Banking compliance and risk has become one of the most significant concerns for financial institution executives. New laws and regulations continue to emerge, such as conduct-risk, next-generation Bank Secrecy Act and Anti-Money Laundering (BSA/AML) risk, risk culture, and third & fourth-party (subcontractors) risk, etc. All banks differ in the way they operate, but one thing they have in common is compliance.
Compliance management is of significant importance in any industry. However, the importance of compliance in the banking industry is even more than in other industries. The reasons why compliance is integral to the banking industry are:-
- After the 2008 financial crisis, banks have faced an increase in the level of scrutiny from the government. The government requires innumerable statutory and regulatory compliance. Hence, every organization requires a compliance management system to ensure the bank is updated about the requirements and complies with it.
- “Regulators aren’t just more aggressively pursuing institutions who break the law. Lawmakers are imposing higher penalties on lawbreakers. Compliance has become a pivotal issue for banks because failing due diligence on customers and transactions leaves a company open to scrutiny and litigation.” – Adrian Morrissey, Manager of the Compliance Division, Robert Walters, New York.
- If banks face legal action for non-compliance the consequences could be catastrophic-ranging from fines, temporary suspension to permanent closure.
- Non-compliance with regulations will have a significant impact on the brand reputation of the bank. For financial institutions, customers are more sensitive to brand reputation and non-compliance would lead to a significant decrease in customers.
In order to avoid some of the above-mentioned consequences of non-compliance, one needs to have a robust compliance mechanism. Compliance management is an integral part of the operations of a bank. Some of the roles played by compliance management in a bank which help the bank meet its statutory and regulatory requirements are:-
- Monitoring activities of clients – The role of compliance management in a bank is not just limited to within the organisation but extends to its clients as well. Banks must monitor transactions of its customers to see if they are operating within laws and not adopting illegal activities. Illegal actions by customers could include money laundering, evading taxes or even funding terrorism. Hence, banks must closely monitor such illegal activities and report it immediately to reduce their liability.
- Communication between departments – It is imperative that all bank-departments stay informed about changes in rules or guidelines issued by regulators. Also, communication is crucial because there are times when the regulators require additional documentation from the bank and the concerned departments need to be informed about the required and the time-frame in which they need to prepare those documents.
- Oversee operational requirements – Thus it has become essential that the compliance mechanism of the organisation oversees its operational requirements.
The operational requirements of an organisation
- APRs (Annual Percentage Rates) and fees should be within prescribed limits.
- Disclose all relevant information to the customer in a timely manner
- Solicitation and advertising practices should be within prescribed limits.
- Document records should be retained as per guidelines
- Ensure customers are aware of their right and are able to rescind.
- Provide re-disclosures to customers in case of changes in regulations
- Monitoring of compliance
An effective compliance mechanism should check whether the banks are compliant with all the required statutory and regulatory requirements. In order to do so, an effective compliance management system sends out reminders before the due date to the concerned personnel. It keeps a track of the compliance that bank may have missed as well as prioritize their completion earliest.
It has become essential for all banks to have compliance management systems in place. Earlier smaller banks or financial institutions would try and avoid the costs associated with having a compliance management system. However, now the cost of non-compliance far outweighs the costs associated with having a compliance mechanism in place.Add to favorites