Transforming Compliance in Banks: A Proactive Approach

The Evolving Role of Compliance

In today’s banking industry, compliance is no longer just a necessary evil. It has become a critical component of a bank’s risk management strategy. With increasing regulatory requirements and growing concerns about risk management, banks must rethink their approach to compliance.

Traditional Approaches are No Longer Sufficient

The traditional view of compliance as a separate function that focuses on ticking boxes and meeting minimum regulatory requirements is no longer sufficient. In today’s complex and interconnected world, banks need a more integrated and proactive approach to compliance that aligns with their overall risk management strategy.

Three Principles for Transforming Compliance

To transform the compliance function, we propose three key principles:

Integrate Compliance with Other Risk Functions

Integrate compliance with other risk functions, such as operational risk, to create a comprehensive view of risk.
This will enable banks to identify and manage risks more effectively and make more informed decisions.

Establish Clear Roles and Responsibilities

Establish clear roles and responsibilities between risk and control functions to ensure effective governance and oversight.
This will help to prevent duplication of effort, reduce conflict, and improve accountability.

Implement a Risk-Based Compliance Approach

Implement a risk-based compliance approach that focuses on high-risk areas and uses quantitative metrics to measure compliance risk.
This will enable banks to prioritize their efforts and resources on the most critical risks and demonstrate a more proactive approach to compliance.

Measuring Progress: A Ten-Point Scorecard

To assess progress in transforming the compliance function, we propose a ten-point scorecard:

Demonstrate Focus on Compliance

Demonstrated focus on the role of compliance and its stature within the organization
This will help to ensure that compliance is taken seriously and prioritized by senior management.

Integrated View of Risk

Integrated view of market risks with operational risk
This will enable banks to identify and manage risks more effectively and make more informed decisions.

Strong Risk Culture

Clear tone from the top and strong risk culture
This will help to create a positive and supportive environment where employees feel encouraged to speak up about compliance concerns.

Risk Ownership and Independent Challenge

Risk ownership and independent challenge by compliance
This will enable banks to identify and manage risks more effectively and make more informed decisions.

Compliance Operating Model

Compliance operating model with shared horizontal coverage of key issues
This will help to ensure that compliance is integrated into the bank’s risk management strategy and that all areas of the business are covered.

Inventory of Laws, Rules, and Regulations

Comprehensive inventory of all laws, rules, and regulations in place
This will enable banks to stay up-to-date with changing regulatory requirements and ensure compliance with all relevant laws and regulations.

Use of Quantitative Metrics

Use of quantitative metrics and specific qualitative risk markers to measure compliance risk
This will help to prioritize efforts and resources on the most critical risks and demonstrate a more proactive approach to compliance.

Compliance Management-Information Systems

Compliance management-information systems providing an integrated view of risks
This will enable banks to identify and manage risks more effectively and make more informed decisions.

First Line of Defense Taking Action

Evidence of the first line of defense taking action and owning compliance and control issues
This will help to ensure that compliance is integrated into the bank’s risk management strategy and that all areas of the business are covered.

Adequate Talent and Capabilities

Adequate talent and capabilities to tackle key risk areas
This will enable banks to identify and manage risks more effectively and make more informed decisions.

Conclusion

Banks that successfully transform their compliance function will enjoy a competitive advantage in delivering better service, reducing structural cost, and significantly de-risking their operations. By adopting a proactive approach to compliance, integrating it with other risk functions, establishing clear roles and responsibilities, and implementing a risk-based compliance approach, banks can ensure that they are well-positioned to meet the challenges of an increasingly complex regulatory environment.