Regulating (from) the inside : the legal framework for internal control in banks and financial institutions

This book examines a key aspect of the post-financial crisis reform package in the EU and UK--the ratcheting up of internal control in banks and financial institutions. The legal framework for internal controls is an important part of prudential regulation, and internal control also constitutes a form of internal gate-keeping for financial firms so that compliance with laws and regulations can be secured. This book argues that the legal framework for internal control, which is a form of meta-regulation, is susceptible to weaknesses, and such weaknesses are critically examined by adopting an interdisciplinary approach. The book discusses whether post-crisis reforms adequately address the weaknesses in regulating internal control and proposes an alternative strategy to enhance the 'governance' effectiveness of internal control.

• Acknowledgements p. v
• Table of Cases p. xiii
• Table of Legislation p. xv
• Part I The Elements of Internal Control in Banks and Financial Institutions
• 1 The Role of Internal Control in the Meta-Regulation of Financial Institutions p. 3
• A Introduction to Internal Control p. 4
• Evolution of the Role of Internal Control Broadly Understood p. 8
• B The Meta-Regulation of Internal Control and the Rise in Meta-Regulation in Financial Regulation Generally p. 14
• The Rise of Flexible and Alternative Models of Regulation p. 16
• Flexible and Alternative Regulatory Strategies in Financial Regulation p. 18
• The Importance of Meta-Regulation in Financial Regulation p. 22
• Meta-Regulation and its Limitations p. 30
• Excessive Proceduralisation p. 30
• C Three Paradigms in the Regulatory Framework for Internal Control in Banks and Financial Institutions p. 34
• D Structure of the Book p. 38
• 2 The Role of Compliance p. 41
• A The Compliance Function: A Profile Sketch p. 41
• The Job Scope of the Compliance Function p. 46
• The Qualifications of Compliance Officers p. 49
• The Organisational Positioning of the Compliance Function p. 50
• Accountability Channels of the Compliance Function p. 52
• B Disjunctions Between the Performance of the Compliance Function and Regulatory Expectations in Securing Firms' Compliance: Analysing the Organisational Dimension p. 54
• Distinct Department or Fused with General Counsel? p. 54
• Centralisation or Decentralisation? p. 55
• Risk-Based Approach to Compliance p. 57
• Reporting Channels and Accountability p. 58
• Power p. 60
• C Disjunctions Between Regulatory Expectations and the Role of the Compliance Function: Analysing the Professional Dimension p. 64
• Lack of Convergence in the Job Scope of the Compliance Function p. 64
• Excessive Proceduralisation in the Job Scope of the Compliance Function p. 68
• Expanding Remit and Work Overload p. 70
• Background Qualifications and Training of Compliance Officers p. 71
• The Role of Ethics in Enhancing the Professionalism of the Compliance Function p. 73
• Emerging Representative Professional Bodies p. 74
• D Concluding Remarks p. 75
• 3 The Role of Risk Management p. 77
• A The Development and Purposes of Risk Management p. 77
• B Disjunctions Between Regulatory Expectations and the Role of the Risk Management Function: Analysing the Organisational Dimension p. 86
• The Constitution of the Specialist Risk Management Function p. 86
• The Independence of the Specialist Risk Management Function p. 93
• The Power and Responsibilities of the Specialist Risk Management Function p. 96
• Resources for the Risk Management Function p. 99
• Risk Culture p. 102
• C Disjunctions Between Regulatory Expectations and the Role of the Risk Management Function: Analysing the Organisational Dimension p. 107
• The Job Scope of Risk Management Functions p. 108
• The Professional Competence of the Risk
• Management Function and its Limitations p. 111
• A Professional Body for Risk Management p. 116
• D Conclusion p. 118
• 4 The Role of Internal Audit p. 120
• A Sketching the Profile of Internal Audit p. 120
• B Disjunctions Between Regulatory Expectations and the Role of the Internal Audit Function: Analysing the Organisational Dimension p. 124
• Independence of the Internal Audit Function p. 125
• Positioning and Power of the Internal
• Audit Function p. 128
• Wider Contextual Factors p. 131
• C Disjunctions Between Regulatory Expectations and the Role of the Internal Audit Function: Analysing the Professional Dimension p. 132
• Development of Internal Audit in Financial Assurance p. 134
• The Role of Internal Audit in Relation to Micro-Prudential Regulation p. 136
• Expanding Remit of Internal Audit's Role and Implications p. 139
• Professional Competencies p. 141
• The Role of Internal Audit as Management Consultant p. 145
• Professional Ethics and Ethical Assurance? p. 147
• D Conclusion p. 148
• 5 The Contextual Frameworks of Corporate Governance and Organisational Culture p. 149
• A Internal Control as Situated Within the Frameworks of Corporate Governance and Organisational Culture p. 149
• B The Salience of Corporate Governance at Banks and Financial Institutions p. 151
• Aspects of Corporate Governance Relevant to Risk-Taking, Monitoring and Control p. 156
• Aspects of Conventional Best Practices in Corporate Governance that may be Unsuitable for Banks and Financial Institutions p. 165
• C Organisational Culture as the Context for
• Risk and Control p. 170
• Modern Banking Culture as a Sectoral Phenomenon p. 171
• Organisational Cultures at Banks and Financial Institutions p. 174
• D Conclusion p. 177
• Part II Making Internal Control Effective in Banks and Financial Institutions
• 6 Regulating Aspects of Corporate Governance and Organisational Culture as a Broader Framework for Internal Control p. 181
• A Regulating the Boards of Banks and Financial Institutions: Structural Aspects in Corporate Governance p. 183
• The Functions of the Board p. 184
• The Responsibilities of Executive Directors, in Particular the Chairman p. 186
• The Special Role of Non-Executive Directors p. 188
• Regulating Board Composition p. 190
• B Shareholders' Role p. 194
• The UK Stewardship Code p. 196
• Practical Challenges and Ideological Weaknesses in the Notion of Stewardship p. 200
• C The Regulation and Approval of Individuals in Banks and Financial Institutions: The UK Regime p. 202
• Personal Responsibility and Liability p. 204
• Liability Under APER p. 205
• Enhanced Senior Persons Liability Under Senior Persons Regime p. 210
• D Reforming Banking Culture p. 214
• Remuneration Reforms p. 215
• Mains or Clawback p. 225
• Ranking Ethics p. 228
• E Structural Reforms and their Impact Upon Banking Culture p. 230
• F Conclusion p. 235
• 7 Incentive-Based Approaches to Improve Internal Control Efficacy: Enforcement and Whistle-Blowing p. 237
• A Regulatory Regime for Internal Control Personnel: Code of Conduct Rules p. 239
• B Key Enforcement Actions Against Internal Control Individuals in the UK p. 242
• Compliance Officer Liability in Breach of the Principle to Exercise Due Skill, Care and Diligence p. 242
• Final Notice Against Dr Sandradee Joseph (18 November 2011) p. 243
• Final Notice Against Alexander Edward Ten-Holter (26 January 2012) p. 247
• Final Notice Against John Douglas Leslie (26 July 2013) p. 249
• Censure of Stephen Morse, Barclays Pic (27 June 2012) p. 251
• Compliance Officer Liability Based on Other Grounds in APER p. 253
• Enforcement Against Robert Stephan Addison (14 September 2012) p. 253
• C Imposing Personal Liability on Internal Control Personnel p. 256
• D Secondary Liability Regimes for Internal Control Functions p. 259
• E Internal Control Functions and the Whistle-Blowing Regime p. 262
• F Conclusion p. 268
• 8 The Need for Enhanced Professionalism for Internal Control Functions p. 270
• A Internal Control Functions as 'Gatekeepers' p. 270
• B Enhancing Professionalism p. 274
• C Liability Regimes p. 291
• D Conclusion p. 295
• 9 Concluding Remarks p. 297
• Bibliography p. 300
• Index p. 325