Compliance Risk Management
Compliance risk can be said to be a potential for material losses and exposures that arises from non-compliance. An organization’s failure to act according to standards of industry, laws or its own policies can lead to legal penalties. Regulatory compliance is the most compelling risk because the statutes enacting the requirements generally bring hefty fines or can even lead to imprisonment for non-compliance. The industry standards are considered as the next tier of compliance risk. With best-prescribed practices, these standards are not laws similar to regulations.
Compliance with the internal policies is said to be the third tier of compliance risk. Regulations and standards incorporate the establishment of written documents that govern all corporate activities. However, the organizations to ensure that the compliance requirements are met must check that the workforce members follow the actions described in written policies.
Compliance risk is also known as integrity risk, for ensuring that organizations operate fairly and ethically many compliance regulations are enacted. For that purpose, compliance risk is also referred to as integrity risk.
Compliance risk management is said to be a part of the collective governance, risk management and compliance discipline. Non-compliance can lead to the loss of reputation of the organization and business opportunities.
What is Compliance Risk?
Compliance has been explained as the outcome for adhering to a rule. Compliance risk includes the legal and financial penalties for failing to act as per the internal and external regulations and legislature. To comply with the laws and regulations, the following points need to be considered:
- Regulation or Act
- Penalty for non-compliance
- Obligation and invested Parties
- Risk rating
- Compliance Status
The risks differ by industry and business type. It is nearly impossible to cover every kind of risk to be faced. However, taking a look at some of the examples, one can understand what types of business practices must be considered to avoid compliance risk.
The following mentioned list can be taken as an example for financial institutions:
- Failure in conducting due diligence on new customers.
- Businesses need to perform steps for ensuring that the customer is genuine by taking identity proof.
- Failure in reporting suspicious transactions.
- Out of the everyday transactions, it must be reported to the Government's treasury and fraud team. Suspicious activity may be informed by large amounts of money moving in and out of the account out of the blue.
Essential Elements for a Successful Compliance Risk Management Programme
A successful compliance-risk management program that is essential for sound organization contains the following elements:
Active Board and Senior Management Oversight
A useful board and a senior management oversight is the primary basis of an effective compliance risk management process.
Effective policies and procedures
Compliance risk management policies and the process must be clearly defined and also must be consistent with the nature and complexity of an organization.
Compliance risk analysis and comprehensive controls
Organizations must use appropriate tools in the compliance risk analysis like self-assessment, process flows, risk maps, key indicators, and audit reports. These enable an effective system of internal controls.
Effective compliance monitoring and reporting
An organization needs to ensure that they have adequate management information systems that provide the management with proper, timely reports on compliance such as training, effective complaint system and certifications.
Independent testing must be conducted to verify that compliance –risk mitigation activities are in place and functioning as intended throughout the organization. Enterslice offers the most advanced and comprehensive solutions of the industry to help organizations adopt a customized, risk-based approach towards compliance management. We deliver a complete solution for managing the entire compliance lifecycle including compliance planning, risk assessment, control management, compliance reporting, and planning.
Key Components of the Compliance Risk Management Program
There are five critical components for a successful compliance risk management program:
Put a system in place
The framework related to your risk management program must provide a proper method of communicating and documenting evaluations regarding:
- The quantity of risk, it can be low, moderate, or high, including the methodology in assigning the risk ratings.
- The quality of concerning how well the broad and management identifies, measures, controls and monitors risk.
- An approximate synopsis of the institution’s risk.
- The direction of the risk like increasing, decreasing or unchanged.
Define tolerance for risk
A broad risk assessment must match your union’s size product offerings, service areas and also an appetite for risk. To properly understand the tolerance risk for compliance risk, examine the scope and complexity of its business activities, market service areas, and also delivery channels for products and services.
Identify risk factors
As the risk increases, the compliance risk management program must ensure sufficient controls are put in place to mitigate the inherent risk in the activities. The following factors must be considered:
- Strategic and business growth, along with complexity and trends.
- Product features volume, characteristics, stability, and third-party involvement.
- Legal and regulatory factors that include non-conformance consequences.
- Environmental factors like market conditions. Competition and demographics.
The risk assessment must incorporate and also calculate inherent as well as residual risk. Inherent risk is the level of risk before applying the controls, while the residual risk is the level of risk that checks on the post-implementation controls. They must encompass the exposure, quantity or likelihood and the quality risk to the union. An organization's broad compliance risk management must identify, prioritize, and assign accountability of managing potential legal and compliance threats. These threats can lead to fines, penalties, reputational damage or prohibition of operating in or expanding to several markets.
The regulatory landscape is constantly shifting, both the rules and interpretations of the existing rules. The laws expect the institutions to assess risk for:
- Overall Consumer Compliance
- Fair lending
- Unfair, deceptive and abusive acts and practices
- Vendor management
These specific areas pose the most noteworthy compliance risk for institutions of all sizes. Violations caused in these areas pose significant harm to the consumers. It also causes damage to legal, financial, operational, and reputational injury to the institution. Every union must incorporate these areas in its product lifecycle risk assessment, not just at the time of product development but throughout the complete cycle.
The risk assessment should be adjusted as market, regulations, offerings, and management's appetite for risk changes. Risk needs to be assessed from all the perspectives, whether it is a current and perspective view of the union's risk profile.
By way of an effective compliance risk management, a union can increase its efficiency and financial performance by minimizing and also mitigating errors while focusing on exact operational decision making.
Benefits of Getting Compliance Risk Management Solution from Enterslice
The benefits of getting compliance risk management solution from Enterslice are as follows:
- Tailor compliance for dealing with the most significant risks.
- Proactively mitigate the risks and compliance issues.
- Higher visibility with regard to compliance profile.
- Best practices that are related to content library accessible within its application.
- Improve efficiency and lower its costs.
- Ensure systematic and consistent compliance across the enterprise.
- Eliminate all the compliance errors and inconsistencies.
- Preparing informed strategic decisions and also minimize business performance.
Types of Risk in Compliance Risk Management
The common types of compliance risk in compliance risk management are aspects of the operation that affects most of the businesses. They are as follows:
Regulatory and Political Uncertainty
The political parties have got the power to influence regulation and put into place the laws that can change the way of conducting business. When there is an uncertain environment, it means that the types of rules that can take effect are unknown that can cause stress on business operations.
With the increasing use of data storage as well as the expansion of technology, the rules surrounding privacy and protection are growing. The speed with regard to technology is moving rapidly, and these changes must be put into place to protect consumer information.
Conflicts of Interest
This concern is basically related to the financial industry as the investment brokers must provide a clear picture with regard to consumer’s money. The investors in their best interests must give insider information as to where they are placing their customer's money so that it may not cause a conflict of interest.
The institutional managers should remain aware of the happenings in the overall market to measure risk, especially when it comes to safe alternatives like electronically traded funds (ETFs).
Compliance risk does not deal with the outside forces, but it also requires that the employees must remain aware and in line with codes of conduct.
Businesses must be responsible such that the employees do not engage in or are not harmed by bribery or fraud.
The product quality and services should be created and offered according to the specific standards. Its failure to comply could result in penalties, product seizure, or business shut-down.
How to Assess Risk in Compliance Risk Management?
The risks can be assessed by making an analysis and also approaching one step further by assessing your level of compliance risk. This is possible by the use of resources and defining roles such as:
Collect Cross-Functional Input
Encouraging the teams to create and enhance their understanding of the risks that their department faces.
The use of data and software analytics tools for managing, assessing, and protection against risks. These tools can ensure that the consumer data and the information provided are accurate. It will also flag suspicious activities. The data tools can be used for avoiding any type of compliance risks by providing reports to the essential organizations of preventing any kind of human error that can further create issues.
Ensuring that each employee understands their role as well as their responsibilities by protecting against the compliance risk.
In case the process is not working, as decided, it will be challenging to implement the improvement process to enhance functioning.
How to Implement Compliance Risk Based on Your Current Situation?
Many companies choose not to manage compliance risk and instead consider fines that are a part of the business cost, while others take advantage of the weak points. Regardless of all the risks, some of the ways to manage risks have been explained below:
Little to No Compliance
It is better to establish a compliance risk team that tries to define assess and potentially assign the resources based on the budget to manage such risks.
Ageing Compliance Process
This approach uses the growth as well as the changes in technology and helps in adapting the existing compliance methods by use of specific tools. It can be done by way of investing in one well-rounded system or different odds and also ends to manage the various steps of the process.
Active Compliance Process
Some compliance processes require an immense amount of documents to be reviewed. This difficult task can be avoided by using artificial intelligence to help in organizing paperwork that is related to issues of compliance.
You can also use digital communication monitoring systems to look at the text, social media patterns, emails and more to help manage employee communication to protect against the factors of compliance risk.