Firm size and compliance costs asymmetries in the investment services
| Pages | 58-74 |
| Date | 22 February 2011 |
| Published date | 22 February 2011 |
| DOI | https://doi.org/10.1108/13581981111106176 |
| Author | Giampaolo Gabbi,Paola Musile Tanzi,Loris Nadotti |
| Subject Matter | Accounting & finance |
Firm size and compliance
costs asymmetries in the
investment services
Giampaolo Gabbi and Paola Musile Tanzi
SDA Bocconi, Milan, Italy, and
Loris Nadotti
University of Perugia, Perugia, Italy
Abstract
Purpose – The purpose of this paper is to find out how effectively implemented are measuring
approaches to compliance and whether there is a correlation between the measures implementation,
financial specialisation and international activity. The authors evaluate if the regulatory framework
implies a measure cost asymmetry, depending both on the proportionality principle and on the existence
of different supervisors with an heterogeneous set of enforcement rules.
Design/methodology/approach – The analysis is based on a survey involving 84 financial firms
(banks, investment companies and insurance companies). Two criteria have been used to interpret the
results: the prevailing workability within international and domestic intermediaries; the intermediary
typology, creating a distinction between banks other financial intermediaries (FIs) and insurance
companies.
Findings – Italian financial firms are sensitive to minimise sanctions, but the reputational impact is
becoming more important. International firms are more sophisticated than domestic ones for their
ability to measure both the probability of non-compliance events and their severity. Banks show
the highest attitude to adopt insurance or financial contracts to minimise the negative impact of
non-compliant behaviours. Small FIs are late in measuring the exposure and losses due to
non-compliance actions.
Originality/value – Four years after the Basel Document on compliance, a large percentage of firms
is still managing the process within a function with different purposes; nevertheless, reputational
impact has become more important. Small intermediaries show a lower attitude to implement a risk
management approach, with a capital management sensitivity. This finding addresses the question
about the existence of size effect which could reduce the compliance attitude.
Keywords Financial services,Compliance costs, Regulation,Italy
Paper type Research paper
1. Introduction
The establishmentof a specific compliance functionin financial firms can be attributedto
a regulatorydecision by the Basel Committeewhich, in 2005, stated that theintermediary
had to “organise its compliance function and set priorities for the management of its
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
The authors thank all the companies taking part in the survey for their availability. The
Research Group, coordinated by Paola Musile Tanzi, is made up of researchers from SDA
Bocconi School of Management. The research was carried out by Adalberto Alberici, Manuela
Gallo, Raoul Pisani, Maurizio Poli, Daniele Previati, Paola Schwizer, Valeria Stefanelli. Sincere
gratitude for the time and commitment goes to AICOM (Italian Compliance Association) and SIA
SSB. We appreciated all the comments and feedbacks received by Claudio Cola, Paola Sassi,
Deborah Traversa and Sara Tovazzi. All remaining errors are the authors’ own.
JFRC
19,1
58
Journal of Financial Regulation and
Compliance
Vol. 19 No. 1, 2011
pp. 58-74
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581981111106176
compliance risk in a way that is consistent with its own risk management strategy and
structures”.
Ten principles were defined by the Committee in order to regulate the responsibilities
of the board of directors (no. 1), senior managers (2-4), the compliance function itself (5),
and the resources involved (6-8). Two final principles were addressed to manage cross
border issues and outsourced processes, respectively.
Our paper focuses on principle no. 7 aimed at describing compliance function
responsibilities which “should be to assist senior management in managing effectively
the compliance risks faced by the bank [...] If some of these responsibilities are
carried out by staff in different departments, the allocation of responsibilities to each
department should be clear.” Particularly, sub points 37, 38 and 39 are devoted to the
identification, measurement and assessment of compliance risk. This raises both a
technical and an organisational concern for compliance officers. Technically, there is no
universally accepted setof metrics to measure the compliance risk, apart from taking into
consideration, on the one hand, legal and regulatory sanctions, and on the other, material
financial losses as operationalevents. Organisationally, investment firms are expected to
re-engineer their processes in order to map and control all the procedures thatcould lead
to non-compliance behaviours, in some cases running the risk of overlapping the
responsibilities assigned to other offices, such as risk management, auditing and legal.
Through the analysis of the Italian financial services industry, our objectives can be
listed coherently with the identification, measurement and assessment of compliance
risk assessed by the Committee.
First, according to principle 7.37 (Basel Committee on Banking Supervision, 2005),
“the compliance function should, on a pro-active basis, identify, document and assess
the compliance risks associated with the bank’s business activities, including the
development of new products and business practices, the proposed establishment of new
types of business or customer relationships, or material changes in the nature of such
relationships”. As a result, our survey finds out if and how the definition and identification
of compliance factors has been established in financial firms operating in the Italian market.
Second, principle 7.38 (Basel Committee on Banking Supervision, 2005) suggests
that “the compliance function should also consider ways to measure compliance risk
and use such measurements to enhance compliance risk assessment”. We find out how
effectively measuring approaches to compliance are implemented and whether there is
a significant correlation between the implementation of measuring models, financial
specialisation and international activity of the intermediaries.
Third, principle 7.39 (Basel Committee on Banking Supervision, 2005) recommend s
that the compliance function “should assess the appropriateness of the bank’s
compliance procedures and guidelines, promptly follow up any identified deficie ncies,
and, where necessary, formulate proposals for amendments”. Our objective is to analyse
how financial institutions carry out the compliance risk management, by assessing
controls and tools to transfer economic losses generated by non-compliant behavi ours.
Besides the goals previously described to verify whether financial intermediarie s
(FIs) operating in Italian markets have developed an effective compliance function
within their organisations, we also evaluate whether the regulatory framework implies
a cost asymmetry due to compliance risk measurement approaches, depending both
on the proportionality principle and on the existence of different supervisors with
a heterogeneous set of enforcement rules (Coffee, 1981; Braithwaite, 2002; Parker, 2006;
Firm size and
compliance costs
59
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