Abstract
Determinants of international banking failures have been widely discussed and summarized. A combination of global and systemic complexity of products that fails down on correct managing of the banking risk systems; consumers who are eager for credits and regulators who are unable to spot the potential global inter-relationships – consequently have led to the failures. As a response to the financial crisis the European Commission has been working actively to complete a comprehensive financial reform to address poor risk management, lack of responsibility and to correct the underlying weaknesses in the supervisory and regulatory framework. The regulatory development is substantially increasing the role of compliance. One of the main supervisory objectives in EU countries is to ensure compliance with relevant laws and regulations. Regulations as such are not to be blamed in a context of financial crisis, moreover we have to draw our attention to the control mechanism that is being reformed and overhauled. Compliance in general terms is the adherence to the existing rules and regulations laid down by those in authority. Currently there is a widespread understanding that compliance means respecting all the regulations and supervisory expectations relevant to financial institution. Compliance means not only adherence to the letter of the law but moreover it is also concerned with adherence to the spirit of the law. Compliance should be considered as something more significant than just a function of conformity with laws and regulations. Banks must have culture of integrity and ethical business conduct. This is one of the main reasons why the development of compliance is a joint effort between the financial industry and the regulators. Recognition of the broader role of compliance as a part of the governance framework for banks is yet very strong and confirmed by guidelines from Basel Committee. The aim of the paper is to highlight possible impact of EU financial reform to the compliance and theoretical constitution of sanctions as one of the main drivers for development of compliance management in Latvia’s banking sector. The article shows several research results of the surveys performed by the EU. The perceived threat of regulatory sanctions is one of the key drivers for compliance strategy in banks. The EU new financial reform program has five key objectives and among them it should be stressed upon – the more effective sanctions against market wrongdoing. The levels of administrative pecuniary sanctions (fines) vary widely across the Member States and seem to be too ineffective activities in some countries. Latvia and other Baltic countries are ranked among them. Analysis of the Latvian laws regarding administrative sanctions has been performed by the author and consequently it can be stated that fines are very small comparing with Nordic and other developed countries. The author in his research concludes that due to the current relatively low level of sanctions in Latvia and the Commission’s activities to strengthen and adequately enforce the Member States, the banking sector of Latvia should pay a greater attention in discussing the issue of compliance and reviewing the current practices. Besides, the discussion is needed regarding education, professional examination and certification for the compliance specialists in Latvia.DOI: http://dx.doi.org/10.5755/j01.eis.0.5.1088
Highlights
The paper deals with European Union (EU) proposal for financial sector reform and sanctions impact to the compliance in banks
Holland (2010) noted that lack of basic knowledge of banking risks and value drivers by the board and senior managers were implicated in the banking crises. He concluded that in general by ensuring greater bank learning, knowledge creation, and knowledge use, governments and regulators could help reduce individual bank risk and the likelihood of future crises. The same time he admitted – given the history of bank learning, incentives to learn and implement knowledge effectively are only to arise at the top of banks with clear regulation and tough sanctions
The study [Deloitte, 2011] confirms that Latvia is among those four EU Member States, which are not publishing penalties
Summary
The paper deals with European Union (EU) proposal for financial sector reform and sanctions impact to the compliance in banks. Completing the single market in financial services that includes banking, insurance and securities is recognized [Monti, 2010] as one of the key areas for EU’s future growth and jobs. The banking crisis 2007 to date has threaten single market completion and create debate about how to safeguard the financial services from further and future failures. As a response to the financial crisis the European Commission (2009) has been working actively to complete a comprehensive financial reform to address poor risk management, lack of responsibility and to correct the underlying weaknesses in the supervisory and regulatory framework. The regulatory developments are substantially increasing Latvia about compliance management practice and support the role of compliance.
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