Over the past 15 years, the role of compliance officer in the financial services industry, and its many variations, has experienced a massive evolution. Before the waves of regulation during that period, compliance roles were barely a standalone function. Financial institutions had them, but they were often tucked away deep within the legal department.

New Rules and Regulations

The first catalyst that shifted the compliance function was in 2001 when President George W. Bush signed the USA Patriot Act into law. A portion of this law cracked down on financial institutions and prosecuted various financial crimes, such as international money laundering and corruption. In turn, with more oversight, more industry scandals emerged.

As impropriety in the securities, advisory, asset management, consumer finance, banking and derivatives segments came to light, regulatory change and pressure snowballed. In response, regulation served as the wind to the back of the compliance officer as it rose in prominence. This role quickly became a core component of nearly every financial institution and served as the first line of defense against a complex, evolving regulatory environment.

Now, with the compliance function largely accepted as an independent function, the reporting lines have shifted away from the general counsel’s office to either the chief risk officer or the CEO directly.

Big Banks Made Big Changes to Compliance Departments 

Last year turned out to be a noteworthy one for the chief compliance officer. Over the past year, we saw a shift in compliance officers in financial services in terms of tenure, profile and leadership. To put this into perspective, the top 6 largest financial institutions in the U.S. include banks ranging in size from $2.5 trillion to $841 billion in assets, and five of these massive banks changed their leadership in the compliance function during the calendar year. These included JPMorgan Chase, Wells Fargo, Citigroup, Goldman Sachs and Morgan Stanley.

If you look deeper into these five management changes, some interesting patterns emerge. For example, these newly selected CCOs are not career compliance professionals and all of them will report to the same position they did previously. Four out of the five of them have deep-rooted, proven leadership experience in the finance or internal audit functions for their institutions. Additionally, three of them chose to select an internal successor, and all of them have background in finance or audit.

Career Stagnation and the “Compliance Ceiling”

Interestingly, none of the predecessors to these new CCO positions took on another compliance role in their next position. In fact, only one was tapped for another position within their institution, and three of them completely parted with their respective banks. In addition, the average tenure of a CCO is only three years, with the exception of Goldman Sachs’ former CCO, Alan Cohen.

This high turnover and lack of compliance experience in top executives could lead to a bumpy road for compliance departments in 2018, particularly by causing a lack of morale in lower-level employees. As new management moves in, it is only natural that they shake up their department to some extent. This constant flow of change every few years could complicate the compliance role and the careers of those within, ultimately rippling down to the mid and junior ranks. It leads many to question the plausibility of achieving the CCO rank of a big bank through a successful compliance career.

The reporting lines and visibility of the CCO position have increased over the last several years. However, it is still a role where outsiders are considered more than mid-level management and capable direct reports.

How Financial Institutions Can Revamp the Hiring Process

These trends indicate that financial institutions need to revamp their processes for finding compliance talent, and they can begin by expanding hiring initiatives to include internal candidates. Hiring teams need to assess the qualities of internal successors and enhance the leadership development and coaching of senior staff. Promoting from within can boost the morale of existing compliance employees and open the door for compliance executives rise to the next level.

Looking ahead, there is a lot we will learn over the next year as the compliance role continues to evolve. Specially, we will see how these new CCOs shape their positions and justify their selections. We will also find out how financial intuitions adjust their hiring processes as the role of the CCO becomes clearer. These new executives highlight a continued challenge for financial institutions and the compliance function as it matures through its evolution.