Compliance Function Needs to Evolve to Meet Regulatory Demands
As regulatory pressures continue to mount, banks are under increasing pressure to transform their compliance functions to ensure effective risk management and maintain a competitive edge.
The Need for Evolution
A new report by McKinsey & Company highlights the need for compliance functions to evolve in response to these changing demands. The report argues that a successful transformation of the compliance function will not only mitigate regulatory risks but also enable banks to deliver better customer experiences, reduce structural costs, and de-risk their operations.
Key Principles for Success
The report identifies three key principles that underpin a successful transformation:
- Clear Tone from the Top: A strong risk culture and demonstrated focus on the role of compliance
- Comprehensive Inventory: A comprehensive inventory of all laws, rules, and regulations
- Quantitative Metrics: The use of quantitative metrics and specific qualitative risk markers to measure compliance risk
Assessing Progress
To measure progress against these objectives, McKinsey has developed a ten-point scorecard that banks can use to assess their compliance function’s effectiveness. The scorecard covers key areas such as:
- Demonstrated focus on the role of compliance
- Integrated view of market risks with operational risk
- Evidence of senior management involvement and active board oversight
Compliance Organization Archetypes
The report also highlights three common archetypes for compliance organizations:
- Legal-Led: Compliance is part of the legal department
- Risk-Led: Compliance is part of the risk function
- Stand-Alone: Compliance reports directly to the CEO or COO
Benefits of Successful Transformation
According to McKinsey, banks that successfully transform their compliance functions will be able to:
- Deliver better service to customers
- Reduce structural costs
- Significantly de-risk their operations
The Role of Audit in Transformation
The report’s authors argue that audit should play an important role in this process, providing an independent view of program status and effectiveness with respect to commonly agreed-upon transformation objectives.
Key Takeaways
- Compliance function needs to evolve in response to changing regulatory demands
- Three key principles underpin a successful transformation: clear tone from the top, comprehensive inventory of laws and regulations, and use of quantitative metrics to measure compliance risk
- McKinsey’s ten-point scorecard can be used to assess progress against these objectives
- Common archetypes for compliance organizations include legal-led, risk-led, and stand-alone functions
- Successful transformation will enable banks to deliver better service, reduce structural costs, and de-risk their operations