Ignoring the rules has never been so pricey for European lenders, spurring them to hire more people to ferret out wrongdoing and offer salaries more in line with the bankers they police.
“It’s actually a very hot market right now,” said Mike Roemer, who became head of compliance at London-based Barclays Plc (BARC) in January. Today the role is seen “as an integral part of how companies manage the overall risk of the organization,” he said.
After the U.S. extracted almost $12 billion in fines in settlements with France’s BNP Paribas SA (BNP) and Zurich-based Credit Suisse Group AG (CSGN) since May, European firms say they’re overhauling culture and boosting pay for compliance staff faster than for revenue-earning bankers. Still lawyers question whether this will be enough to deter future misdeeds as authorities around the world probe alleged manipulation of interest rate, foreign exchange and gold benchmarks.
For banks, there’s an incentive to change: European firms may have to set aside $50 billion, on top of the $80 billion already provisioned or paid, to cover litigation and settlement costs, according to a July 7 Morgan Stanley report. U.S. banks are better situated, according to analysts led by Huw van Steenis. They may need another $25 billion on top of the $125 billion they’ve provisioned or spent so far, they wrote.
BNP Paribas shares rose 1.3 percent to 48.85 euros at 11:33 a.m. in Paris. They have dropped 14 percent this year. Barclays gained 2.1 percent and Credit Suisse was up 1.3 percent.
European banks aren’t alone in paying dearly for misdeeds. Citigroup Inc. (C) agreed this week to pay $7 billion in fines and consumer relief to end an investigation into allegations the New York-based firm misled investors in mortgage-backed bonds. The U.S. government has sought about $17 billion from Bank of America Corp., the second-biggest U.S. lender, to settle similar claims, according to a person with knowledge of the matter.
The average annual salary for a compliance employee in London rose 12.9 percent to 80,538 pounds ($138,000) in 2013, according to a survey by London-based recruitment firm Astbury Marsden & Partners Ltd. That compares with a 6.1 percent increase to 90,669 pounds for a revenue-generating banker.
That said, bankers still get significantly bigger bonuses. On average, compliance employees expected bonuses of 18,572 pounds for 2013, compared with 94,148 pounds for so-called front-office staff, the survey found.
Hiring more compliance employees and paying them more won’t necessarily get them the internal respect they need to have to ensure their warnings are heard.
“Simply paying a large sum of money, throwing money at the problem, won’t by definition solve the problem,” Owen Watkins, an alumnus of the U.K. financial-services regulator who is now a lawyer at Lewis Silkin LLP in London, said in a telephone interview. “You’re going to need to have an environment where the compliance person is at the heart of decision making.”
Commerzbank AG will probably be the next European bank to announce a settlement with U.S. authorities on allegations Frankfurt-based firm handled funds linked to blacklisted nations, a person with knowledge of the situation said this month. Deutsche Bank AG, also under investigation for allegedly violating sanctions, plans to hire about 500 compliance, risk and technology employees in the U.S. by year-end, Jacques Brand, its North American chief executive, said in an interview this month.
Those are the same sort of cases that left BNP Paribas with a record penalty last month, prompting the Paris-based lender to step up its investments in compliance and to reevaluate how it polices employees, setting up a team in New York dedicated to ensuring respect of U.S. sanctions.
HSBC Holdings Plc, Europe’s largest bank, sought to beef up its regulatory compliance group in the wake of a similar U.S. investigation after its oversight chief, David Bagley, quit during a Senate hearing. The London-based lender brought Ruth Horgan in from KPMG LLP as global head and hired Alison Hewitt, an alumna of the U.K. markets regulator, last month from Lloyds Banking Group Plc (LLOY) to lead the European group.
Royal Bank of Scotland Group Plc, based in Edinburgh, and Banco Santander SA, Spain’s biggest bank, hired regulatory agency veterans as well. While banks are pushing to hire senior compliance executives, attracting talented individuals can be more difficult than just offering big pay packages.
It’s a challenge as even people accustomed to the grueling pace of investigations get “burnt out” amid the pressure for banks to pay for past misconduct, Nick Hedley, a partner at compliance headhunter Hedley May, said by telephone.
Hector Sants, the former head of the U.K. markets regulator, quit Barclays as its head of compliance and government regulatory relations in November after less than a year in the job citing “stress and exhaustion.”
Barclays promoted Roemer in January from leading the bank’s internal audit group.
“It’s stressful,” Roemer said. “There are very high expectations from our regulatory partners globally.”
HSBC’s Bagley announced he was leaving the bank in the middle of a 2012 U.S. Senate hearing on its investigation, saying “there have been some significant areas of failure” in the bank’s money-laundering controls and that the time had come for the bank to find another compliance chief.
“That gives you some idea of just how at-risk these roles are,” Hedley said.
Banks are also looking to change the way their compliance departments function, making them more than internal police who mop-up wrongdoing and into units to help avert future blowouts.
“They don’t just wait for things to go wrong,” Anne Murphy, head of U.K. financial services at Odgers Berndtson LLC, said in an interview in London. “They’ve gone from being reactive to proactive.”
Barclays announced a partnership this month with University of Cambridge’s Judge Business School to train employees in compliance that puts “clients at the heart of decision-making.” The course will be opened to staff at other firms and the university will award certificates in compliance.
The bank paid 290 million pounds to settle a probe into rigging of the London interbank offered rate with U.K. and U.S. authorities in 2012 and is under investigation in New York over claims it lied to lure customers to its anonymous trading platform. Barclays spends about 300 million pounds on compliance each year, Roemer said.
Compliance has to work more with front-office executives and other risk and audit departments to be effective, according to Andrew Procter, the former head of compliance at Frankfurt-based Deutsche Bank who joined London law firm Herbert Smith Freehills LLP. “It’s not simply leaving the grinding work to the compliance department,” he said.
That’s a U-turn from the past when compliance was seen as a backwater in the banking industry.
Roemer got a seat on Barclays’s executive committee with his promotion. While he said installing a compliance chief on the board is “a new phenomenon” at Britain’s second-largest bank, firms like BNP Paribas have done so for years. That wasn’t enough to ensure people heeded the rules, investigators found.
BNP Paribas ignored its compliance staff when they raised alarms over potential pitfalls. That was an aggravating factor in calculating the fine, according to statements by U.S. officials and documents released with the June 30 settlement.
France’s largest bank valued its role as what U.S. Deputy Attorney General James Cole called Sudan’s “defacto central bank” so highly that a senior executive from Paris blocked notes from being taken when compliance staff warned against continuing to do business with a regime supporting terrorists and allowing atrocities in Darfur.
That and “dragging their feet” once the Justice Department put the bank on notice that their illegal conduct was under investigation contributed to the fine’s size, Cole said at a June 30 press conference. BNP Paribas “ignored U.S. sanctions laws and concealed its tracks,” he added.
“Banks would like to think that having enhanced compliance functions decreases the risk of there being a breach in the future,” said Michael Raffan, head of Freshfields Bruckhaus Deringer LLP’s global financial services group. “They would be naive to think it will mean there will never be one again.”