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Compliance Function Crucial for Effective Risk Management

In order to ensure compliance with regulatory requirements and mitigate potential risks, financial institutions (FIs) must establish a robust compliance function. The Compliance Committee Meeting (CCM) plays a vital role in overseeing the management of entity-wide compliance risks and promoting a high compliance culture.

Composition of CCM

According to guidelines issued by the regulatory authority, the CCM should comprise key executives from various departments, including:

  • Legal
  • Shariah review
  • Trade
  • Treasury
  • Credit or risk management
  • As needed

This ensures that the compliance function receives assistance and guidance from experts in specific areas.

Responsibilities of CCM

The CCM is also responsible for enhancing buy-in of compliance risk management by senior management at individual and cross-functional levels. This education will help employees understand the drivers of risk and devise targeted strategies to bridge identified shortfalls.

Moreover, the guidelines emphasize the importance of including certain key functions within the Terms of Reference (TORs) of the CCM, such as:

  • Overseeing entity-wide compliance risks and ensuring that management understands the risks
  • Promoting a high compliance culture and assisting the compliance function in discharging its duties
  • Facilitating successful implementation of compliance programs across different functions
  • Assisting in developing and implementing organization-wide training programs on compliance risk matters

Reporting to the Board

The guidelines also stress the need for regular reporting to the board on the effectiveness of FI’s overall management of compliance risk. This report should provide insights that enable the board to discharge its responsibilities effectively.

Compliance Function Structure

In terms of structuring the compliance function, FIs must organize their CF in a manner that allows effective management of compliance risks entity-wide. The guidelines suggest that:

  • Larger FIs with extensive networks and diverse customer bases are naturally exposed to greater risks of non-compliance
  • Smaller FIs are not immune to compliance risks, and their organization must be consistent with the overall strategy, risk profile, and structure of the FI

Matrix Reporting Structure

International branch operations should maintain a matrix reporting structure, with compliance officers reporting to both country/regional heads and the Chief Compliance Officer (CCO) at head office. The CF may also:

  • Collect information from internal audit departments regarding incidents of non-compliance observed during audits
  • Conduct independent compliance risk assessments of key functions where the likelihood of non-compliance is high

Subject Experts

Subject experts in various critical areas can provide guidance to business units on compliance issues relevant to their area, helping to identify and manage compliance risks. These areas may include:

  • Risk management
  • Credit operations
  • Product compliance
  • Customer service
  • International trade
  • Outsourcing
  • Corporate governance
  • Financial disclosures
  • Business continuity
  • Information technology
  • General banking operations
  • Anti-money laundering (AML) & combating the financing of terrorism (CFT)
  • Etc.

Expectations

FIs are expected to cover the scope and frequency of reviews by the CF in their compliance risk policy. The CF should not rely overly on internal audit reports and conduct assessments independently or in coordination with operational risk units. Having subject experts will add great value in enhancing compliance risk management, and FIs are encouraged to have these experts in all important fields to make advising and review functions more effective.

Conclusion

In conclusion, the establishment of a robust compliance function is crucial for effective risk management in financial institutions. The CCM plays a vital role in overseeing entity-wide compliance risks and promoting a high compliance culture. By structuring their compliance function effectively, FIs can mitigate potential risks and ensure compliance with regulatory requirements.