipient of complaints,
then they must be seen to discharge
their duty to protect investors, and
when this proves impossible, to provide a means of redress. The incredulity of Maxwell pensioners and the
scepticism the regulatory system
subsequently attracted arose because
the Investment Managers Regulatory

'There also seems to be an

increasing feeling that it is very
difficult to obtain a competitive
378

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the constitution, culture and policy

of the employing organisation.

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edge through product differentiation, so companies try and establish this in the services they
provide.'16

INDIVIDUAL CIRCUMSTANCES
AFFECTING THE COMPLIANCE
OFFICER'S ROLE

It would appear, therefore, that as

standards of service become more
influential in determining commercial success, the compliance officer's
contribution assumes greater significance.
But
these
demands
apply
throughout the industry; all compliance officers derive their authority
from FSA (1986); they subscribe to a
common strategy of self-regulation,
and while the tactics adopted vary
according to the vagaries of the various rule books it can be argued that
this is a matter of method rather
than substance. Out of the original
SROs two (The Securities Association and The Futures Brokers and
Dealers Association) have joined
forces to form the SFA, and the two
others (LAUTRO and FIMBRA) controlling some 200 companies and
7,000 independent advisers respectively will disappear shortly, to reemerge as the Personal Investor
Regulatory Authority. There would
thus seem to be no major difference
of purpose between regulators.
It appears, therefore, that the difficulty in defining and understanding the compliance officer's role
cannot lie in the regulations or in
the differences between the regulators, nor even in the procedural differences which their rules produce.
The problem cannot originate from
the industry, which is broadly controlled by identical statute, nor is it
likely to derive from the personal
expectations of the investor. It must
derive from the unique set of circumstances within which each compliance officer operates. These are

To understand exactly the extent to

which the responsibilities of each
compliance officer assume a unique
character, to understand the implicit
as well as the explicit requirements
of the company, it may be useful to
look at compliance in an organisation which has unique attributes but
which is nonetheless bound by the
same regulation as other UK insurers. In the interests of brevity as well
as for other considerations the
organisation will be referred to as
the 'Firm'. Because the Firm markets
its own pension and life assurance
products it is regulated under the
FSA (1986) and is a member of
LAUTRO, yet although it is also
regulated by the Department of
Trade and Industry as an insurance
company, it is more than an insurance company. Similarly, the Firm is
not a Friendly Society, although it
shares many features with them
including a common origin in the
mediaeval guilds. The Firm and the
Friendly Societies also share the concepts of serving a membership
rather than clients, of being owned
by the membership for their exclusive benefit, and of being democratically self-governing (by the
membership). The Firm is a fraternal
benefit society.
In operational terms the distinctive features of the Firm are that it
offers membership of the Society
and access to a range of social and
financial benefits (called fraternal
benefits), to families or individuals
either

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- through membership of the society

(non FSA), or
- through (and ancillary to) the purchase of life assurance and pension
products (subject to FSA).
These fraternal benefits are noncontractual; they are awarded at the
discretion of the Firm but in practice
are never withheld from qualified
claimants.
Members
may
participate
through a system of local courts
(lodges or branches) in the activities
of the society and for many members and their children the recreational activities of the Firm are a
large and important part of their
social life. In the same way, many
members like to take advantage of
the opportunities arranged by the
Firm to contribute to the welfare of
the community either in voluntary
service or by supporting local and
national charities. The Firm also
supports its own registered charity
in the field of child abuse by meeting all the administrative expenses.
As indicated above, the Firm
developed from an earlier society
whose North American courts
seceded from their English parent to
form an independent organisation
towards the end of the nineteenth
century. The Firm now has members
in the USA, Canada and the UK,
with its international headquarters
located in Toronto and the UK head
office in London.
Differences between fraternal and
conventional insurers and the difficulties
caused
One of the main differences which is
immediately apparent in dealing
with a fraternal rather than with a
conventional insurer is the organisa380

tion's culture. The conventional

insurer perceives the association
with the 'investor' as a purely business relationship established for gain
and which is embodied in, and
defined by, the contract or policy. In
the fraternal insurer there is a
genuinely shared concern for the
welfare of all, above and beyond the
contractual and fraternal benefits.
Such concern takes many different
forms but includes material assistance as well as moral support when
it is needed.
There is also the anomalous position that while there may be only
one life 'insured' many members of
the immediate family are potential
beneficiaries of the fraternal benefits
deriving from the membership. Thus
children of the life-insured may,
without any prior death or other
tragedy, receive substantial financial
assistance with their education.
Alternatively, members of the family
other than the insured may qualify
for financial assistance in the case of
illness. It can be seen, therefore, that
while the conventional insurer/client
relationship is entirely described by
the contract or policy, and generally
limits the gain or benefits to the
contracting parties, the fraternal/
member relationship extends considerably further.
For the compliance officer this
creates two difficulties. First the
undoubted appeal of the (noncontractual) fraternal benefits to the
prospective purchaser would not in
itself be adequate justification for
the recommendation of an investment contract. Secondly, many individuals or families are already
committed (financially) to a membership which provides only fraternal benefits. They might find the
prospect of increasing their total life

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insurance, for a disproportionately

small additional outlay, irresistible.
Despite proper respect for the aims
of regulation, it is inevitable that a
sales force which is committed to the
fraternal culture will produce examples which will tend to breach the
rules in both of these ways.
To the compliance officer falls
the task of devising sales and administrative procedures to ensure
that the genuine enthusiasm of the
representatives is channelled into
compliant selling, and of ensuring
that committed members who have
already espoused fraternalism are
not improperly exploited. He or she
will also be responsible
for
monitoring the effectiveness of these
procedures and reconciling any
apparent inconsistencies.

'Policies'. This is compounded by the

significant
technical
differences
between the two terms; certificates
are 'open' contracts and include an
entitlement to whatever fraternal
benefits are available (at the time).
Thus there are situations where it is
perfectly feasible to comply with the
regulatory terminology and use
'policy' without causing offence or
subverting the meaning (eg in internal documentation
where
the
readers are fully aware of the
employer-cultural alternative). There
are also situations (for example in
advertising) where the use of (the
Firm's) preferred 'Certificate of
Insurance' would not only incur
regulatory censure but would be
completely misleading in a UK context. Similar problems are created by
a whole range of terms whose
specialised meaning is lost outside
the fraternal context and by phraseology commended by regulation
which is not apposite to the business
of a fraternal society. The compliance officer must resolve these differences.

Distinctive vocabulary
A further consequence of a fraternal
culture is that a separate and distinctive vocabulary has developed. This
may seem an unlikely or perhaps an
insignificant obstacle to regulation
in the UK where fraternals are rare.
However, in North America, fraternal societies constitute a major part
of the life insurance industry. There
is consequently an understandable
view that the Firm's fraternal phraseology is a valuable and worthwhile
representation of larger tradition
and any attempt to substitute
'foreign' terminology to comply with
recent overseas legislation is met
with resistance. The compliance
department is thus presented with
the
problem
of
reconciling
employer-cultural demands with
regulatory demands. For example,
the Firm's preference for the standard term 'Certificates of Insurance' is
not always interchangeable with the
regulatory requirement for the label

Recruitment
Complications arising from cultural
considerations are also found to
influence the policy adopted in the
field of recruitment. Firms conducting regulated business in the UK are
required to ensure that staff who are
hired with a view to taking up a
position as authorised representatives must satisfy demanding criteria.
They must be 'Fit and Proper'
persons to start with and they must
achieve a minimum level of competence in their chosen fields. The aim
of establishing such criteria is to eliminate those who, on the evidence
available, either do not have the
abilities or the attitudes which are
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deemed necessary and also to establish and maintain standards of technical knowledge and practical ability,
thus raising the calibre of those who
may advise the investor. This is generally well understood and accepted
and indeed many aspects of the preemployment selection procedures
had been in regular use prior to
their introduction by the regulator.
There is, however, a major difference between an insurer who can
offer a career based only on regulated investment products, and a
fraternal which can additionally
offer a career based on a non-regulated product (membership). The
recruitment criteria must be applied
immediately for the insurer if the
effort of training is not to be wasted
on ineligible applicants. For the
fraternal society, however, a new
recruit will only be considered for
an authorised position when he or
she has established a satisfactory
record selling (membership). Thus
the criteria may be applied several
months after the initial recruitment.
Although this difference should not
be interpreted as implying the adoption of lower standards, two distinct
advantages accrue.
The first of these is that although
some aspects of the pre-recruitment
assessment are based on matters of
fact, for example the extent of
indebtedness to previous employers,
others are subjective and can be
more accurately assessed after a
period of supervised employment.
Following SIB's adoption of Dr
McDonald's report on training and
competence and the implications for
greater investment in training candidates, the opportunity thus provided
of delaying and improving the selection decision must be welcomed.
The second advantage is that
familiarity with fraternalism, a con-

cept quite new to the majority of the

Firm's recruits yet an essential prerequisite for all their representatives,
can be inculcated prior to the commencement of the finite authorisation training period. This separation
of the familiarisation or induction
training, which in some form is part
of all employers' responsibility, from
the mandatory authorisation training enables a higher proportion of
the latter to be spent on the essential features with a resulting
improvement in its effectiveness.
The downside of this arrangement is that the permanent pressure
on recruitment to increase the sales
force may lead to attempts to dilute
initial recruitment standards on the
grounds that a longer period of
assessment is needed (with borderline applications) or that the final
decision may be taken later. Apart
from the obvious threat of lower
standards of recruitment, there is
also a danger that objectivity will be
compromised by the identification of
the recruiter with the candidate
during a prolonged assessment
period. To restore objectivity senior
management may become involved
in the hire/fire decisions, and as the
pivot on which such decisions are
inevitably balanced is the application of the relevant SRO's rules the
compliance officer's involvement
becomes almost unavoidable. These
considerations
therefore
create
another area unique to fraternal
societies which demands the compliance officer's attention.
Life insurancefor minors
There are other practices which
create the potential for problems
with the regulator. One causing
interest currently has arisen from
the long standing tradition of North
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-CRU1CKSIIANKS-

activity of (some of) their clients will

not have the formal basis or official
encouragement that characterises a
fraternal society.

American insurers offering life

insurance on the life of a minor, or
juvenile (in this context a child from
the age of 15 days to 15 years) to
parents. This has also been the tradition of the Firm in the UK. The
paper refers here not only to shortterm endowments with no permanent life cover, but to long-term
plans. These may be short (10-15
years) or longer term endowments,
variable premium universal life products, or whole of life plans. Unfortunately this practice does not fit
easily into the compliant framework
of selling practices which representatives willingly adopt when advising
adult clients: what is 'best advice' for
a four-year old? Yet it must be
accepted by all concerned that the
desire of many adults to purchase
long-term insurance for their children is a legitimate and sensible
ambition. It is, however, extremely
difficult to demonstrate the rationale
for such sales within the present
requirements of fact-finds and best
advice. Consequently the compliance
officer is torn between devising
procedures which adequately protect the representative and his firm,
as well as the investor, from the
regulatory demands and which may
discourage such business, or adopting a more pragmatic approach.

CONCLUSION
It is apparent that ever)' compliance
officer's schedule contains some
standard elements. These include
the regulators' demand that their
rules are adequately interpreted and
put to work effectively. There is a
requirement that breaches should be
detected and recurrence prevented
either by training or sanctions.
There is also a constant demand
from all sectors of the industry that
the cost of regulation is minimised;
that the compliance officer must
maintain a balance between cost and
effectiveness. The dilemma of containing costs and investors' rights to
a system which should ensure that
they will be treated fairly or provided with redress falls to the compliance officer. Thus there is a large
area of work falling within the compliance officer's remit which will find
an echo in every regulated firm and
which could be regarded as the core
of every compliance officer's responsibility.
In addition, however, to these
considerations and to the differentiation of responsibility which arises
from the products handled, this
paper has tried to demonstrate that
a complete appreciation of the compliance officer's role is only possible
after the constitution, culture and
policy of the employer have been
taken into consideration and understood.

There are many other areas

where the particular demands of a
fraternal heritage, or the policy
adopted by a fraternal in the light of
that tradition, create not only
unique demands but also changes of
emphasis in the application of the
regulators' requirements. Some of
these such as the complications arising from being separated by several
thousand miles from the head office,
may be mirrored in other regulated
firms. Others, like the involvement
of the sales force in the recreational

REFERENCES
1 M. Weait (1992), 'Swans Reflecting
Elephants: Imagery and the Law',
Law and Critique, Vol. III, No. 1, p. 65.
383

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2 M. Weait (1983), 'Icing on the Cake?',

TheJournal ofAsset Protection and Financial Crime, Vol. 1, No. 1, p. 88.
3 The Securities and Investments
Board Rule Book, Rule 2.08.
4 Life Assurance and Unit Trust Regulatory Organisation (LAUTRO), Rule
Book, Rule 2.12(3).
5 Op.tit.,p. 64.
6 Op. cit, p.62.
7 LAUTRO, Rule Book, 2.12(4)(a).
8 M. Weait (1993), 'Icing on the Cake?',
TheJournal ofAsset Protection and Financial Crime, Vol. 1, No. 1, p. 87.
9 LAUTRO Rules Bulletin, No. 53.
10 Association of British Insurers (ABI)
Circular No. LIC 134/92, 9th September, 1992.

384

11 Association of British Insurers (ABI)

Circular No. LIC 134/92, 9th September, 1992.
12 Chairman of the Parliamentary
Select Committee on Social Security
(investigating the Maxwell pension
fund scandal) quoted in Money
Marketing, 20th February, 1992.
13 The Insurance Ombudsman Annual
Report 1991.
14 The Investment Ombudsman Report
1991/92.
15 LAUTRO Rules Bulletin 53.
16 J. Birds and C. Graham (1992), 'Complaints against Insurance Companies',
Faculty of Law, University of
Sheffield.