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Compliance Transformation: A Path to Greater Efficiency and Effectiveness

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In today’s complex regulatory landscape, banks face unprecedented challenges in managing compliance risk. As a result, the compliance function has become increasingly critical to ensuring the integrity of financial institutions. However, many banks struggle to keep pace with evolving regulations, resulting in inefficient processes and inadequate oversight.

Principles for Transforming the Compliance Function

To address these issues, McKinsey’s latest report highlights three key principles for transforming the compliance function:

  • Focus on Risk Management: Compliance should be centered around risk management, rather than mere regulatory compliance.
  • Integrated View of Risks: Banks must adopt an integrated view of market risks with operational risks to ensure a comprehensive understanding of potential threats.
  • Clear Tone from the Top: Senior management and the board must provide a clear tone on the importance of compliance and risk culture.

Measuring Progress

To measure progress against these principles, McKinsey recommends a ten-point scorecard, focusing on areas such as:

  • Demonstrated focus on the role of compliance
  • Integrated view of market risks with operational risks
  • Clear tone from the top and strong risk culture
  • Risk ownership and independent challenge by compliance

Benefits of Compliance Transformation

Banks that successfully implement these changes will reap significant benefits, including:

  • Improved oversight and control
  • Increased efficiency in compliance processes
  • Enhanced competitive advantage through better service delivery and reduced structural costs.

Archetypes for Compliance Organizations

The report also highlights three common archetypes for compliance organizations: legal-led, risk-led, and stand-alone. While each has its pros and cons, the risk-led organization is increasingly gaining popularity among global banks.

Conclusion

A well-designed compliance transformation can bring numerous benefits to financial institutions. By adopting an integrated view of risks, focusing on risk management, and providing clear guidance from the top, banks can ensure effective oversight while reducing costs and improving customer experiences.

Authors: Piotr Kaminski, Director at McKinsey’s New York office, and Kate Robu, Associate Principal at McKinsey’s Chicago office.