Financial institutions must tighten their compliance measures.

Ask AI · How can a Chief Compliance Officer help financial institutions prevent systemic risk?

Recently, several commercial banks have announced their selected candidates for “Chief Compliance Officer.” In December 2024, the National Financial Regulatory Administration issued the Measures for the Compliance Management of Financial Institutions, requiring financial institutions to establish a Chief Compliance Officer at their headquarters, improve compliance management mechanisms, and strengthen constraints on business conduct. As of now, among A-share listed banks, more than 30 have identified candidates for the Chief Compliance Officer role.

No rules make no standards that apply across the board; this is true for all trades and industries. But for the financial sector, the significance of “compliance” is even greater. The risks arising from compliance violations in the financial industry have stronger spillover and contagion effects, and may even lead to major risks and systemic risk. Therefore, at the level of ideas, financial institutions must keep the “compliance” string taut at all times. At the operational level, they must also carefully formulate and strictly implement relevant rules and regulations to ensure that compliance DNA is embedded throughout the entire process and across all domains of development decision-making and business operations, preventing compliance management from becoming mere formality or empty talk.

What is “compliance”? The core of compliance is to follow laws and regulations and regulatory requirements—do not cross the “bottom line,” and do not touch the “red line.” That is to say, the operating and management conduct of a financial institution and employees’ performance of their duties must comply with laws, administrative regulations, departmental rules, normative documents, as well as internal rules that the financial institution formulates in order to implement regulatory requirements. From the perspective of intent, the reasons for compliance violations mainly fall into two categories. One is compliance violations caused by work oversights or inadequate performance of duties; the other is deliberate compliance violations, which more often involve illegal and disciplinary issues such as the transfer of related benefits.

How can we ensure that “compliance” management is effectively implemented and does not become mere formality?

First, you need to establish rules and build and improve the compliance management system. The key to establishing rules is to clarify the specific responsibilities of each department and relevant responsible persons, so that effective coordination is formed in which multiple parties each carry out their duties and take responsibility. According to the Measures for the Compliance Management of Financial Institutions, financial institutions shall formulate compliance management systems, and in accordance with the requirements of “graded management and responsibility at successive levels,” improve the organizational structure of compliance management, clarify compliance management responsibilities, deepen the building of a compliance culture, and establish and improve the compliance management system. In terms of compliance management objectives, the board of directors is responsible for setting the objectives and bears ultimate responsibility for the effectiveness of compliance management; senior management is responsible for implementing the objectives and bears leadership responsibility for the compliance of business in the areas they oversee or manage. Specifically for the Chief Compliance Officer: if any major illegal or noncompliant conduct by the financial institution or its employees, or any major compliance risk hidden hazard, is found, it must promptly report to the board of directors, the chairman, and the president/president general manager, propose handling opinions, and urge rectification.

Second, you need to clearly reward and punish, and strictly implement compliance management systems. Once rules are established, they must be strictly enforced; otherwise, the rules will become a showpiece and will not serve the original intention of promoting the prudent operation of financial institutions and achieving high-quality development. On the one hand, you must increase the strength of sanctions. For relevant personnel’s illegal and noncompliant conduct, financial institutions must dare to fight, and dare to confront issues head-on, and impose serious accountability. Over time, it will form a compliance atmosphere in which all employees do not dare to violate, cannot violate, and do not want to violate. This shifts compliance governance from “passive regulatory compliance” to “active compliance governance.” On the other hand, reward and punishment must be clear-cut. Encourage financial institutions to spontaneously form an atmosphere of proactive self-examination and active rectification. According to the Measures for the Compliance Management of Financial Institutions, through effective compliance management, financial institutions proactively discover illegal or noncompliant conduct or compliance risk hidden hazards, handle them actively and appropriately, implement accountability for follow-up, improve internal control systems and business processes, and where statutory circumstances are met, the National Financial Regulatory Administration and its dispatched institutions may, in accordance with law, impose a lighter or reduced penalty. Where the circumstances are minor and the illegal or noncompliant conduct is corrected in a timely manner, and no harmful consequences have been caused, or where only the internal rules of the financial institution have been violated, no accountability shall be pursued. (Author: Guo Ziyuan Source: Economic Daily)