The Paradox of Being Commercially Minded: How to Balance Risk and Reward in Legal and Compliance

We have witnessed an increase in commercial mindedness across Legal & Compliance in recent years which we believe is a by-product of wider market conditions within the financial services sector and generally heightened risk awareness in the industry. The impetus has been thrust upon control functions to improve awareness of risk across all product areas, while at the same time, Legal & Compliance practitioners have had to step up their understanding of the businesses they support. In the following paragraphs, we will explore how Compliance functions have improved their commercial mindedness while Legal functions have sought to enhance their awareness of risk.

The transition and trends from a pre-crash compliance officer to today’s more business-aligned demographic has meant that commercial awareness has become an essential prerequisite for anyone looking to get ahead in these so called ‘middle-office’ functions. Gone are the days of ‘box ticking’ and simply going through the motions of adhering to the rules. Now there is a flow of former business professionals making the transition from transactional teams into regulation and compliance, where we are seeing traders moving into surveillance and sales professionals into risk advisory. However the transition manifests itself, it is normally driven by an awakening to the fact that control functions need to be infused with an in-depth and thorough understanding of the commercial rationale and drivers behind the transactions being undertaken by financial institutions.

“The role of in-house lawyer has morphed significantly from facilitator and ‘deal doer’ to advisor and protector”

Conversely, in Legal we have witnessed a seismic shift of emphasis from the business led transactional side to the more risk aware litigation and regulatory functions within the in-house sector. The impact of this shift is reflected by law firm demand as they have strived to adjust to their clients’ needs. The role of in-house lawyer has morphed significantly from facilitator and ‘deal doer’ to advisor and protector (even sometime ‘whistleblower’) with an emphasis on reputation, risk profile and standing with the regulator. Whilst individual front line teams within banks and funds may still comprise of lawyers, they ultimately defer to authority and sign off of with an independent legal function which is most likely be headed up by a GC whose principal focus will be on regulation and risk.

In parallel with the gravitation of legal counsel away from commercial mindedness towards risk awareness, we have seen law firms in turn apply commercial mindedness in their own way, namely seeking to capitalise on the opportunities which have sprung up from banks needing to tighten compliance and risk measures and those systems underpinning their control functions. This accounts for the rise in law firms setting up consultancies and risk advisory businesses to meet client demand, and the call for additional support in tackling the mammoth task of regulation and risk compliance.

Noting where we are in the cycle and the extent to which financial institutions have stepped up control functions and systems to meet their obligations and industry standards, while regulatory change is likely to continue to be a hot topic, we sense the pace of change is beginning to slow down as markets start to turn a corner. While we are unlikely to return to the heady days witnessed during the first decade of this century, there will need to be a further adjustment of the balance of power between risk awareness and commercial mindedness. With lessons learnt, greed banished and pre-emptive measures in place, we ask ourselves whether it is conceivable that an equilibrium be struck between “risk” and “reward”.

If you would like to more information on this topic, please contact authors Director Shirin Stanley or Consultant Max Alfano.

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