Compliance Function Must Evolve to Meet Changing Regulatory Landscape

In today’s increasingly complex regulatory environment, banks must transform their compliance functions to stay ahead of the curve. The compliance function is no longer just about checking boxes and meeting minimum requirements, but rather a critical component of a bank’s risk management strategy.

Key Principles for Effective Compliance

The report highlights three key principles that financial institutions must adopt to ensure effective compliance:

Integrate Compliance into Risk Management: Banks must develop a single integrated inventory of operational and compliance risks, and coordinate risk assessment, remediation, and reporting methodologies.
Focus on Outcomes That Matter: The compliance function should focus on delivering outcomes that matter, such as reducing risk, improving customer experience, and increasing efficiency.
Measure Progress Effectively: Banks must develop a scorecard to measure progress against desired outcomes, including demonstrated focus on the role of compliance, integrated view of market risks, and clear tone from the top.

Organizational Structure and Placement

The report also highlights the need for banks to consider changes to their organizational structure and placement of the compliance function. Migration of compliance to risk organization is a recent trend among global banks, which reinforces the view of compliance as a risk similar to operational risk and as a control rather than advisory function.

Measuring Progress: A 10-Point Scorecard

To measure progress on this journey, the report suggests applying a 10-point scorecard that includes:

Demonstrated focus on the role of compliance
Integrated view of market risks with operational risk
Clear tone from the top and strong risk culture
Risk ownership and independent challenge by compliance
Compliance operating model with shared horizontal coverage
Comprehensive inventory of laws, rules, and regulations
Use of quantitative metrics and specific qualitative risk markers
Compliance management-information systems providing an integrated view of risks
Evidence of the first line of defense taking action
Adequate talent and capabilities to tackle key risk areas

Competitive Advantage

Banks that successfully transform their compliance function will enjoy a distinctive source of competitive advantage in the foreseeable future, being able to deliver better service, reduce structural cost, and significantly de-risk their operations.

Conclusion

Regulatory compliance has undoubtedly affected banks in challenging ways, but by implementing targeted changes to its operating model and processes, banks can deliver a better quality of oversight while increasing efficiency.