Audit of BFS Uncovers Lack of Effective Controls

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A recent internal audit of the Bank of England (BFS) has revealed a lack of effective controls, which could have contributed to the bank’s collapse. Although the audit did not uncover any unauthorized activities, it made specific recommendations for separating roles and responsibilities within the bank.

Causes of the Collapse

• Those with direct executive responsibility for establishing effective controls must bear much of the blame.
• The report identified ways in which executives failed to discharge their responsibility and how lower-level managers also failed to act effectively.

Regulatory Reforms

In recent years, several financial scandals have highlighted the need for tougher regulation. The collapse of banking systems in many Southeast Asian countries, as well as the collapse of Beige (a pharmaceutical company), Leisurenet, and Saambou Bank in South Africa, has led to increased calls for stricter regulations.

Quotes from Regulatory Authorities

• “I fail to see the difference between over-trading and theft, between trading on margin and outright fraud.” - Helen Liddell, Economic Secretary for the United Kingdom
• This highlights the need for more effective regulation to prevent such incidents from occurring.

Regulatory Requirements

Financial service providers must comply with a vast array of regulatory requirements. These requirements are set out in Acts of Parliament, subordinate legislation, and supervisory guidelines.

Challenges Faced by Compliance Officers

• Significant challenges in ensuring that institutions meet these requirements.
• Purpose of compliance is not to frustrate business activity but rather to support its development while protecting investors, depositors, and consumers.

Regulators

Regulators are appointed to promote/enforce adherence to regulatory requirements. In South Africa, the two main financial services industry regulators are:

The South African Reserve Bank (SARB) and the Financial Services Board (FSB)

• Derive their power from certain pieces of legislation.
• Make it illegal for financial service providers to conduct a specific type of business unless authorized or licensed.

Compliance Requirements

• Financial service providers must undergo a process of licensing and enter into a relationship with the regulator, undertaking to comply with regulatory requirements.
• Effective management of regulatory requirements is crucial in today’s complex regulatory environment.