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Compliance 101 for Banks

VComply Editorial Team
Dec 2, 2020
15 minutes

The purpose of compliance in banking is to detect and prevent any abnormality, criminality, and noncompliance in the bank’s functioning. Banks must operate with integrity and follow regulations, internal policies, and applicable laws.

Every bank should have a compliance division. The division will make sure that the bank cooperates with all the laws and helps in upholding its reputation of the bank. The division should be given the duty to oversee the bank’s actions, recognize and examine the areas of risk, evaluate the bank’s plans and strategies’ suitability, and provide the remedy to risks.

The compliance functions should ensure that the bank’s transactions are transparent and in conformance with the policies. They should have checks in place to prevent any non-compliant acts, especially legal issues, and identify compliance risks and ways to mitigate them.

Banking Laws and Regulations

The United States has a dual banking structure. Dual banking structure means that the United States banks can be regulated by one of the 50 states or by the federal government. Every bank must have a federal manager. The United States has a complex administrative system that has several federal administrative offices.

Here are two bank administrative offices:

The Board of Governors of the Federal Reserve System: This is the main banking structure of the United States and manages the U.S. pecuniary plan.

The Federal Deposit Insurance Corporation: This is the main administrator for those state-chartered banks who are not apart of the Federal Reserve System.

Here are some of the banking acts that were passed to manage regulatory aspects:

  • The National Bank Act 1863
  • The Federal Reserve Act 1914
  • The Banking Act 1933
  • The Bank Holding Company Act 1956
  • The Bank Secrecy Act 1970
  • The International Banking Act 1978

Compliance Function in Banks 

The board of directors of the bank is in charge of supervising the administration of compliance risk for the bank. When the board decides on a compliance plan, they must include a compliance function in the form of an official long-lasting and operative contract.

Every year the board of directors must check if the bank is supervising compliance risk diligently. The bank’s compliance plan will not be operative if the board of directors does not encourage the principles of nobility and uprightness all over the company.

The senior management of the bank is in charge of administering the compliance risk of the bank. The management needs to set up and pass on a compliance plan, ensure it is obeyed, and report to the board of directors on the administration of the bank’s compliance risk. The senior management is also in charge of setting up a lasting and operative compliance function in the bank as a section of the bank’s compliance plan.

Challenges of Regulatory Compliance Management in Banks 

The compliance attempts of the bank are concentrated on an established governance, risk, and compliance (G.R.C.)function. Because of that, banks haven’t been able to construct modern capacities necessary for fighting back arising compliance risks. 

The administration of compliance is not totally connected to the bank’s policy-making procedure. Banks use a compliance sign-off method rather than using a preventive defense approach. G.R.C. programs are controlled in a clumsy way, which leads to irregular executions. 

Compliance I.T. execution attempts focus only on the primary compliance instructions and don’t provide any focus towards the longevity features. This gives rise to unusual ‘quick fixes’ that enlarge the later complexity and decrease flexibility.

Best Practices Of Banking Compliance

Compliance functions make sure that the banks work with honesty and follow the rules and regulations. A powerful compliance function reduces risks that are connected to wrongdoings, money manipulation, and other risks. 

Here are some of the best practices for banking compliance:

1. Up-to-date technology

Upgrading banking technology can help not only the company but also the consumers. Procedure advancements can supply consumers with superior financial protections at the user level. The technology will have to develop if the consumer base becomes bigger.

2. Managing compliance

Banks must try and automate compliance processes, to ensure they don’t fall behind on their regulatory responsibilities. The compliance function in the bank is responsible for ensuring all employees are aware of their roles in maintaining compliance. There are also several tools such as VComply that provide banks with risk-based alerts, so they can deal with concerns before they become an issue.

3. Get all departments on the same page

When physical actions have been replaced with automation, then the banks should take a long term view and tackle exterior risks. It’s essential for each member in a bank to be aware of all the rules and how they must be dealt with.

Banking Compliance Strategic Plan

There are eight necessary components for an efficient compliance structure in banking:

1. Administrative Level Management

The Board must make sure that the bank has a Compliance Plan. The Senior Management should form and manage the Compliance Program and the Chief Compliance Officer (CCO) must be the Senior Officer of Compliance.

2. Compliance Framework

The compliance framework should be developed in three important zones: governance, committed capital, and imposition of schemes and strategies.

3. Schemes and Strategies

The bank must have up-to-date schemes and strategies which comply with the rules and regulations.

4. Observation and Evaluation

The compliance plan should be observed and evaluated all the time.

5. Management Information Systems and Accountability

Banks should account for everything to keep a tab on: crucial matters and administration problems, execution, and reliable deployment and exchange of data.

6. Coaching

A good compliance structure is only possible if the entire personnel is well-educated on how to sustain a strong compliance plan.

7. Compliance Analysis

An individualistic analysis must be done to ensure that the compliance-risk reduction instruments are working as expected.

8. Working Together with Supervisors

Banks should work together with the supervisors by providing them with regulatory documents and responses on draft plans. 

Banking Regulatory Compliance Checklist

Here’s a quick checklist for banks to create their own compliance and regulatory framework: 

1. Assign Responsibility of the Compliance Structure

Every division should take responsibility for the compliance structure and should be held responsible if something goes wrong. The division that produces the risk should deal with that risk as well.

2. Recognize and Deal with Risks

Even after a bank recognizes and provides controls to risks, there might be additional risks to consider. Banks can deal with these risks by avoiding them, accepting them, transferring them or mitigating them.

3. Use Integrated Risk Management

Integrated risk management helps banks set up schemes and strategies. These are backed by risk-aware ways to better policy-making and work.

4. Oversee Development 

Schemes and strategies should not be deployed on a set-it-and-forget-it basis. Banks should regularly conduct audits and reviews to see if their compliance strategies are bringing the results expected.

Wrapping Up

As with any other business, banks have a set of rules and regulations to abide by too. The failure to keep up with these can result in heavy penalties and increased risk for banks. 

We hope this article provides you with enough information to set up your banking compliance policy. 

If you’re looking to manage banking compliance in a simple and efficient way, we’d recommend you checkout GRC software by VComply.

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