With the recent news about JPMorgan Chase and its $6.2 billion loss in derivatives trading, there are renewed calls for increased government oversight and tightened regulations on today’s financial services firms.
It’s not my intent to take a position in this blog on whether or when government intervention is necessary, but rather to simply state the fact that we’re living in an era when more stringent regulatory requirements are a reality. Moreove the likelihood that these requirements will become permanent—and will expand over time—is increasing.
Why the increase? In a word, transparency. Regulators, financial services professionals, investors and taxpayers all want a clearer picture of the financial transactions that drive markets and shape the world we live in. To achieve this transparency, there’s a need to gather and report on increasingly mountainous volumes of data—a process that leads to a simple equation:
The more you regulate, the more labor that is required. If automated systems are not in place, that means manual labor, which leads to an expenditure of time, energy and capital that is not scalable or ultimately sustainable.
What’s a regulator to do? Or what about the investment firm or entity that’s being audited?
Compliance Tip 1: Ask Smart Questions; Set Clear Goals
First, participants in the regulatory process need to cultivate a realistic perspective on what can and can’t be done. It’s not possible or desirable to regulate everything under the sun.
Rather, it’s important to pose questions that help you establish a clear direction for the audit. First, what are you trying to do? Or, to give the question a different slant, what are you trying to prevent, and who are you trying to protect? Are you seeking to shield investors from the possibility of another Bernie Madoff? Trying to save large financial institutions from themselves, such as when they disregard their own internal risk models and put their organization and stockholders in danger?