Evolving Role of Compliance in Banks and Financial Institutions

Key Points

The evolving role of compliance within banks and financial institutions is becoming increasingly critical. Here are the key points to consider:

Compliance as Risk

• Viewing compliance as a risk similar to operational risk is crucial for effective management.
• This approach allows for proactive measures to mitigate potential risks.

Integrated View Across All Risk Types

• An integrated view across all risk types is essential for effective compliance management.
• This includes considering market, credit, liquidity, and operational risks when making decisions.

Three Archetypes of Compliance Organizations

There are three common archetypes of compliance organizations:

• A. Legal-led organization: Compliance reports to general counsel, with a focus on legal expertise.
  • Strengths:
    • Strong understanding of regulatory requirements
    • Effective risk management through legal frameworks
  • Weaknesses:
    • Limited integration with other risk types
    • May not fully understand business operations
• B. Risk-led organization: Compliance reports to chief risk officer, with an integrated view across all risk types.
  • Strengths:
    • Comprehensive understanding of risks and opportunities
    • Effective decision-making through holistic analysis
  • Weaknesses:
    • May lack in-depth legal expertise
    • Can be resource-intensive
• C. Stand-alone compliance function: Compliance has its own reporting line, similar to internal audit, with clear separation from business units.
  • Strengths:
    • Independence and objectivity
    • Effective risk assessment through regular audits
  • Weaknesses:
    • May lack integration with other risk types
    • Can be seen as separate entity rather than integrated part of the organization

Key Takeaways

Banks that successfully transform their compliance functions will enjoy a competitive advantage in the future. The transformation process should focus on delivering better service, reducing structural costs, and de-risking operations. Audit plays an important role in measuring progress against desired outcomes.

By understanding these key points and archetypes of compliance organizations, financial institutions can make informed decisions about transforming their compliance functions to achieve success in the evolving regulatory landscape.