Compliance is one of the most important challenges for any banking institution operating in today’s market. Non-compliance has consequences, and in 2020 alone, several banks received major fines amounting to $11.39 billion. U.S. banks Goldman Sachs, Wells Fargo, and JP Morgan Chase paid upwards of $7.50 billion toward this total tally, indicating that even the sector leader isn’t immune. Naturally, any form of negligence within this realm of operation can lead to big losses, especially considering how strict legislation has become in the sector.
The banking sector has always had compliance models in place, but it is becoming increasingly common to find banking entities funnel money into their compliance department. Some assume it is to keep up with the ever-changing compliance environment or to institute more-efficient controls. Whatever the reasoning, one thing is exact, and it is that optimizing protocols to stay compliant is now more of a priority than it used to be.
Going back a few years, the textbook compliance model was simply a stand-in to enforce legal function. In fact, it was maintained mostly in an advisory capacity without much of a focus on risk management or its identification. Such a model may be best suited as another lesson for managers to learn from in today’s environment. With the advent of process automation, wide-spread digitization and globalization, compliance literacy is undoubtedly the need of the hour.
However, even though many banking organizations, including regional and small-scale entities, have some form of compliance framework in place, there are still a number of important questions that go unanswered. These are pertinent to the big picture, i.e., complete compliance, and the answers help establish effective models. For greater insight and to broaden your understanding on banking compliance, read on.
The evolution of banking compliance can be traced through several key phases and developments, driven by changes in regulatory requirements, technological advancements, and shifts in the global financial landscape.
Here’s a broad overview of the evolution of banking compliance:
The evolution of banking compliance is an ongoing process, driven by an ever-changing regulatory landscape, technological advancements, and shifts in the global economy. Banking institutions are continually adapting their compliance measures to meet these evolving challenges and obligations.
The compliance department within an organization plays a critical role in ensuring that the company adheres to all relevant laws, regulations, and industry standards. Its responsibilities include developing and implementing compliance policies and procedures, conducting regular risk assessments, monitoring and enforcing compliance with internal and external regulations, and providing guidance and training to employees. The compliance department is also responsible for investigating and reporting any instances of non-compliance, managing regulatory relationships, and staying updated on changes in laws and regulations that may affect the organization. Ultimately, the compliance department serves as a safeguard to protect the organization’s reputation, integrity, and financial stability while fostering a culture of ethics and responsibility throughout the company.The compliance department typically has a range of responsibilities, including but not limited to:
In a vacuum, the compliance department is usually tasked to:
Besides these, the department may also be tasked with creating a compliance program or policy. This is usually achieved through a joint effort with senior management. The department establishes the general policy while the management establishes the culture of compliance across the enterprise. Some of the best ways this is achieved is by:
The third point is a significant responsibility as it ties into efficient risk management. With a standard process for routine operations like doing inventory, addressing risks, managing problems and offering resolution, the organization becomes a lot more efficient as it acts only on the basis of bank policy. In addition to all this, the compliance department has a responsibility to ensure that customers interact with the bank as per regulation. Any acts committed outside the purview of regulation or may cause the bank to become non-compliant must follow a clearly defined set of rules.
For instance, as per the Office of Foreign Assets Control, banks in the U.S aren’t allowed to process any transactions from individuals and countries that the U.S. has previously sanctioned. Any attempts made must be blocked and reported, failing which, the bank will face serious consequences. All of these responsibilities are handled by a compliance department, and it is clear that having the right tools in place can make all the difference when assessing the true efficacy of any compliance program.
In an industry where regulations shift regularly, it can be hard to adapt on the fly. But it must happen as being non-compliant, in any sense, is detrimental. Thankfully, to operate within regulation, there are reliable practices you can enforce.
Effective compliance not only safeguards an institution’s reputation but also ensures financial stability, customer trust, and legal adherence. So, what strategies can banks employ to stay compliant effectively? Let’s delve into this vital subject.
The foundation of effective compliance begins with the development of comprehensive and up-to-date policies and procedures. These documents should clearly outline the organization’s commitment to adherence, define responsibilities, and provide a roadmap for addressing regulatory requirements.
An organizational culture that prioritizes compliance is key. This starts with leadership setting the tone by championing ethical behavior, risk management, and adherence to regulations. Regular training and education programs for all employees help instill a culture of compliance at every level.
The use of technology is a game-changer in compliance. Banks can employ compliance management systems and software to streamline processes like Know Your Customer (KYC) and transaction monitoring. Automation reduces human error, enhances efficiency, and ensures consistency in compliance activities.
Regulations are dynamic, with frequent updates. Staying informed about changes in laws and regulations is essential. Banking organizations should maintain active channels of communication with regulatory bodies, subscribe to updates, and adapt swiftly to new requirements.
Thorough risk assessments are critical to identifying potential compliance vulnerabilities. These assessments allow banks to allocate resources effectively and prioritize areas that need immediate attention. Risk assessments should be conducted periodically to stay proactive.
Implementing ongoing monitoring and conducting regular internal audits are integral parts of effective compliance. These measures help identify and rectify issues before they become major problems. External audits by third-party experts can also provide valuable insights.
In an era of data breaches and privacy concerns, safeguarding customer data is not only good practice but also a legal obligation. Banks must have stringent data protection measures and cybersecurity protocols in place to protect sensitive customer information.
Sustainable finance is an emerging area of compliance. Banks should explore and implement eco-friendly practices and adhere to regulations related to environmental, social, and governance (ESG) standards.
A strong code of conduct that defines ethical behavior and fosters a culture of integrity is a must. Banks should actively discourage unethical practices and establish channels for reporting violations confidentially.
Engaging constructively with regulatory authorities is essential. A positive working relationship with regulators can facilitate compliance efforts, making it easier to seek clarification and guidance when needed.
Inherent risk is defined as the risk that exists without considering the external controls. However, residual risks is the risk that remains even after the treatment or in presence of controls and to deal with these effectively, consider these four options:
Because compliance regulations are always changing, it is unwise to respond by creating new protocols or databases to stay compliant. Instead, consider adding your existing processes and financial dashboards by making workflow improvements. These should integrate seamlessly and eliminate the need to divert capital to keep up with regulatory reform. Another way to go about it is to leverage the power of technology and automation. This includes tools that can:
These tools greatly improve operational efficiency while remaining completely compliant with the added bonus of enhanced customer service.
Managing compliance costs is a critical concern for banks, as regulatory requirements are an integral part of the financial industry. To balance the need for compliance with cost-efficiency, banks can implement several strategies:
Balancing compliance with cost efficiency is an ongoing challenge for banks. By implementing these strategies and staying vigilant in monitoring regulatory changes, banks can reduce compliance costs while ensuring adherence to necessary regulations.
Compliance is one of the most critical challenges for any banking institution operating in today’s market. Non-compliance has consequences, and in 2020 alone, several banks received significant fines amounting to $11.39 billion. U.S. banks Goldman Sachs, Wells Fargo, and JP Morgan Chase paid upwards of $7.50 billion toward this total tally, indicating that even the sector leader isn’t immune. Naturally, any form of negligence within this realm of operation can lead to big losses, especially considering how strict legislation has become in the sector.
Explore what makes VComply a consistent G2 high performer in Compliance Management. Request your demo today and transform your approach.
Discover the immediate impact VComply can bring to your compliance program. Move beyond the limits of spreadsheets with a system of record designed for complete compliance management.