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Large Fines: The Need for a Comprehensive Compliance Framework
The era of large fines has arrived, and financial institutions are under increasing pressure to demonstrate robust compliance frameworks. In response, banks must integrate their operational-risk view with their management approach to ensure a comprehensive understanding of their risk portfolio.
Integrating Operational and Compliance Risks Yields Tangible Benefits
By integrating operational and compliance risks, banks can gain a single, holistic view of their risk landscape, reducing the burden on both business and control functions. This integrated approach also enables risk-based allocation of resources and management actions, facilitating more effective remediation and investment in cross-cutting controls.
Practical Actions to Integrate Compliance into Risk-Management Governance
To achieve this integration, banks can take several practical steps:
- Develop a single inventory of operational and compliance risks
- Establish standardized taxonomies for risk, process, product, and control management
- Coordinate risk assessment, remediation, and reporting methodologies and calendars
- Define clear roles and responsibilities between risk and control functions
- Develop integrated training and communication programs
- Establish clear governance processes and structures
- Consistently involve senior compliance stakeholders in determining action plans and priorities
Changes to Organizational Structure
Some banks are reorganizing their compliance function, moving it from reporting to legal to a standalone function. This new structure reinforces the view of compliance as a risk similar to operational risk.
Measuring Progress: A 10-Point Scorecard
To measure progress on this transformation journey, banks can apply a 10-point scorecard that assesses areas such as:
- Focus on the role of compliance within the organization
- Integrated view of market and operational risks
- Clear tone from the top and strong risk culture
- Risk ownership and independent challenge by compliance
- Compliance operating model with shared horizontal coverage
A Low Score May Require Significant Transformation
Assuming one point for each requirement, a bank with a low score may require significant transformation. Rigorous measurement of progress against desired outcomes can help maximize the impact of this transformation.
Conclusion
The regulatory environment is evolving rapidly, and banks that successfully transform their compliance function will enjoy a distinctive source of competitive advantage. By implementing targeted changes to its operating model and processes, the compliance function can deliver better oversight while increasing efficiency, reducing structural costs, and de-risking operations.