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Compliance Function Overhaul: A Shift Towards Efficiency and Effectiveness

In an effort to stay ahead of the curve in a rapidly evolving regulatory environment, banks are undergoing a significant transformation of their compliance functions. The goal is to increase efficiency, effectiveness, and oversight while reducing costs.

Integrated Approach to Risk Management

A key aspect of this overhaul is the adoption of a more integrated approach to risk management. This involves:

• Developing a single inventory of operational and compliance risks
• Standardized taxonomies for risk, process, product, and control
• By doing so, banks can reduce duplicative risk assessments and remediation activities, and allocate resources more effectively.

Redefining the Compliance Function’s Role

Another crucial element is the redefinition of the compliance function’s role within the organization. Rather than being seen as an advisory or support function, compliance should be viewed as a key player in risk management, with its own independent challenge and oversight responsibilities.

Organizational Structure Changes

To achieve this, banks are considering changes to their organizational structures, including:

• Migrating compliance to a risk organization
• Elevating it to a stand-alone function
• This will enable compliance to take a more proactive role in identifying and mitigating risks, rather than simply reacting to them.

Measuring Progress

A ten-point scorecard has been developed to measure progress on this journey, with key metrics including:

1. Demonstration of focus on compliance
2. Integrated view of market risks
3. Clear tone from the top
4. Risk ownership and independent challenge by compliance
5. Compliance operating model with shared horizontal coverage of key issues
6. Comprehensive inventory of all laws, rules, and regulations
7. Use of quantitative metrics and specific qualitative risk markers to measure compliance risk
8. Compliance management-information systems providing an integrated view of risks
9. Evidence of the first line of defense taking action and owning compliance and control issues
10. Adequate talent and capabilities to tackle key risk areas

Practical Actions for Implementation

• Developing a single integrated inventory of operational and compliance risks
• Developing and centrally maintaining standardized risk, process, product, and control taxonomies
• Coordinating risk assessment, remediation, and reporting methodologies and calendars
• Defining clear roles and responsibilities between risk and control functions
• Developing and jointly managing integrated training and communication programs
• Establishing clear governance processes and structures with mandates that span across risk and support functions

By adopting these best practices and measuring progress against desired outcomes, banks can ensure that their compliance functions are equipped to deliver a better quality of oversight while increasing efficiency.