Integrating Compliance Framework with Operational-Risk View: A Must for Banks
In today’s complex regulatory environment, banks must rethink their approach to compliance management. To achieve success, they must integrate their compliance framework with an operational-risk view of the world.
The Importance of Integration
Integrating risk management offers several tangible benefits, including:
- A comprehensive view of portfolio risks
- Visibility into systemic issues
- Reduced burden on business and control functions by eliminating duplicative risk assessments and remediation activities
To achieve this integration, banks must take practical steps, such as:
Key Steps for Integration
- Developing a single inventory of operational and compliance risks
- Creating standardized taxonomies
- Coordinating risk assessment methodologies and calendars
- Defining clear roles and responsibilities between risk and control functions
- Developing integrated training programs
- Establishing governance processes
- Involving senior compliance stakeholders in determining action plans
Evolution of Compliance Organizations
The article highlights three archetypes of compliance organizations in banks, with a recent trend being the migration of compliance to a risk organization. This new structure reinforces the view of compliance as a risk similar to operational risk and as a control rather than advisory function.
Measuring Progress
To measure progress, industry experts recommend a 10-point scorecard that assesses factors such as:
- Demonstrated focus on the role of compliance
- Integrated view of market risks with operational risk
- Clear tone from the top
- Evidence of senior-management involvement and active board oversight
A bank with a low score may require significant transformation, highlighting the need for rigorous measurement against desired outcomes.
The Role of Audit
Audit plays an important role in this process, providing an independent view of program status and effectiveness.
Conclusion
Regulatory compliance has presented challenges for banks, but there is also an opportunity for the compliance function to get ahead of the curve by implementing targeted changes to its operating model and processes. Banks that successfully make this shift will enjoy a distinctive source of competitive advantage in the foreseeable future.