Combining Risk and Compliance Management

Without a doubt, compliance and risk are intricately linked, with both contributing significantly to the prevention of threats to business stability and brand reputation. 

However, as global rules and stakeholder pressure continue to increase, financial institutions need to recognize the critical distinctions – and parallels – between the two disciplines, as well as the areas where their operations intersect.

The Opacity of Risk and Compliance

Whereas businesses historically focused on maintaining sound business practices, companies now must comply with a slew of regulatory regulations to guarantee they perform fairly and ethically. As regulatory pressures have increased, the distinctions between risk and compliance have gotten somewhat muddled in recent years.

Consider the Sarbanes-Oxley Act of 2002, which requires the incorporation of risk mitigation activities into regulations, so integrating compliance into the broader ERM approach. The same is true for the 2010 Dodd-Frank Act, which was enacted to address macro and micro risk management oversight problems.

What does the term "compliance" mean in comparison to "risk management"? 

As we all know, risk management entails recognizing and analyzing the risks that an organization faces and devising a strategy to reduce those risks. This critical role contributes to a company's resilience in a changing business environment and addresses the very difficulties that may obstruct the achievement of a company's main objectives. 

Meanwhile, compliance management is concerned with adhering to applicable laws, rules, codes of conduct, internal policies, and best practices in order to minimize the possibility of economic loss or reputational harm. 

This means that non-compliance is a danger in and of itself – which is where the overlap emerges.

Risk management for compliance 

Therefore, if non-compliance is a danger, shouldn't compliance be employed to mitigate certain risks? 

For example, the Senior Managers and Certification Regime (SMCR) holds individuals accountable for their conduct and competence, so creating improved governance and bolstering market integrity. Adherence to this law may result in a direct reduction of human capital risks such as misbehavior or turnover. Similarly, compliance with anti-money laundering (AML) regulations may mitigate exposure to fraud risk. 

After all, compliance is really about safeguarding organizations from the hazards associated with a disrespect for (or lack of understanding of) established laws and regulations. This prevents organizations from becoming compromised and safeguards the interests of critical stakeholders such as investors, workers, and consumers. 

As a result, compliance management strategies may play a critical role in mitigating risk in operations — and vice versa.

Harmonization Of Risk Management and Compliance Approaches 

Risk and compliance functions are frequently handled by two distinct divisions in many financial businesses. However, the disadvantage of this strategy is that compliance risk may be regarded independently of other corporate risks, resulting in a disconnected approach. 

The majority of senior leaders will agree that having a firm grasp of compliance standards is critical for safeguarding an organization from risk. This requires risk experts to understand the risk of non-compliance as thoroughly as any other company risk in order to assist build the ERM approach. Similarly, compliance personnel should be educated about the company's risk tolerance in order to make more informed decisions. 

Where risk and compliance are segregated within an organization's structure, managers should seek to integrate compliance into risk management planning and execution in order to bring the two areas together. Risk management technology can assist in streamlining this process by giving a real-time picture of compliance risk and any other hazards that financial services firms face. 

Another significant benefit of automating risk management operations is the ability to disseminate critical regulations from a centralized document repository, therefore fostering a more compliant culture among employees and reducing the danger of a breach.

Additionally, risk management systems may simplify otherwise time-consuming administrative procedures, while simultaneously serving as a critical analytical tool that enables organizations to focus their attention where it is most required in a world where the two disciplines are always evolving.