Financial Crime World

Financial Institutions’ Oversight of Compliance Risk: A Critical Review

A recent analysis has highlighted the importance of financial institutions (FIs) maintaining effective oversight of compliance risk, a crucial aspect of their operations. In this report, we examine the regulatory requirements and best practices for FIs to ensure they are adequately managing compliance risk.

Regulatory Expectations

The regulatory environment is increasingly focused on ensuring that FIs have robust compliance programs in place to mitigate risks associated with non-compliance. Key expectations include:

  • Appointment of Chief Compliance Officer (CCO): The CEO shall approve the appointment of a CCO with sufficient experience and expertise to effectively manage compliance risk.
  • Compliance Function Organization: FIs must organize their compliance function to ensure effective management of compliance risk, taking into account size, geographic diversity, target market, nature of operations, and complexity of business.
  • Regular Compliance Risk Assessments: FIs are expected to conduct regular compliance risk assessments, including independent reviews of critical functions, such as lending operations, investment operations, and anti-money laundering and combating the financing of terrorism (AML/CFT).

Best Practices

To ensure effective oversight of compliance risk, FIs should consider the following best practices:

  • CCO Independence: The CCO should report directly to the CEO or board of directors to maintain independence and objectivity.
  • Matrix Reporting Structure: International branch operations should have a matrix reporting structure, ensuring that compliance officers report to both country/regional heads and the Head Office CCO.
  • Subject Experts: FIs should establish subject experts in critical areas, such as risk management, credit operations, product compliance, customer service, and AML/CFT, to provide guidance and training to business units.
  • Independent Compliance Risk Assessments: FIs should conduct regular independent reviews of critical functions and activities to identify and mitigate compliance risks.

Conclusion

Effective oversight of compliance risk is critical for financial institutions to ensure regulatory compliance and maintain the trust of their customers. By implementing the best practices outlined in this report, FIs can demonstrate their commitment to compliance risk management and reduce the likelihood of non-compliance events.