Compliance Can Be Your Friend

EY Incubator: Compliance

A recent high-profile case involving one of Silicon Valley’s most promising “unicorns” graphically illustrated the challenges for fintech startups trying to disrupt a highly regulated industry. The founder and CEO of Zenefits was compelled to step down after charges from various state regulators that the company employed sales people that were improperly licensed to sell insurance. The new CEO told employees the problems went even deeper – many of the company’s controls were inadequate, and its cultural attitude toward compliance needed to change.

This cautionary tale set the stage for a panel discussion at the most recent Ynext Incubator bootcamp featuring three compliance experts: Brian Dennen, Chief Compliance Officer at Wealthfront, Evan Meagher, CCO for SigFig, and Laxmi Ramanath, Founder and CEO of La Meer, a financial services risk management consulting firm.

After a quick show of hands determined that none of the participating companies had appointed a dedicated compliance person, the panel enumerated some of the challenges that startups face. Startups are companies that “need advice the most and can afford it the least,” Dennen observed. They are trying to bring new business models into entrenched industries, in which the rules were written 50 to 60 years before the commercial Internet or the mobile app.

Young companies often view corporate compliance as a cost center and a necessary evil at best. At worst, they try to circumvent the “old” rules that they view as irrelevant to new, technology-enabled opportunities.

Yet compliance programs can actually be beneficial to a company trying to get off the ground. The reason there’s so much opportunity in finance, the panel noted, is because it’s regulated. And the reason it’s regulated is because there’s so much opportunity.

Chief among the benefits of compliance for financial startups:

  • It helps define operating processes.
  • It helps companies identify the types of errors or fraud they could be susceptible to, and take measures to minimize their risks. The earlier risk is identified and mitigated, the less it will cost to mitigate later.
  • It helps provide employees with guidance and direction they want and need.
  • It helps define technology requirements, particularly as regulators are increasingly focused on cybersecurity measures.
  • In short, the compels firms to put protections in place that are ultimately for their own good and for that of their customers.

Moreover, good compliance practices can be a key point of differentiation when you’re trying to win over decision makers, be they investors or potential partners or customers.

Look for compliance people who understand what you’re trying to do as a business and want to help you, the panel advised. The role of a compliance officer is not simply to advise you on the letter of the law, but to help you get to yes – to help figure out how to accomplish your goals within the regulations. Good compliance people are business-minded, not just legal-minded.

Other advice for startups:

  • Document company policies, and have employees acknowledge them.
  • Document processes and procedures.
  • Establish a process for managing employee turnover and document knowledge transfer.
  • Leverage technology to reduce the risk of human error; as you build out your infrastructure for efficiency, you can build compliance into it.

Above all, for entrepreneurs and founders, set the right tone at the top. Management should develop a culture of compliance by example, and employees will follow.

“Don’t succumb to contempt for the regulators,” Meagher cautioned. “Don’t think you’re too smart for them and they just don’t get it.”

Trust is the hardest thing to earn, the panel noted, and the easiest to lose. Compliance should empower you to be productive and grow. Non-compliance, as recent events have shown, can do just the opposite.

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