Compliance
Steve Bickell
Good morning, Ladies and Gentlemen. I think compliance is probably a subject that hardly needs an introduction at the moment. Nearly a day seems to pass without another alleged scandal hitting the headlines. And given the events over the last couple of weeks, both which we have seen previously and some experiences we have had in the Asian markets, we are acutely aware that our reputations can easily be damaged. This subject is of critical importance to us and maintaining high standards of compliance throughout all of our Asian businesses is a vital part of building a successful and a sustainable business model for Prudential Corporation Asia.
Against this backdrop we anticipate that over time the Asian regulatory regimes will continue to be strengthened. From Prudential's history elsewhere in the Group, we are well aware of the potential for regulatory impact on both our products and our distribution, and also how quickly regulations can change. Our benchmark is to treat the local regulatory regimes as the absolute minimum standards that needs the be met – effectively the floor. And generally we want to be above those in most of the markets we operate (in). Our businesses also need to comply with our own Prudential Group standards, where these are over and above the local rules.
Three years ago we made a decision to create a dedicated compliance function in each of our local operations, even though these were not required under local law in many of the markets. This decision has helped us to now create a platform of compliance teams from which more sophisticated compliance prevention and detection procedures are developed. The compliance culture is absolutely critical in all of this. Compliance issues will never be completely eliminated, but it's vital that from the top down everyone in organisation understands that there can be no compromise around the need for strong compliance and the consequences to the business of having major problems. Where things need to change, we are able to quickly leverage for the best practise and experience within our Asian operations and also from the wider Prudential group.
Our aim throughout the business is to stay ahead of the regulatory developments, which means not only ensuring a strong culture of compliance, but also keeping our processes and infrastructure under review.
Management compensation through personal bonus schemes is aligned to help us achieve this objective. We see the personal ownership as absolutely essential in proactively embedding our compliance culture throughout the entire business, and not waiting for problems to arise before taking action. All of our leadership development programmes include a compliance component and the whole area of compliance and its fundamental importance to our future success is a key theme of our management conferences and other events. Basically we drive home the compliance message to our senior management team at every opportunity we get, and we are very keen to share experiences, whether they be good or bad, and learn from problems that we had.
As a market leader it's vital that Prudential supports the development of the regulatory regimes. All of our CEO's are encouraged to engage with regulators across the region and for their businesses to take a leadership role in the development of market regulations. We have a number of examples where this has been very positive for us. In Malaysia, our local unit trust team that have worked with the regulators to develop regulations for new Unit Trust products and in the Philippines we have jointly worked with the insurance authorities to help to develop the Unit Linked regulations.
As I said, our initial priority was to (put?) and create a dedicated compliance function into each or our businesses. These functions have already grown to reflect the risk (and/of/in) regulatory developments in each market as well as the growth and complexity of the businesses themselves. These factors will continue to drive the need for compliance resources. For example, increasing the resources that are now allocated to China and putting more of our people into the sales area. Our local compliance teams need to be embedded in the business, but as an oversight function they also must be able to exercise independence in judgement, challenge and be able to easily escalate issues through effective reporting lines. We see the best model is to concentrate the bulk of our compliance people on the ground, that means in the operations, but to give them unrestricted access to a regional team that sit outside of the businesses. In turn, that regional team had strong links to our head office in London.
By also creating strong relationships with the internal audit and risk management functions, we can operate with a significant degree of independence across all of our compliance teams in the region.
Our compliance plans and designs are all designed to be risk based and where it is possible compliance is integrated into the core operating systems of the business. For example, (going?) in the funds business, the front office investment system currently being run out across the region, includes automated controls to ensure compliance with both external and internal holding limits. And this is a very effective and simple tool for providing early warning of potential breaches.
I think it's probably useful to consider how we brought all of compliance theory into practise in the operations, using a real life example. It's legal for Hong Kong insurers to sell policies to Mainland Chinese citizens whilst they are in Hong Kong, but the companies can not sell, market or distribute their products in the Mainland itself. The border is clearly very accessible and I think we can also readily see the opportunities, particularly when the range of Hong Kong products are very attractive to Mainland citizens. I think, there is no doubt that overseas agents have been crossing into China to sell or market products for many years, but the general opening of the border and the development of the Chinese insurance industry has seen the Chinese government take a much more determined stance in seeking to stamp out this activity and it's been a widely covered subject in the media, including a Chinese TV documentary earlier this year, which you can see some stills from on this screen. We tackle this area from a different number of directions. Upfront the Asian contracts make it absolutely clear that they are not permitted to sell business into Mainland China. And this message has been reinforced for all staff by clear management communications and is dealt with at all training events by agents and their leaders. Then from a back-office perspective, we require that all new policy applications are backed by documentary evidence that the sales have legitimately taken place in Hong Kong and be sure agent sign declarations to that effect.
Our local compliance function has in place monitory arrangements to review sales documentation in order to identify unusual activity and then separately we have an audit function that looks at this whole area.
But we appreciate that all of the controls may not be enough. And we have made it absolutely clear from the top of the organisation that agents and their leaders will be disciplined if they breach the company rules, irrespective of how impressive their sales performance may be. And this year our business in Hong Kong has terminated two agents we believed were tempted to sell policies in the Mainland.
And finally our business leaders in both Mainland and in Hong Kong keep a dialogue with the regulators about how the Hong Kong industry can best tackle this issue.
Despite (of all this?), our compliance functions and processes continue to develop, and this is not an area where we expect to finish work or we can afford to drop our guard. Our regional compliance team has brought together people with operational compliance experience from other parts of the Group and we supplement this by calling on Group expertise from time to time. A current example of this is where the Group's Head of money laundering prevention, who is based in London, is working with our operations in Asia to ensure that their processes are consistent with the international standards, which have been ever strengthened following 9/11.
We also transfer best practise around the region and work to common standards, particularly corporate governance and you can see here the Prudential Corporate Governance Manual, the Asia version and then this is translated in this country into Vietnamese, and it means that every one has access to the same set of common standards, wherever they would be in the organisation.
Our Singapore business has lead the way in Prudential Corporation Asia by dedicating compliance resources to the sales process and that compliance team now hosts compliance office from around the region to provide hand-on training in this area. In the same way, the regional spread of our businesses and the different stages of the regulatory development in the markets, means that operations are able to learn from each other. For example, if the fact find type regimes begin to spread across the region, we will be able to use the experiences that we've gained in Singapore and Malaysia to help the other businesses, and I think this will be absolutely invaluable.
By using (common on the line?) standards, tailored to our local markets, it allows us to share training platforms and to roll out changes across (all our?) operations in short time frames and consistent standards. For example, we are able to use the experience of new compliance controls developed in our Funds business, which is a highly regulated area, and put them immediately in the investment functions within our insurance companies.
Another good example, where we can use synergies that (get around?) money laundering prevention is that we are using a computer based training program developed by a compliance officer in Malaysia to train all the staff and agents for our business across the region, thus avoiding each business needing to develop its own individual solution.
In summary, we believe that strong compliance is a critical component of our future success. We anticipate and we are preparing for the rules in Asia getting tougher. We see this creating opportunities for us to use both our internal expertise and our existing strong relationships with the regulators to help support and implement the emerging regulations. New compliance issues will arise from time to time, to be frank, we expect that in a business of our size. Our approach is to manage compliance through upfront prevention, as well as rigourous compliance detection regimes, which are targeted to match our areas of growth and the risk that we see, territory by territory. We also make a lot of effort to learn from our own experiences. I think finally we see that the diverse portfolio businesses that we have in Asia, and our experience in the international market very much gives us a head start (to?) build and operate effective and first class compliance arrangements.
I now want to hand you over to Clive Baker and Krishnan Narayanan. Clive is the General Manager and Krish is the Project Director from Prudential Services Asia in Malaysia, and they will be jointly talking to you about the development of an integrated operating model. Thank you.
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