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Transforming Compliance Functions in Banks

The compliance function plays a critical role in ensuring that banks manage regulatory risks effectively. However, many banks face challenges in transforming their compliance functions to meet the changing needs of the industry. This article proposes three key principles for transforming the compliance function and provides practical actions for banks to achieve this transformation.

Key Principles

Understanding the Role of Compliance

The first principle emphasizes the need for a clear understanding of the compliance function’s role within the organization, its relationship with other risk functions, and its impact on business operations.

  • Clarify roles and responsibilities: Define the compliance function’s scope and boundaries to avoid confusion with other risk functions.
  • Develop a clear value proposition: Communicate the benefits of effective compliance to stakeholders across the organization.

Integration with Operational Risk

The second principle highlights the importance of integrating compliance into the overall risk management framework, including operational risk, to ensure a comprehensive view of risks across all areas.

  • Develop a single integrated inventory of operational and compliance risks.
  • Standardize risk taxonomies: Use consistent language and frameworks to classify and manage risks.
  • Coordinating risk assessment methodologies and calendars: Ensure that risk assessments are conducted regularly and consistently.

Measuring Progress

The third principle suggests that measuring progress against key outcomes is essential to ensure the effectiveness and efficiency of the transformation process.

Ten-Point Scorecard

To measure progress, a ten-point scorecard can be used:

  • Demonstrated focus on the role of compliance within the organization
  • Integrated view of market risks with operational risk
  • Clear tone from the top and strong risk culture
  • Risk ownership and independent challenge by compliance
  • Compliance operating model with shared horizontal coverage of key issues
  • Comprehensive inventory of laws, rules, and regulations
  • Use of quantitative metrics and qualitative risk markers to measure compliance risk
  • Compliance management-information systems providing an integrated view of risks
  • Evidence of the first line of defense taking action and owning compliance and control issues
  • Adequate talent and capabilities to tackle key risk areas

Organizational Structure and Placement

To achieve transformation, banks may need to consider changes to their organizational structure and placement of the compliance function. This includes migrating to a risk organization (archetype B), where compliance is reported to risk management rather than legal.

Conclusion

Banks that successfully transform their compliance functions will enjoy a distinctive source of competitive advantage in the foreseeable future, being able to deliver better service, reduce structural cost, and significantly de-risk their operations. By following these key principles and practical actions, banks can achieve this transformation and stay ahead in the industry.