The role of compliance in supporting the integrity of regulatory frameworks; ii The larger social and economic consequences that can arise from compliance lapses; and iii. The impact on public confidence and trust in an environment where financial intermediation is no longer the exclusive domain of banks. 1/5  BIS central bankers' speeches  Regulation, particularly for banks, has become significantly more complex as banks grow in size and sophistication. In the face of these growing complexities, global standard setters continue to develop standards that can best manage this issue. In general, Bank Negara Malaysia has been supportive of moves to make regulation simpler and less costly. Even so, some complexity in regulation is inevitable due to rapid advancements in the business of banking, compounded by the process of globalisation and changes in the banks’ operating landscape and interactions with other components of the financial system. Continuous regulatory changes are necessary and will be the norm as efforts are continuously taken to safeguard financial stability. If you observed carefully over the last few years, it is not just banking rules that are becoming more complex. Developments in financial reporting standards are adding to this complexity as well, in ways that we may not even fully contemplate yet. Regulation has also evolved from detailed prescriptions to “standards”, which focus on principles and outcomes. With this evolution, substantial value judgement and discretion are required in such an approach. Banks need to determine and decide on how to reflect these standards in their day-to-day operations.

Financial reporting standards now work in much the same way, with considerable management discretion required. This is a sensible approach, given that operating models and business strategies differ from one bank to another. Prescriptive rules, especially if they are rigid, are always ill-suited if intended for all institutions, as they often lead to numerous exemptions, waivers or perverse outcomes. So, even if we exhaustively pursue prescriptive rules to secure financial stability, there will inevitably be areas where allowance for judgement is necessary. Regulators have a keen interest in the development of a strong compliance function within banks given the more complex rules, combined with the wider use of principle or outcome-based regulations. The compliance function plays at least three critical roles. First, to ensure a bank’s operational frameworks are consistent with the intentions of regulatory standards. Second, to provide a level of independent assurance on the processes behind detailed calculations of regulatory ratios and limits. And third, to support consistent and wellreasoned applications of management discretion and judgement. The existence of a strong compliance function, therefore, protects the integrity of the regulatory framework. We should be mindful that when banks’ internal functions cannot be relied on to achieve financial stability objectives, experience shows that regulation will then tend to be more intrusive. In the process of intervening to remedy such gaps in the stability framework, tensions often surface over the delicate balance in regulation.