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With the constantly increasing chaos and uncertainty, banking compliance, and government strategy have been going through a continuous overhaul. Regulatory bodies are twisting arms and introducing new compliance requirements at frequent intervals. Banking institutions are racing to gear up to face the new age challenges and create modern compliance and governance strategies for 2023 to eliminate risk and invest in cross-functional controls.
Since 2009, regulatory fees have increased dramatically relative to banks’ earnings. In addition, the scope of the regulatory approach and scrutiny are continuously expanding. Non-compliance can result in heavy penalties and in 2020 alone, several banks were hit with substantial fines of $11.39 billion. While most regional and small-scale entities and major banking enterprises have some form of compliance framework in place, there are still a number of questions related to banking compliance that go unanswered.
Banks such as Goldman Sachs, Wells Fargo, and JP Morgan Chase paid more than $7.5 billion for non-compliance-related fines which suggests that even top players are constantly dwelling with risks and compliance factors. Regulators such as the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors (FRB), the Consumer Financial Protection Bureau (CFPB) the Committee on Banking Supervision of Basel, and the Office of the Comptrollers (OCC) are constantly screening banks against compliance risk management policies. In several cases, they’ve initiated compliance actions for an underlying weakness when it becomes an uncertain condition, practice, or violation of regulations. Even a minor non-compliance issue can cause havoc and put a dent in the banking organization’s reputation. Banks need a more structural and extensive approach to risk and compliance management and governance which allows them to proactively and efficiently create robust and sustainable compliance and governance frameworks.
The traditional banking compliance model was developed at a different time and for a different purpose, primarily as a compliance arm for the legal department. Compliance organizations used to publish internal bank guidelines and regulations largely in an advisory capacity with a narrow focus. It was mostly attributed to the identification and management of real risks. However, the traditional approach provided a limited understanding of the underlying business operations and risks, as well as very little insight into the regulatory requirements from the business perspective. Banks back in the day played safe and tried to constrain risk management within the parameters of the 20th-century playbook. Being so accustomed to the siloed approach and archaic processes, many banks even now are still struggling with fundamental front-line control environment issues as compliance activities are typically isolated. Also, there is no clear connection to the broader framework of risk management, governance, and processes.
Banking regulations in the United States are highly fragmented compared to other countries, which typically have only one banking regulator. Banking and financial services in the US are controlled at the federal and state levels. Depending on the charter and structure, a bank would be subjected to numerous regulatory bodies and regulations. Different countries around the world have their own rules, regulations, and reforms. This increases the challenge for global banks and financial institutions. A BCG report shows more than a third of all banks report to 10 or more regulators and more than 75% of all banks report to four or more regulators.
Source The costs of compliance and risk mitigation have become the most challenging factor over the past eight years. Operating compliance costs for retail and commercial banks have increased by more than 60% compared to pre-financial crisis spending. Regulators and shareholders expect banks not only to meet new regulatory requirements but also to ensure their effectiveness. That mounting cost pressure associated with compliance, coupled with low-interest rates and flat top-line growth, hasn’t resulted in significant growth for banks. Compliance management is no longer just the domain of the Chief Compliance Officer or the Chief Revenue Officer. Other CXO roles such as CISO, chief conduct officer, CFO and CDO, and executives play a critical role in the planning and compliance implementation. Many CXOs across institutions are looking for ways to dramatically improve regulatory productivity to avoid penalties.
Additional Read: Role of compliance officer and chief risk officer Focusing on traditional cost-cutting options such as process reengineering, lean, location-based strategies, and automation has brought some relief, but now many CXOs are looking to new technologies for transformation and getting an edge on risk and compliance management. As compliance has evolved, three main organizational models have emerged.
With new regulations knocking on the doors of banking institutions at regular intervals, it is crucial to ensure continuous compliance to keep things under control. Many regulatory compliance practices in banking are new and evolving, with stringent implementation deadlines putting further pressure on banks. Banking institutions face the challenge of keeping up with the proliferation of regulations regarding risk and compliance management. Banks must have a strong infrastructure and highly skilled staff for compliance management to ensure the new standards. The existing risk management framework will help to manage risks of different types and levels. A streamlined risk management process would enable the bank to identify, monitor, and control compliance risks proactively. Routine risk management solutions and ad hoc practices need to be replaced with a robust risk management system. The merging of different risk factors, the reference to different compliance standards, and the integration of different audit processes are only possible through an integrated company-wide architecture. In addition to facilitating regulatory compliance, it tracks potential violations to avoid legal penalties and business opportunity restrictions. Connected banking includes end-to-end process automation to mitigate risk. Efficient digital integration with partners, customers, regulators, and government agencies facilitates proactive risk and compliance management. Gartner cautions that performing typical compliance activities individually is an unsustainable approach. Compliance programs must function as integrated steps in banking operations rather than being a separate and siloed process.
Traditionally, risk management and compliance management have been treated as separate disciplines. Risk managers dealt with risk identification and mitigation, while compliance managers dealt with compliance verification. However, this approach is no longer cost-effective or efficient. The need of the hour is a holistic strategy that is integrated with risk management and business goals. Risk-based compliance management enables compliance auditors to first identify key compliance risks and then propose controls to mitigate those risks. So the focus is only on the risks and compliance regulations that are crucial for banking institutions. The compliance and risk management lifecycle is critical to a profitable and efficient banking system and it consists of:
VComply’s regulatory compliance management software for banks automates the banking compliance process so that they can keep up with the regulatory changes.
As more organizations in the banking and financial services industry rely on technology to complete transactions, GRC is more important than ever. GRC in banking and financial services is about:
Source Although in the banking industry, GRC is designed to mitigate risk to stakeholder data, the GRC requirements may vary based on geographic location and banking and financial ecosystem. GRC is also vital to keep banks and financial services organizations fully operational to support the day-to-day needs of businesses and individuals. For example, the United States government classifies financial systems as critical infrastructure. If left unaddressed, the risks to the banking industry could disrupt the operations of many institutions and affect the livelihoods of US citizens. The importance of a GRC platform for the banking industry:
When it comes to sensitive banking and financial services transactions, earning customer trust is crucial to sustaining your business. A GRC platform like VComply can help you demonstrate your commitment to keeping transactions fair and secure to meet the needs of your customers.
In most cases, banks need to transform the role of their compliance officers from mere consultation to laying more emphasis on management and active risk controls. The role crosses beyond the routine advice on legal rules, regulations, and laws and becomes an active co-owner of the risks to ensure independent oversight of the control framework. In light of this development, the responsibilities of the compliance function extend to:
Implementing a risk culture has a special place in the compliance playbook for a banking institution. The elements of a strong risk culture are relatively clear and include:
Using tools like the structured risk culture surveys a can provide a deeper understanding of the nuances of risk culture across the organization, and your results can be benchmarked against similar institutions to uncover critical gaps. It provides a detailed view regarding the organization’s risk appetite, management’s point of view, decision making process, risk governance and control strategies along with risk management accountability. Risk culture can be actively shaped, monitored, and maintained by committed leaders, management, and the stakeholders of the organizations and helps organization and the respective stakeholders to align and integrate risk culture with the values and purpose.
The concept of governance, risk, and compliance management (GRC) is not new. Ever since banking regulations were introduced, banks have had to comply with them in order to continue doing business. Over time, GRC management has grown to encompass multiple aspects of a financial institution’s business, including compliance, risk, business continuity, audit, 3rd party risk management, incident management, operational risk, and many more. Typically all these components are managed separately on different business sources and applications. To obtain information on multiple areas of compliance practices, financial institutions often use a mix of technologies: a combination of spreadsheets, email, documents, and shared drives and files. While this approach is quite handy, it’s imperative to look at compliance and risk management from a holistic perspective. Otherwise, risks can arise in the gaps between these business silos. A centralized compliance management platform would be the best way to navigate the situation.
One of the traditional industry practices has been to identify high-risk processes and then to identify all controls that relate to each of them. However, this approach does not provide true and complete transparency regarding material risks and often becomes a purely mechanical exercise. First, the lack of an objective definition and a clear recognition of a high-risk process is quite subjective and at the discretion of respective business units. This can result in the omission of risks that are critical from a compliance risk perspective but are considered less important from a business perspective. The process may seem like an insignificant part of the overall business portfolio, but can be a critical area for regulatory compliance. This approach also suffers from inconsistencies. The new focus on residual risks and critical process breakpoints ensures that no significant risk is left unaddressed and forms the basis for monitoring activities and efficient and truly risk-based remediation. Address these challenges by directly linking regulatory requirements to processes and controls. There are numerous internal controls associated with each regulatory requirement.
Even with a holistic level view, you’ll need data to support conclusions. If you’re not leveraging data effectively, it’s hard to interpret risks and this could result in missed opportunities. Having multiple documents and technologies in place creates bottlenecks when it comes to analyzing data, but having such data is critical to measure the effectiveness and efficacy of GRC frameworks. There are two ways to ensure your institution is fully utilizing its data:
A GRC platform for banking compliance management helps build strong data governance oversight that is backed with credible real-time insights.
The benefits of an integrated risk management framework cannot be overstated. They include:
The following best practices can help a bank integrate regulatory matters and risk management processes:
Fostering cross-department collaboration can be tricky in any organization. But this becomes especially important for financial institutions when it comes to governance, risk, and compliance. Institutions that prioritize the breaking down of organizational silos will see the benefits reflected in a better risk management and compliance program. Greater internal collaboration significantly improves:
When a financial institution develops a new policy, the impact on IT, training, HR, and legal must be taken into consideration. All these areas will look at the document and they will have their respective suggestions and amends. How does an institution collate the feedback, manage it, and then disperse it again? To cut down on data redundancy, an institution should invest in a GRC technology that comes with a collaboration component. VComply’s GRC platform makes the process easier to manage rather than taking a manual approach and drives efficiency, cuts time, boosts collaboration, and provides a central repository to archive policy versions.
The best defense against breaches in your governance, risk, and compliance program is to properly map each risk to control. Risk is easy to recognize, but associating the right controls with it is another ball game altogether. Here is an example of how to map risk with controls: Risk: People (like tellers, loan officers, and underwriters) have access to sensitive information like account details and social security numbers. Checks:
Ideally, financial and banking institutions would conduct this exercise for every risk they identify in their business.
Technology is the best way to implement and simplify the best practices outlined above. In addition to facilitating day-to-day GRC management, technology can drive innovation in two other areas of institutional compliance: third-party risk management and process automation. Regarding third-party risk management, banking institutions must gather evidence to demonstrate the proper management of the partner or provider. Technology systems can be automatically configured to request specific documents that require yearly maintenance, such as SOC1 (Service Organization Controls Report), contract review, on-site verification of the supplier, complaint management, and supplier risk assessment. Learn more about SOC2 assessment. Once an issue has been appropriately mapped and assigned to a control that is successively tested, then check for residual risks.
Artificial Intelligence (AI) is becoming increasingly important for regulatory compliance as it addresses common operational challenges and systematic problems that regulators face every day. There are myriad potential benefits from technological advances in AI for bank compliance management:
Naturally, implementing new technology is challenging and highly dependent on the nature of the business. But with the right steps, you can get the best possible outcome from the implemented technology. Here are some recommendations that will help you get the most out of your GRC platform, improve risk management and maximize the return on your investment.
A GRC platform can help you streamline compliance processes and establish strong governance, security, risk, and compliance management framework across the banking enterprise. VComply is a no-code cloud-based GRC platform that allows banks and financial institutions to create, manage, track, and monitor GRC programs. It allows you to streamline GRC processes with a focus on collaboration and smooth user experience. With VComply, you can automate alerting, monitoring and reporting, and analyze compliance gaps to create corrective action plans across devices. VComply for banking compliance management The VComply suite is primed to meet the needs of next-generation financial and banking institutions with the following regulatory compliance management features. VComply’s compliance solution for banks helps them stay current and compliant by implementing measures, processes and policies. It helps banking specific business areas to assess their risks, implement internal controls and eliminate inefficiencies.
Also, VComply features have been designed for smooth and streamlined banking operations. Navigation It is crucial to give potential customers access to the desired information in the simplest possible way. VComply keeps the navigation and user experience simple, reducing friction and making the experience enjoyable. For example, it’s quite easy to create or monitor a control that links to a SOC2 or GDPR framework. Security GRC platforms store critical information and any data breach can threaten the organization. VComply comes with a strong security system, role-based access rights, and data encryption to safeguard your confidential and sensitive information. Scalability Legacy GRC tools and spreadsheet-based compliance management are not equipped or efficient enough to keep up with the pace of user requirements or the rising complexity of modern banking and financial institutions. This is where VComply helps simplify compliance and governance for banking and financial service organizations.
Banks are constantly under pressure with regulatory bodies and huge fines and penalties often levied on them. A systematic and methodical approach backed by technology can be the savior here for banks and can save the banking institutions from hefty fines and lawsuits for non-compliance with regulations and compliance policies. Organizations need to develop and implement the right approach to keep the risk and compliance factors under control. A GRC-focused approach would be the best weapon in the arsenal of banks for effective and integrated risk and compliance management as it allows for compliance, risk management, and assessment activities to be systematically coordinated across multiple departments and stakeholders of the organization, assisting in breaking silos and bottlenecks, and making more informed business decisions.
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