What is the function of compliance in Banking and Finance?

Vcomply Blogger

Background

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 other

industries. The reasons why compliance is integral to the banking industry are :-

 After the 2008 financial crisis, banks have faced an increase in level of scrutiny
from the government. 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.
Law makers 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 significant decrease in
customers.
 Compliance Management

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.

Conclusion

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.