Regulatory Compliance Risk Management: Key Risks & Solutions

Regulatory Reporting
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As the number of regulations and laws increase, so too does the time, effort, and cost of adhering to compliance regulations. Regulatory compliance risk management is not only critical to protect a business from devastating consequences, it also has serious impact on how a business functions, innovates, and succeeds in its market.

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In this article, we will answer the main question of, “What is regulatory compliance?” and look at how risk and regulatory compliance can be properly managed with the aid of automation solutions.

Coming Up

1. What is Compliance Risk?

2. What is the Difference Between Compliance Risk and Regulatory Risk?

3. What are the Types of Business Regulations?

4. How to Spot Regulatory Risks?

5. What are Regulatory Compliance Risk Examples?

6. What is the Risk Management Mechanism for Compliance?

7. How to Improve Regulatory Compliance?

8. How to Reduce Compliance Risk with Software?

9. What are the Benefits of Compliance Software?

10. How to Choose the Best Regulatory Compliance Software?

11. What is Compliance Risk Management?

12. The Bottom Line

What is Compliance Risk?

Compliance risk is the chance that your company will break current laws and/or regulations. To manage compliance risk, organisations actively set codes of conduct and stay up-to-date with industry standards to ensure compliance risk can be minimised. Further in this article, we will see how automation tools also help organisations remain compliant.

To fully grasp compliance risk, let’s take a moment to define operational risk. Operational risk is the management of risks associated with pursuing and achieving the company’s strategic objectives. It is with regard to how a business does its business. Compliance risk has to do with the minimum requirements it takes to be a player in the field.

Compliance risk is dictated and determined by the industry in which a business operates, along with the goods and services offered. For financial services, there are plenty of regulations that an entity must comply with, such as APRA and prudential standards, to name a few.

What is the Difference Between Compliance Risk and Regulatory Risk?

On the topic of compliance risk, it’s also important to understand the differences between compliance risk and regulatory risk.

Compliance risk is managed systematically.

Regulatory risk refers to when new laws and regulations take effect that can cause losses to your business. To exemplify on an extreme scale, changes could take place that could make current business activities completely illegal.

In order to adhere to regulations, organisations must stay on top of what’s happening in the legal, political, and economical landscape. Additionally, it’s best to devise a forward-thinking strategy so you can proactively adapt.

What are the Types of Business Regulations?

Regulations are industry-specific and ever changing. That being said, there are two main categories for which issues can be categorised, namely:

1. Anti-Money Laundering (AML)

Financial institutions in the United States are required to comply with the Bank Secrecy Act from the Financial Industry Regulatory Authority (FINRA). The regulation calls for institutions to perform due diligence in order to verify the identities of account holders to establish whether they are organisations or individuals. The goal is to prevent money laundering.

2. Anti-Bribery and Corruption (ABC)

There are countless regulations that work to prevent bribery and corruption. Again, as an example, the United States has the Foreign Corrupt Practices Act (FCPA) to prosecute U.S. citizens who try to bribe foreign officials.

While this is an abbreviated list of examples, it goes to show that regulations are very serious, and the failure to comply with them will lead to negative outcomes.

How to Spot Regulatory Risks?

The most effective way to spot regulatory risk within your organisation is to be proactive and manage it well. Many organisations employ a dedicated risk and compliance team (with a compliance officer) to manage this aspect of business.

Along with a dedicated team, you can:

1. Assess Your Risk

Get together with different departments to discuss what type of risks are possible and the probability that these risks will happen. You can use a risk assessment matrix to aid in this process.

2. Use Compliance Software

Compliance software mitigates risks. It provides business information databases and can automatically match customers and third parties with known names and entities. This helps to nip money laundering or fraud practices in the bud. Software also enables data access in real-time, which further helps prevent violations.

What are Regulatory Compliance Risk Examples?

Since every industry has their own fair share of compliance and regulatory risk that is industry-specific, let’s look at the broad categories of regulatory compliance risk.

Compliance Risk Examples

  • Quality
  • Corruption at work
  • Market risk
  • Conflicts of interest
  • Political uncertainty
  • Data protection

Regulatory Risk Examples

  • Antitrust
  • Consumer privacy
  • Fraud
  • Healthcare patient privacy

What is the Risk Management Mechanism for Compliance?

Regardless of the type of risk, regulatory compliance risk management can be taken care of by choosing the following mechanism. Depending on the type of risk, its probability, and the potential outcome, businesses can choose to:

1. Avoid Risk

Risk is inevitable, but in some cases, business can choose a different way of doing business to avoid a risk altogether.

2. Control Risk

If the risk is not possible to avoid (as in it’s an effect of doing business or executing strategy, for example), then companies may seek to minimise the risk. Ways of minimising risk can be properly training employees or deploying automation tools for proper oversight.

3. Transfer Risk

For some cases, businesses can transfer risk. This is what insurance is. However, businesses must decide if the cost of transferring the risk is worth it.

4. Accept Risk

Lastly, sometimes, it’s the best decision to accept the risk. This is the case when the effect of the risk is less than the alternatives of transferring, avoiding or mitigating the risk. It falls within a “tolerable level.”

How to Improve Regulatory Compliance?

While you can’t control regulations, you can improve regulatory compliance risk management by:

  • Having a framework in place
  • Conducting a risk assessment
  • Implementing policies to ensure compliance is met
  • Reporting and updating on compliance risk management efforts

The best way to manage risk and comply with regulations is to be proactive and aware. While it may take time, it will end up saving your business time, money, and potential reputational damage.

How to Reduce Compliance Risk with Software?

Additionally and importantly, you can utilise compliance risk using automation software. This is especially useful for finance teams. Finance teams often use spreadsheets and are stuck executing processes manually. This opens the door to risks from mistakes, security issues, and lack of standardisation with processes.

With automation software, companies can centralise their databases and manage processes with oversight and transparency. Standardisation is made simple as important processes can be automated. Along with automation, the software will store all information and actions taken.

This makes it easy to create audit trails and pull audit reports, should they be required.

What are the Benefits of Compliance Software?

Compliance software can save businesses time and money. It comes along with a list of benefits, including:

  • Eliminating manual processes thereby saving time
  • Centralising compliance information
  • Lowering regulatory compliance risk management costs
  • Tracking everything and streamlining audits
  • Enabling rapid report generation
  • Overseeing compliance of third parties

How to Choose the Best Regulatory Compliance Software?

To adequately manage risk and regulatory compliance, software is a desirable solution. But, how do you choose the right compliance software for your business’ needs and goals?

Here are some things to consider:

  • Review the types of risks you wish to address
  • Understand your data sources and how often data is updated
  • Look into user reviews and testimonials
  • Get to know how the software is implemented and deployed
  • Request a demo in advance

What is Compliance Risk Management?

With constantly shifting regulations and requirements, it’s best to have a plan in place to handle regulatory compliance risk management. Suggestions to do so include:

1. Define Approach

Have a set approach in place. This may be a hybrid approach, which combines the use of compliance software and a designated team to oversee compliance and regulations. The approach sets the framework for dealing with regulations.

2. Establish Processes

Set processes in place for how you conduct business. These processes should keep in mind compliance and regulations so that they remain at the forefront of how things get done.

3. Clear Accountability

Make sure to designate roles and responsibilities clearly. This way, everyone remains accountable for their position and what they handle. With automation software, this step is made easy as you can designate roles and responsibilities when you design a process for automation.

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The Bottom Line

Regulatory compliance risk management is essential for any business to maintain solid standing and be able to function and innovate. On a more serious note, it can be the difference between remaining in business or going out of business.

Although every industry has their own set of specific regulations and rules to abide by, automation software and compliance software can help ease the burden of remaining on top of the laws. Automation software makes it simple to standardise and streamline processes, generate reports, protect data, remove manual errors, and create audit trails.


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