What is the history of compliance?
This EFS RegCom Academy article takes a closer look at the origins of compliance and how it has spread to more industries over time.
The basis for functioning coexistence in any society is created by moral values and rules that define appropriate and inappropriate behavior. The same applies to companies, as they are an integral part of society through the production and trade of goods and services. Since companies are not physical people (“natural persons”) but “legal persons”, states have created their own laws that apply only to them. With these, companies shall be forced to ensure the protection of people, animals and the environment at all times.
How a book became the catalyst for the US food law
The first regulations emerged well over 100 years ago. For the most part, they had a direct impact on human health. In the food sector, for example, the US Food and Drug Administration (FDA) passed the Pure Food and Drugs Act back in 1906. This law created the obligation to label products for the first time. Trigger for this was the book “The Jungle” by Upton Sinclair, who wrote about the appalling methods used in meat processing. Unhygienic processing of meat and dirty factories led to unclean meat, which could also cause illness. (More background information can be found here).
Financial sector as a pioneer for modern compliance regulations
The first international collapse of financial markets led to regulations as early as the 19th century. The stock market crash of 1873 was caused by speculation and insolvencies of large stockbrokers and companies in the USA and Europe (see more background here). In response, the states decided to restrict (international) free trade. For the first time, protective tariffs were introduced on foreign imports. Furthermore, trade unions were created, which placed more emphasis on the social function of companies.
As capitalization increased in the 20th century, states passed additional laws to further regulate the financial markets. Laws were passed against corruption and to increase the transparency of financial markets and their players. The aim here was in particular to promote ethical business practices.
Various crises and scandals (e.g. Enron, WorldCom) in the 2000s led to a rethink of compliance in the financial sector. Instead of promoting good practices, inappropriate ones were to be strictly prohibited. Companies and banks were given the responsibility to proactively set up systems that make inappropriate behavior impossible. The modern compliance (risk) management system was born.
Regulations in an increasing number of sectors
Manufacturing companies have only been subject to their own laws for a few decades. The focus here is on production safety for employees, and product safety and liability for the final product. Here too, the concept of compliance has changed over time: Before the 20th century, companies were called upon to manufacture safe products. However, the buyer was responsible for inspecting and testing the product upon purchase (Latin ‘caveat emptor’). It was not until the USA introduced its own product liability regulations in the 1960s and EU product liability legislation was introduced in 1985 that the situation was reversed. Since then, companies are obliged to accept liability for their products without the need for direct fault.
The situation is completely different in the automotive sector. The first international law (‘1926 International convention relative to motor traffic’) was passed as early as 1926. It laid the basis for the standardization of certain car parts such as steering wheels, brakes, horns, headlights, license plates, etc.. Here too, the basic idea was to ensure the safety of the driver himself and his surroundings. Over the course of the 20th century, more and more specific regulations, norms and standards were introduced. Just like in the financial sector, this led to manufacturers having to develop their own compliance systems in order to meet legal requirements.
The future of compliance: extending standards to multiple sectors
In the meantime, the world of compliance has changed. Previously, compliance standards were mainly specific to industry. But now there are more and more regulations that are cross-sectoral. This mainly concerns the world of chemicals, waste, product labeling for the circular economy, consumer and data protection and environmental protection. For companies, this means that they have to comply with more and more general regulations in order to remain legally compliant.