Compliance Function Independence

A compliance officer who reports to the sales head and is paid from sales results will struggle to say no. Independence addresses that problem. In practice it means a written mandate, often called a compliance charter, approved by the board; a head of compliance of senior rank with the right to report directly to the board or one of its committees; no revenue-generating duties; and a budget and staff that management cannot cut on its own. Dismissal of the head is usually subject to board approval. Independence does not mean isolation, since compliance still advises the business and works with it daily. Banking supervisors, including the Basel Committee in its guidance on bank compliance, expect it, and many sector regulators set similar expectations. Without it, compliance becomes a signature rather than a check.

The head of compliance at a mid-sized insurer is told by the chief executive to hold back a regulatory breach notice until after results are announced. Because her charter gives her direct access to the audit committee chair, she raises the instruction there. The committee backs her, and the notice goes to the regulator on time.