In Eastern philosophy, Yin-Yang is a concept that represents dualities in the natural world, such as light and dark. Yin and yang can be thought of as complementary forces that interact to form a dynamic system, in which the whole is greater than the assembled parts. The philosophy describes how these dual forces are interconnected and mutually dependent, and harmony is achieved when the two forces combined are in balance. The taijitu symbol for Yin-Yang is often depicted as a rotated pattern within a circle, half light and half dark, with a spot of the opposite element contained within each section.
This concept can be useful when trying to understand the differences, and similarities, between the roles of one’s Legal and Compliance departments within a financial institution (“FI”). If these roles are balanced and working in harmony, no one needs to consider who does what because it all seems invisibly fluid. However, if the two departments are not working together, it can lead to a dysfunctional workplace that could potentially have adverse consequences for the financial institution as a whole.
There is no right or wrong way to define the functions of the General Counsel and the Chief Compliance Officer. These roles are as unique as the organization itself, and are often defined based on broad principles and corporate culture in light of the size and complexity of the FI. Indeed, in many smaller organizations, including fintechs, these roles may be combined within a single person. Some compliance professionals are also attorneys (as is this author), and some FIs structure Compliance to report up into Legal.
The scope of this article is not to provide strict definitions of what should be, but rather to provide a framework for insightful discussions to help an organization discover for itself what these roles can be. What are the key elements needed for an FI to create a culture that can provide the greatest value for its particular needs and circumstances, while maximizing efficiencies and effectiveness in managing and mitigating regulatory risk?
Good, or perhaps great communication between Legal and Compliance is a critical element for balance and harmony. Legal is generally in charge of the broad array of legal requirements for an FI, while Compliance is generally focused on specific regulatory requirements, a subset of legal requirements. Compliance is charged with the oversight of policies, procedures, and controls, as well as assessing, monitoring and mitigating risk.
However, there are times that Compliance may sometimes exceed what may be the minimum legal requirement, such as an instance where a “best practice” approach is adopted, or consumer regulations are voluntarily applied to small business. It is important that Compliance communicate with Legal in these instances before implementation, so that the Board of Directors can understand all perspectives from such an approach and make an informed decision.
Likewise, it is important for Legal to provide Compliance an opportunity to weigh in before committing the FI, such as before signing a contract with a third-party vendor. Compliance may want to provide insight into essential contractual terms, like the ability to conduct onsite monitoring, gain access to data, and determine responsibilities and timelines for remediation.
In this author’s personal experience, the best communication between Legal and Compliance has occurred at FIs when there was frequent contact and discussion between the two groups. Sometimes the most important conversations occurred in a casual context, such as with colleagues working late at night or having impromptu “water cooler” discussions. In an age when many Legal and Compliance departments do not work in the same building, good communication may mean that the organization needs to proactively develop opportunities for these teams to meet regularly for open discussions, and also meet occasionally in person just to “get to know” each other.
An important part of getting to know each other is building trust between the two departments. Without trust, each function will duplicate many tasks, resulting in higher costs and slower implementations, at a time when consumers are demanding speed and competitors are finding greater efficiencies to significantly reduce delivery times.
A good example of this occurs frequently when an organization is managing a regulatory change. Legal may have one interpretation of the impact on the business, Compliance may have a different assessment, but one outcome is certain—the line of business will align with whichever department assesses the lowest impact. The FI needs to have a process to anticipate not only that differences of opinion may arise, but that a forum exists to bring key stakeholders together to efficiently resolve differences. There needs to be a uniform assessment of the impact and risk of a proposed regulation, and continuing agreement as the proposed regulation evolves through to the final rule. No one wins with a divide-and-conquer strategy.
Another aspect of trust comes with the Legal and Compliance departments having genuine, mutual respect for each other. Legal can sometimes be intimidating with a wall full of sheepskin diplomas that confers legitimacy in interpreting laws and regulations, while Compliance members can sometimes feel that years of working their way up through the ranks affords a deeper understanding of the practical nuances of a regulation. A process to build trust along with mutual respect can garner the best that all professionals can bring to the conversation and analysis.
Transparency is a word that is in frequent use these days in the business world, and for good reason. In general, a good working definition includes the perception that something can be easily seen through. When Legal and Compliance are at odds, oftentimes the information that needs to be transmitted is buried within paragraphs of words or hidden in a footnote.
This disconnect may occur, for example, when both departments are evaluating a new business offering or service. While each group may be eager to show support for the new idea, a lack of transparency may incline them to not highlight certain concerns or objections that they can pull out later if things go askew. To build mutual trust and develop great communication, there needs to be an opportunity to be fully transparent with all anticipated concerns or hurdles. A more open, transparent approach by both departments provides the FI with the best opportunity to solve for these issues in real time, and it supports the successful launch of new products, services and other initiatives.
Within any FI that has both a Legal and a separate Compliance function, it is critical that there be solidarity with a single goal of supporting the organization. Legal may give advice in interpreting the strict boundaries of laws and regulations, whereas Compliance may manage those risks in a way that best aligns with an overall approach that mitigates risks. What is critical is that each department learn how to function synergistically as they are ultimately on the same team.
FIs that are struggling with harmony and balance between the Legal and Compliance departments may want to step back and consider team-building exercises or other ways to develop soft skills that are needed to align culture and values as an over-arching theme.
Transforming two departments with different DNA into one balanced and harmonious team isn’t easy, especially if there are bad habits embedded within each department. Like the principles of Yin-Yang, it may be critical to remind everyone that there is at least a spot of the opposite side contained within each function. By focusing on similarities and commonalities instead of differences, and by building key elements such as communication, trust, mutual respect, transparency and teamwork, an FI can move the Legal and Compliance functions into balance to drive a single focus for success and harmony.
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