Last Updated on May 10, 2023 by asifa
We’re breaking down three compliance models that could make your business a lot safer. One of the biggest concerns for financial firms in the part few years has been the idea of compliance risk due to the fact that regulatory fees have increased with banks earnings. This is making for a very tightly run ship where compliance solutions are always at the forefront of firms’ minds.
On top of that, regulations are expanding. In the digital age there are big financial changes taking place. Regulators are focusing on compliance solutions to data security, cybercrime, digital money laundering, and other problems within the new cryptocurrency industry. In order for firms to effectively stick to their compliance solutions, they should have a compliance model in place that will target these areas effectively.
We’re breaking down the most useful compliance models to pursue and where they can help you in your compliance solutions.
Table of Contents
Integration of risk-management and regulatory affairs
Compliance risks and other banking risks are often driven by the same elements, however there is more to lose in compliance, like large fines and business restrictions, therefore it makes sense to merge the two into the one compliance framework.
There are a lot of visible benefits to this, such as ensuring that the financial firm has a detailed and comprehensive portfolio of risks and that none of them go on ignored, making for a very tight framework.
A few practical moves can help a bank integrate compliance into their regular risk management framework, such as creating an inventory made up of compliance and operational risks, running risk assessment, remediation, and reporting, clearly defining the roles and responsibilities of risk and control functions, establishing clear processes that span risk and support functions for each of these inventory examples.
The risk-and-control framework
As yet, compliance solutions focus their role on advising firms on the next step forward after having had a problem arise, whereas they should be taking on a more pro-active role. Compliance departments are expected today to put more work into active risk monitoring and management.
Practically, this means expanding the role beyond the common of advising on regulations, laws and statutory rules and taking on the role of weeding out problems before they become a problem.
Under this framework, the role of the compliance department would be expanded to include generating a standard of material risks and how they could occur, creating a risk identification tool kit, offering practical applications on laws, compliance solutions, and regulations, etc.
The compliance department would also maintain ongoing compliance solutions with training programs and incentives for employees to follow in order to get to the root cause of a problem rather than just treating the surface level “symptoms”, like training the staff in cyber security so as to not deal with a hacking.
Any compliance solutions should be made with the understanding of the bank’s risk culture, its strengths, and its shortcomings to avoid any gaps in compliance. Risk culture is especially important due to the fact that a lot of problems rising the past few years have had a root cause in the culture of the financial firm, which eventually leads to harsher regulations looking for higher level compliance solutions.
Transparency of residual risk exposure
The traditional approach to compliance solutions was to scan the financial firm’s operations for “high-risk processes” and to then identify “all risks” and “all controls” of each of these processes. This approach, however, doesn’t allow for transparency into material risk exposures and ultimately gets treated as an industrial exercise.
There is a fundamental issue with the term “high-risk process” for one thing, which is too vague and therefore leaves it up to the businesses themselves to determine, allowing for a lot of firms misreading the term and missing a lot of available and necessary compliance solutions.
It often means that businesses are targeting risks that affect the business and the customer rather than risks that affect compliance.
And then there is the idea of “all risks” and “all controls”, which offers too broad a term, for what should really be happening. It implies that compliance departments should be looking for as many simple, surface level compliance solutions for issues across the board, rather than allowing for any deep dives into the root cause of risks, like bank culture.
In order to avoid these problems, departments looking at compliance solutions should adopt a new approach that focuses on risk exposures within the firm and critical process breakpoints to ensure that there is no material risk left ignored.
Creating a solid compliance models means that not only is your financial firm safe from the risks to the customer, but also for regulations. Between the two, regulations can offer much harsher consequences for not adhering, such as fines and restrictions, so it’s important to have a framework in place that doesn’t allow for any risk to go unnoticed or unchecked.