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Integrating Compliance into Risk Management: A Path to Enhanced Oversight and Efficiency

Financial institutions must adopt a modern compliance framework that is fully integrated with operational-risk views to reap tangible benefits.

In today’s complex regulatory landscape, financial institutions face numerous challenges in managing their risk profiles. However, integrating compliance management into the overall risk-management governance structure can provide a comprehensive view of risks and enhance oversight efficiency. A recent trend among global banks is the migration of compliance functions to risk organizations, reinforcing the notion that compliance is a critical control function akin to operational risk.

Benefits of Integration

By integrating compliance management with operational-risk views, financial institutions can:

Gain a truly comprehensive understanding of their risk portfolios and identify systemic issues.
Reduce duplicative efforts across business lines and control functions.
Facilitate risk-based allocation of resources and management actions on remediation and investment in cross-cutting controls.

Practical Actions

To achieve this integration, financial institutions can take the following practical steps:

Develop a single, integrated inventory of operational and compliance risks.
Establish standardized taxonomies for risk, process, product, and control categories.
Coordinate risk assessment, remediation, and reporting methodologies across functions.
Define clear roles and responsibilities between risk and control functions.
Jointly manage training and communication programs.
Establish governance processes and structures that span across risk and support functions.

Organizational Structure

Some financial institutions are reevaluating their organizational structure to better align with the integrated compliance-risk management framework. Exhibit 4 illustrates three archetypes of compliance organizations in banks, highlighting the trend towards migrating compliance functions to risk organizations.

Measuring Progress

To ensure successful integration, it is essential to measure progress against desired outcomes. A ten-point scorecard can help financial institutions assess their transformation journey, covering aspects such as:

Focus on compliance and its stature within the organization.
Integrated view of market risks with operational risk.
Clear tone from the top and strong risk culture.

By applying this scorecard, banks can identify areas for improvement and measure progress towards a more efficient and effective compliance-risk management framework.

Conclusion

In today’s complex regulatory environment, integrating compliance management into the overall risk-management governance structure is crucial for enhancing oversight efficiency and reducing costs. By adopting a modern compliance framework that is fully integrated with operational-risk views, financial institutions can deliver better service, reduce structural costs, and de-risk their operations. Those that successfully make this shift will enjoy a distinctive source of competitive advantage in the foreseeable future.