Risk-Based Approach to Compliance Takes Centre Stage in Barbados’ Financial Sector
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Barbados is making a significant shift towards a risk-based approach to compliance, marked by the adoption of Risk-Based Supervision (RBS). This new strategy focuses on assessing risks within the financial system and prioritizing their resolution.
What is Risk-Based Supervision?
Risk-Based Supervision is a comprehensive and formally structured system that evaluates the degree of risk in a company’s business operations and determines how to reduce it accordingly. The approach emphasizes “focusing on what matters” by monitoring entities for compliance with rules and effective risk management. Failure to comply or manage risks well can result in regulatory action.
Key Factors Considered Under RBS
- Finding contraventions of the law
- Reconciliation of data
- Business strategy
- Financial analysis
- On-site inspections
- Market intelligence
- Management style
- Attitude to risk
- Control environment
- Industry knowledge
Strengths of Risk-Based Supervision
Compared to a traditional compliance approach, RBS requires:
- Ability to apply judgment
- Interaction across supervisory teams
- Robust framework for QA processes
- Extensive formal education
- Industry knowledge
- Company knowledge
- Communication skills
The Journey of Risk-Based Supervision
The risk-based approach is not a destination but a journey that requires ongoing assessment and monitoring. A prerequisite for effective RBS is knowledge of the institution, its industry, and operating environment.
Implementation in Barbados
In Barbados, the Financial Services Commission (FSC) assesses risk through:
- Off-site monitoring
- On-site examinations
- Review of financial data filed by institutions
- Use of ratios and other methods to analyze financial data and determine the allocation of supervisory resources
Evaluating Inherent Risk and Quality of Risk Management
The RBS process involves evaluating inherent risk and quality of risk management. Institutions may have similar levels of inherent risk but differ in their risk management processes.
Benefits of Risk-Based Supervision
Barbados’ adoption of RBS is likely to lead to:
- More targeted and effective supervision
- Focus on high-risk entities and activities
- Priority on risk management by institutions
Conclusion
By shifting from a rules-based to a risk-based approach, Barbados’ financial sector can benefit from more efficient and effective regulation, ultimately promoting stability and growth in the industry.