Compliance risk, or the risk that a financial institution will fall short of compliance requirements, is one of the greatest challenges facing financial institutions (FIs). FIs must comply with thousands of laws and regulations at both the federal and state level. This includes both existing laws and regulations as well as new and updated laws and regulations. Violating these laws or failing to follow internal policies designed to ensure compliance can have steep reputational, financial, and regulatory consequences.
Compliance risk management is the process of proactively identifying, assessing, mitigating, and monitoring compliance risk. It’s not just checking the boxes on a compliance checklist. It’s regularly evaluating the risk different regulations, products, services, and activities pose to your institution’s ability to remain in compliance and then implementing and auditing compliance controls to keep risk in check.
Managing compliance risk is essential to enterprise risk management (ERM), the framework a financial institution uses to holistically manage risk throughout the organization. This is done with a compliance management system (CMS). A compliance management system is the framework financial institutions use to ensure compliance with relevant laws, regulations, and industry standards. A CMS helps FIs identify and mitigate compliance risks, track compliance-related activities, and demonstrate to regulators that they have an effective program in place.
The most effective way to implement these two frameworks is with risk and compliance software. Enterprise risk management software helps institutions identify and assess compliance risk, helping allocate limited compliance resources to the riskiest areas. Compliance management software for banks, credit unions, and mortgage companies helps FIs manage the compliance process so they can:
Let’s take a closer look at the challenge of compliance risk management and how compliance risk management software can help, including Ncomply and Nrisk can help.
Compliance risk comes in many forms. A 2021 compliance survey conducted by Ncontracts and CBANC found the top four compliance risks identified by compliance officers are:
These are just a few compliance risk examples. Recent enforcement actions show us other compliance and risk management fails.
Enforcement actions cost the financial services industry billions of dollars. Just look at this sampling of big bank civil money penalties over 10 months.
Compliance risk is not just a big bank problem.
Many financial institutions struggle with compliance management, and not all compliance management programs get the job done. One third of financial institutions reported that examiners expressed concerns about their FI’s compliance management in the past 18 months, according to a recent CBANC survey. That figure rises to 39 percent for institutions that track governance, risk, and compliance (GRC) manually – relying on tools like spreadsheets and email instead of compliance risk management software.
An effective compliance management system must address:
Many financial institutions streamline these activities with compliance management software. By implementing a compliance management software, organizations can demonstrate their commitment to a culture of compliance, reduce their exposure to legal and regulatory risks, strengthen their three lines of defense, and enhance their reputation with stakeholders.
Related: What Is Regulatory Change Management at Financial Institutions?
Managing compliance risk can be a heavy lift for financial institutions. The good news is there are ways to make the job more manageable.
Tip #1: There is no one-size-fits-all approach to risk management or compliance, so use that to your advantage and customize it to your size and risk tolerance.
An appropriate risk management and compliance system for a smaller FI will look very different from the CMS of a larger, complex FI—and should be tailored to the institution based on complexity and risk tolerance. It may involve a compliance department, a compliance officer, a compliance committee or a combination of all three.
Whatever model your FI chooses, the goal of your risk and compliance management should be to prevent consumer harm and include the basic building blocks of a CMS (board and management oversight and a compliance program with policies and procedures, monitoring and testing (compliance monitoring software can help), complaint resolution, and tailored training).
The key focus should be foundational. Be consistent with risk management and compliance and leverage your work in your business decisions to get the most value from risk management activities.
Tip #2: Have your compliance officer focus on the interpretation of regulation and guidance.
Tracking new laws, regulations, and guidance is time-consuming, and a FI is much better served when a compliance officer focuses on interpretation. While there are plenty of technologies and partners that can track regulation, only your compliance officer can engage in in-depth analysis to understand how to best effectively and efficiently implement the rule at your FI. Removing tasks that may not require a compliance officer’s particular set of skills frees up their time to focus on higher-value tasks like interpretation and implementation.
Tip #3: Seek out solutions designed exclusively for the financial services industry.
Financial services is one of the most highly regulated in the U.S. Managing compliance risk means understanding the laws, regulations, and guidance the industry must follow. Solutions designed for the financial services industry are filled with expert, regularly updated content such as model risk assessments and plain-English summaries of complex regulations to lighten the compliance workload while increasing confidence in compliance risk management.
Tip #4: There is no such thing as too small for ERM.
ERM is essentially risk management that allows your FI to better identify opportunities in the market and enhance strategic decision making.
Many institutions lack the resources, management support, or data to conduct thorough testing. Other compliance officers worry their testing and review plan isn’t robust enough and requires more specific scoping and better monitoring. Address this issue by using your risk assessment to recognize which controls you are relying on the most to prevent the biggest risks and focus your testing and monitoring on those controls. When it’s impossible to do everything, focus on the most significant issues that present the most risk. ERM helps you do all these things.
Tip #5: Try to attract a diverse board with great skills.
The board sets a financial institution’s risk appetite and ensures strategy aligns with it. Attracting a diverse board gives an institution more perspectives on risk, including compliance risk. For instance, banks with female directors on the board are less likely to be fined by regulators, and when they are fined, the fines are smaller.
Tip #6: Customer-facing technology is important, but don’t forget the back office.
If your back office is still running tons of manual processes, your FI is at increased compliance risk due to employee mistakes. Seek out areas where your FI can automate back-office processes. Replacing manual processes with automation can save money, especially if a variety of staff members are spending significant amounts of money completing manual processes on a daily basis.
Tip #7: Think about processes and people.
Communication and organization are essential to compliance risk management. Where are policies, procedures, compliance risk assessments, regulatory implementation plans, training logs, and other related materials stored? How do you know you have the correct, most up-to-date version? How do you make materials accessible to everyone who needs it? How thorough is your audit trail? These questions must be answered for a program to be effective.
Managing compliance risk is essential to protecting financial institutions. Ncontracts’ secure, SaaS-based ERM solutions simplifies this process with automated software backed by a team of regulatory compliance attorneys and certified risk and compliance professionals that helps you:
Ncomply is an audit-ready, centralized compliance management software application that helps financial institutions proactively manage compliance and exam readiness on a continuous basis.
Features include:
Nrisk is a secure and highly-customizable ERM application that offer efficiency at every turn. It strengthens compliance and controls for more effective risk management that continuously evaluates, measures, and tracks risk.
Features include:
Meet a Chief Risk Officer using Nrisk to build compliance risk controls linked to specific regulations and guidance. Nmarketing - Ncontracts Case Study Nrisk implementation - FNB.pdf - All Documents (sharepoint.com).
Meet a Vice President of Integrated Risk using Ncontracts solutions to build a risk and compliance culture—while setting the stage for growth. RPM Suite Case Study Download (ncontracts.com)
Ready to transform compliance risk management at your financial institution? Ncontracts’ powerful SaaS-based risk management and compliance solutions combine user-friendly, cloud-based software with expert services to provide you with the best-in-class risk and compliance management platforms. This knowledge as a service (KaaS) approach to compliance risk solutions can help you more efficiently and effectively manage compliance risk, giving you the tools you need to succeed.