Financial Services Need To Take Compliance Seriously Because The Benefits Are Very Real

Why is compliance important anyway?

We empathize. Really, we do. We are an award-winning software company thanks to CRM products that help financial services organizations globally, which is why we empathize the minute ‘compliance’ is mentioned. We are aware of how the rules and regulations seem to change constantly; we understand that where a firm does business can make all the difference to its bottom line, and we believe that technology and changing customer expectations call for more agility than ever before.

Here’s something we have learned over the years though. Financial services organizations may differ in how they operate, depending upon whether they are into wealth management, corporate banking or commercial banking, but the one thing all successful firms have in common is how seriously they take compliance — following all applicable rules, regulations, and laws that enable them to preserve their integrity and reputation.

Why Is Compliance Important Anyway?

This is a valid question when one takes into account the significant amount of time and money invested by financial services organizations towards mitigating risk and complying with regulatory requirements. The short answer is this: Compliance is important because of how the nature of risk has been changed by globalization, technological advances, the explosion of new businesses, and gains in efficiency.

Modern banking has evolved over centuries, shaped by geography as well as history. Events like the Industrial Revolution and the Great Depression had a profound impact on the definition of banking as well as money lending, supply, and credit, all of which led to the creation of regulations to protect these institutions as well as their clients. The role of banking started to expand beyond government control in the 1950s, with the rise of credit unions, private and community banks among other institutions. This lead to new complexities that, in turn, demanded new ways of compliance and risk management.

It also prompted the creation of regulatory agencies at various levels — the local, state and federal levels in America, for example — which continues to this day. The idea of compliance and risk management continues to evolve, thanks to political, economic and operating risks brought on by globalization, coupled with a rise in the outsourcing of business processes and related external risks.

An Integrated Approach Makes A Huge Difference

There has been a change in the focus on data and customer privacy brought about by electronic banking and legislation such as Data Retention, Know Your Customer (KYC) and the Data Privacy Act, all of which change by geography. Compliance departments need to be able to constantly monitor measured risks and unmeasured uncertainties, and evaluate all sources of risk keeping an institution’s overall long-term financial objectives in mind.

This is why integrated risk and compliance management has replaced the earlier silo approach, where compliance and risk activities were undertaken by different departments using different data sets. The old method often proved to be uncoordinated, leading to the recognition of risks being interdependent on the basis of how controls are shared across a financial institution. Integration increases compliance effectiveness, reduces costs, and enables a financial services institution to take a cross-organizational and coordinated approach to risk management.

The benefits of an integrated approach are also evident when one considers that market scrutiny, business complexity, and regulations are on the rise, making it more important to define, manage, and monitor external and internal business environments more effectively. It increasingly makes sense to oversee compliance centrally while distributing risk and compliance accountability across lines of business.

How Compliance Can Help Your Business

For a start, it helps increase shareholder value and confidence because streamlined risk and compliance management translate to a better brand. Secondly, there are lower compliance and governance costs associated with integrated corporate governance and risk management. It also leads to an increase in transparency and visibility, enabling financial institutions to undertake initiatives with the most optimal risk-reward outcomes. Finally, it makes better operating and business performance possible with the proactive identification, tracking and resolution of issues.

NexJ recommends a few practices that can help financial institutions reduce structural costs and de-risk operations to deliver better service. These include clearly defining roles between risk and control functions to prevent gaps or overlaps, developing integrated training and communication programs, establishing clear governance processes and structures, and creating a comprehensive inventory of all rules and regulations for a compliance-risk-assessment program. If you would like to know more, why not read our white paper on compliance, or get in touch with us?

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