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Transforming Compliance Functions in Banks: A Key to Effective Oversight and Risk Management

In today’s evolving regulatory landscape, banks must prioritize transforming their compliance functions to ensure effective oversight and risk management. This transformation requires a shift in approach, focusing on integrating compliance into the overall risk-management governance, regulatory affairs, and issue-management process.

Three Key Principles for Compliance Transformation

To achieve this transformation, we outline three essential principles:

1. Integrated View

• Integrating compliance into the overall risk-management governance, regulatory affairs, and issue-management process.
• This holistic approach enables banks to identify and mitigate potential risks more effectively, ensuring a more robust compliance framework.

2. Clear Tone from the Top

• Ensuring senior management involvement and active board oversight in setting a strong risk culture and demonstrating the importance of compliance within the organization.
• A clear tone from the top sends a powerful message to employees about the bank’s commitment to compliance, driving a culture of accountability and responsibility.

3. Compliance as a Control Function

• Positioning compliance as a control rather than advisory function, similar to operational risk.
• This shift in perspective enables banks to view compliance as an integral part of their risk management strategy, rather than an afterthought.

Measuring Progress: A Ten-Point Scorecard

To gauge the success of this transformation, we recommend using a ten-point scorecard that assesses factors such as:

• Demonstrated focus on compliance’s role within the organization
• Integrated view of market risks with operational risk
• Clear tone from the top
• Adequate talent and capabilities to tackle key risk areas

By adopting these principles and measuring progress using this scorecard, banks can enjoy a competitive advantage in delivering better service, reducing structural cost, and de-risking their operations.

Three Archetypes of Compliance Organizations

Banks can categorize their compliance organizations into three archetypes:

1. Archetype A: Compliance Reporting to Legal

• This archetype is characterized by compliance reporting directly to the legal department.
• While this approach may be sufficient for small banks, it may not provide the level of oversight and risk management required for larger institutions.

2. Archetype B: Migration of Compliance to Risk Organization

• In this archetype, compliance is migrated to the risk organization, enabling a more integrated approach to risk management.
• This shift can help banks better identify and mitigate potential risks.

3. Archetype C: Elevating Compliance to a Stand-Alone Function

• In this archetype, compliance is elevated to a stand-alone function with clear separation from business operations.
• This approach enables banks to maintain a strong focus on compliance while also ensuring that it is not seen as an obstacle to growth.

Conclusion

Transforming compliance functions in banks requires a proactive and strategic approach. By adopting the principles outlined above and measuring progress using a ten-point scorecard, banks can enjoy a competitive advantage in delivering better service, reducing structural cost, and de-risking their operations.