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How Financial Sector Leaders Can Ensure Compliance

How Financial Sector Leaders Can Ensure Compliance

by Dustin Abad on and last update on October 05, 2020

 Financial sector leaders went into overdrive with risk management because of the 2008 financial crisis. Bank management teams and shareholders devoted significant funds and efforts to board risk oversight and risk management capabilities to ward off the resulting intensification of compliance requirements and regulations.

It’s been over ten years since that crisis. What is the current role of leaders in the financial sector in ensuring compliance?

Compliance Regulation Fallout after 2008

Financial institutions and banks have significantly improved their resilience and risk management activities following the 2008 crisis. However, the increased focus on these aspects of business led to a prevailing issue.

The delineation of accountability and responsibilities between top management and board members has blurred. Board members have taken on the oversight role as well as the managerial.

It’s therefore key for the board, the board risk committee specifically, to deviate from this mindset and develop a framework for increasing the oversight role of the board and the implementation role of the senior management.

Additionally, over the years, compliance risk at financial institutions has become a siloed activity. Instead of focusing on business operations and exposure risk in a broader context, compliance risk settled on the assessment and management of this specific area in financial institutions.

The Evolving Compliance Risk Landscape in the Financial Sector

Compliance risk in the financial sector continues to expand. We can see tighter regulations of, e.g., cards or deposits. The growing list of compliance risks includes:

  • Anti-Money Laundering (AML)
  • Bank Secrecy Act (BSA)
  • Conduct risk
  • Subcontractor risk
  • Risk culture

As the risk and operating environment are expanding, they create the need for boards to improve their risk and bank compliance management practices. Specifically, the risk committee should take a broader look at the exposure surface taking into account the bank’s business operations and strategies.

How Should Financial Sector Leaders Approach Bank Compliance Risk

Proactive Approach

Compliance departments should take a proactive approach to the risk control framework. This includes creating risk identification and management processes, developing risk mitigation processes, and regularly assessing the compliance program.

Risk Committee

Develop a dedicated and independent risk committee. Risk committees should have the capacity to analyze and challenge risk management strategies. The role of the risk committee should not only be to advise on how to avoid compliance risk but to actively help in the development and governance of the risk management apparatus.

Assessment and Development of Risk Culture

Risk culture in an organization always begins with a ubiquitous understanding of business operations. Good risk culture is key to facilitate decision-making processes regarding risk management among employees and leaders.

Shape risk culture to include a shared mindset to change established practices if they prove ineffective. Risk culture also entails information sharing and discovery of emerging risks to be included for evaluation.

Risk culture should be monitored and shaped. Practices that help in the development of risk culture include regular reporting of operational changes and sharing values and behaviors that increase risk awareness and risk management capabilities.

Information Flow

Seamless information flow is not only a foundation of risk culture but also directly affects the quality of the oversight role of the board. Senior management needs appropriate tools for sharing critical information with the board in a timely manner.

Accountability of Senior Management

It’s within the key responsibilities of the board toward the shareholders to ensure that the management fulfills its role adequately. Overall risk management and risk mitigation require senior management to be accountable.

Chief Risk Officer

Strengthen the independence of the chief risk officer. When CROs act independently, he or she is better equipped to reduce business and compliance risks. By coordinating and leading enterprise risk management with enough authority, a CRO can significantly minimize possible losses caused by compliance risk.

It’s critical to recognize that a CRO’s role should be separated from other business line and executive responsibilities.

Effective Compliance Risk Rules

The Compliance Framework

A financial institution’s compliance framework should be included in overall risk management. This way, an organization gains a detailed view of all risks and issues that stretches beyond compliance risks and ensures there are no gaps in risk assessment.

The integration of the compliance framework also streamlines the process of risk assessment activities, decreasing the number of duplicative actions.

Toolset for Ensuring Compliance

Effective compliance risk management relies on the assessment, oversight, and management of compliance risk in relation to the whole operational risk. To stay on top of the expanding regulatory and compliance risk landscape, the board needs adequate tools and frameworks. The documentation should be organized and stored securely for authorized-only stakeholders.

Board management software, such as Convene, can helps leaders in the financial sector practice good governance and ensure compliance. With Convene, bank boards can easily empowers  effective risk management. Convene helps shift the focus from worrying about compliance to exercising effective leadership.

Governance and Leadership
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