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Chapter 10 Ethics, corporate governance and internal controls 10/9

There are numerous examples of weak controls and compliance breaches that have destroyed large,
seemingly unassailable institutions such as the illegal trading activities of Nick Leeson that saw Barings
Bank collapse in 1995 with losses of $1.3 billion; this was the world’s second oldest merchant bank
founded more than 200 years earlier in 1762.

C2A Compliance function
The compliance function generally includes the identification of compliance responsibilities, assessment
of risks, advice, monitoring, and reporting on the firm’s compliance with laws and codes of conduct, as
well as assisting in the prevention of company violations.

Compliance risks include the risk of legal and regulatory sanctions against the firm and firm personnel,
material financial loss, loss to reputation, and actual loss of the franchise. These potential losses are
incalculable. Therefore, unlike other risks, such as market and credit risks, which are risks taken as part
of the firm’s business, compliance risks are not and the compliance function should therefore be robust.

C2B Internal audit function
Internal audit conducts periodic, independent reviews of all control functions within a company. This
means auditing all risk control areas, including the compliance function.
The compliance function and the audit function should be separate, to ensure that the activities of the
compliance function are subject to independent review.
There should be a clearly documented understanding as to how risk assessment and testing activities
are divided between the two functions. These principles underlie the expectations of the regulator’s
examinations of a firm’s internal audit function.

C3 Complaints procedures

Complaints procedures have become compulsory in some countries and, where this is not so, voluntary
complaints procedures are regarded as good practice. Not only is it morally right that providers should
be concerned about the grievances of their customers but, commercially, a satisfied customer is a good Reference copy for CII Face to Face Training
customer.

A complaint is defined in the FCA Handbook as:
any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of, a person about
the provision of, or failure to provide, a financial service, which alleges that the complainant has suffered (or
may suffer) financial loss, material distress or material inconvenience.
A complaints department should have a set of formal procedures to be followed by every member of the
firm and breaches of these procedures should have disciplinary implications. The purpose of the
procedures should be to ensure all of the following:
• The proper handling of client complaints.
• Prompt and appropriate remedial action, where justified.
• Notification of any further course of action available to clients who are not satisfied with the firm’s
reaction or remedy.

In many countries, dissatisfied clients have access to official bodies beyond their adviser and product
provider. In some countries, there is a statutory body which has a supervisory responsibility over the
adviser and/or product provider. Additionally, in some countries, groups of companies in an industry
have collaborated to finance an industry ombudsman which will provide an impartial investigation into
the complaints against providers. In others, trade associations can exercise pressure on member firms
that are not behaving as they should. Where there is no such body, the law courts are open to those
clients who can afford to take legal action. Chapter

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