The Cross-Border Provision of Investment Services: Identifying the Evolving Regulatory Risks and the Strategies for Compliance

Abstract

The tension between the global reach of capital markets and the local (national or at best regional) scope of financial services regulation is well known in business and regulatory circles. International financial institutions, and in particular global banks, serve clients across multiple jurisdictions but face increasing risks in complying with divergent regulatory requirements around the world. The existence and magnitude of this cross-border compliance risk is a key determinant of a global institution’s ability to intermediate international capital flows. Building on recent international reports on regulatory fragmentation, this chapter starts by exploring the nature of the cross-border compliance risk for global banks offering investment services in wholesale securities and derivatives markets. It argues that in order to manage this risk, global banks need to implement global compliance programmes where the institution’s Compliance function plays a key role. This chapter further describes what role and activities the Compliance function should perform for such programmes to be effective and elaborates on what conditions they should have in order to be value-enhancing. Finally, it provides additional details regarding the relationship between the Compliance function and other control functions (specifically Legal and Internal Audit functions) when dealing with the cross-border compliance risk.