Compliance: A Key Driver of Competitive Advantage for Banks

The Evolving Regulatory Landscape

As the regulatory landscape continues to evolve, banks are under increasing pressure to adapt their compliance functions to ensure effective risk management and oversight. However, a recent study suggests that many institutions are failing to leverage this critical function as a source of competitive advantage.

Transforming Compliance Operations

In an effort to stay ahead of the curve, leading banks are transforming their compliance operations by implementing targeted changes to their operating models and processes. According to industry experts, these transformations involve three key principles:

Key Principles

• Integration with Risk Management: Compliance must be seamlessly integrated into the risk management framework, ensuring that all risks are considered and mitigated.
• Process Efficiency: Compliance processes must be streamlined and automated to reduce costs and increase efficiency.
• Measurable Outcomes: The compliance function must be able to demonstrate measurable outcomes, such as reduced regulatory risk and improved customer experience.

Strategies for Achieving Transformation

To achieve these goals, banks are adopting a range of strategies, including:

• Integrating Risk and Compliance:
  • Developing single integrated inventories of operational and compliance risks
  • Implementing standardized risk, process, product, and control taxonomies
  • Coordinating risk assessment, remediation, and reporting methodologies across functions
  • Defining clear roles and responsibilities between risk and control functions
• Rethinking Organizational Structure:
  • Moving compliance into a standalone function
  • Integrating compliance into the risk organization

Measuring Progress

To measure progress on this journey, industry experts recommend applying a 10-point scorecard that assesses factors such as:

• Demonstrated Focus on Compliance: Does the institution demonstrate a clear focus on the role of compliance?
• Integrated Risk View: Is there an integrated view of market and operational risks across functions?
• Clear Tone from the Top: Is there a strong risk culture with a clear tone from the top leadership?
• Risk Ownership and Independent Challenge: Are roles and responsibilities clearly defined, with independent challenge by compliance?

Conclusion

By leveraging these strategies and metrics, banks can maximize the impact of their compliance transformations and enjoy a distinctive source of competitive advantage in the foreseeable future. As one expert noted, “Banks that successfully make this shift will be able to deliver better service, reduce structural cost, and significantly de-risk their operations.”