What is Compliance Risk and How to Manage it

Regulatory Reporting
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As global regulations and accessibility grow, so does compliance risk for businesses. Depending on the sector in which you operate, both internal and external rules and regulations will dictate what your business can and can’t do, as well as what you need to be aware of while managing everyday operations.

Failure to comply with such regulations can result in detrimental effects for your business, ranging from financial penalties and can go even so far as imprisonment. That’s why, when it comes to compliance risk, ignorance is certainly not bliss.

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Coming Up

1. What is Compliance Risk?

2. What is Compliance Risk Management?

3. Examples of Risk

4. How to Categorise Compliance Risk

5. What are Common Types of Compliance Risk?

6. How to Assess Compliance Risk

7. What are Elements of a Leading Compliance Risk Assessment?

8. How to Manage or Implement Compliance Risk Based on your Situation

9. Wrap Up

What is Compliance Risk?

Compliance is defined as the outcome for adhering to a rule. Compliance risk captures the legal and financial penalties for failing to act under internal and external regulations and legislature. To be able to comply, the rules and regulations must be clearly defined, and the following must be considered:

  • Regulation or act
  • Penalties for non-compliance
  • Obligation and invested parties
  • Risk rating
  • Compliance status

What is Compliance Risk Management?

Compliance risk management is the business process of identifying, assessing, and mitigating compliance risk. Organisations may put compliance risk management policies and procedures into place which lay out the framework by which they address and control compliance risk.

Since regulations and laws are constantly changing and being updates, compliance risk management policies and procedures should follow suit. Everyone within an organisation should be made aware of the risk management policies for them to properly practised.

One of the simplest ways to ensure these policies take effect is to implement automation software solutions that have these compliance rules built into the business processes. We’ll touch more on this shortly.

Examples of Risk

Since risks vary by industry and business type, it’s nearly impossible to cover every kind of risk that you can face. But, in taking a look at some of these examples, you can understand what types of business practices need to be considered when working to avoid compliance risk.

The following list is particularly essential for financial institutions:

  • Failure to conduct due diligence on new customers:
    Businesses must perform steps to ensure that a new customer is who they say they are, for example, by requiring proof of identification. A company can perform these steps themselves or hire a third party to do so.
  • Failure to report suspicious transactions:
    Out of the everyday transactions must be flagged and reported to a government's treasury and fraud team. Suspicious activity may be exemplified by large amounts of money moving in and out of an account out of the blue.

To better understand and manage compliance risk, it’s best practice to categorise risks in four broad areas by impact type, including:

How to Categorise Compliance Risk

Legal Impact:

Regulations and laws that can be used against the organisation with failure to comply which could result in fines, imprisonment, product seizures, penalties or debarment.  

Financial Impact:

Outcomes that affect the business’ bottom line, loss of investor confidence, share prices or potential future earnings.

Reputational Impact:

Results that affect customer perception of a brand via bad PR decreased employee confidence or customer trust.

Business Impact:

Factors that affect a business’ ability to operate like a plant shutdown or a trade embargo.

What are Common Types of Compliance Risk?

The most common types of compliance risk are aspects of the operation that affect most businesses. These include:

Regulatory and Political Uncertainty:

Political parties greatly influence regulation and put into place laws that can change how business must be conducted. When the climate is uncertain, it means that the types of rules that may take effect are also unknown, which can cause stress on a business’ operations.

Data Protection:

With the rise of data storage and the expansion of technology, rules around privacy and protection are growing. Take for example new regulations like GDPR. The speed of technology is moving rapidly that changes must be put into place to protect customer information.

Conflicts of Interest:

This concern particularly plagues the financial industry as investment brokers must steer clear of acting in their own best interest with insider information or placing their customers’ money in places that may cause a conflict of interest.

Market Risk:

Institutional managers must remain aware of what’s happening in the overall market to gauge risk, especially when it comes to “safe alternatives” like electronically traded funds (ETFs).

Conduct Risk:

Compliance risk doesn’t only deal with outside forces, but it also requires that employees remain aware and in line with codes of conduct. For example, sexual discrimination and harassment issues have internal and external consequences that cannot be ignored.


Businesses are responsible such that their employees don’t engage in or are not harmed by bribery or fraud.


Product qualities and services must be created and offered according to specific standards, and failure to comply could result in penalties, product seizure or business shut-down.

Human Error:

When employees aren’t fully trained or aware of the signs of phishing and social engineering, your data is at risk for a breach. The same could be said about outdates software systems that are in place with inadequate security measures.

Lack of Monitoring:

For many compliance regulations, oversight and internal control are required. With monitoring, organisations are able to keep abreast of threats and remain aware of data breach alerts. Active monitoring helps to reduce the severity of a potential breach, and thus, reduce the legal and fiscal consequences of one.

How to Assess Compliance Risk

By looking at the different types of risk and categorising their effects into buckets, you can then take your analysis and approach one step further by assessing your level of compliance risk. This can be done by using resources and defining roles as such:

Collect Cross-Functional Input:

Leverage your teams to create and enhance their understanding of the risks that their department faces. Allow them to provide their assessment of how big or small the risk may be, in terms of likelihood of an event occurring, as well as the magnitude of its effects.

Leverage Data:

Use data and software analytics tools to manage, assess and protect against risks. These tools can start by ensuring customer data and information is accurate and go as far as flagging suspicious activities. Data tools can also be used to avoid compliance risks by automatically providing reports to the necessary entities so that human error cannot cause issues.

Define Responsibilities:

Make sure that each employee understands their role and responsibilities by protecting against compliance risk.

Continual Revision:

If a process is not working as is, don’t be afraid to implement business process improvement to enhance functioning.

What are Elements of a Leading Compliance Risk Assessment?

Managing compliance risk comes from the top. In order to implement effective compliance risk assessments, keep in mind the following best practices and necessary elements:

Involve Your Team

Every department faces it own fair share of compliance risk. So, it’s best to involve them in the compliance risk assessment set-up and procedure design. By consulting with the risk owners, there’s credibility baked into your risk assessment policies.

Establish Ownership

Given that compliance risk stems from each department individually and affects the organisation overall, it’s optimal to define which individuals are responsible for managing each type of risk. This ensures accountability is in place.

Make it Actionable

Since the compliance risk assessment identifies, assesses, and defines how risk should be mitigated, be sure that the mitigation activities are actionable and clearly defined. No matter what compliance risk examples remain relevant in your business, the output of the risk assessment should be understood by all involved.

How to Manage / Implement Compliance Risk Based on Your Current Situation:

Some companies choose not to manage compliance risk, and instead consider fines to be part of a business cost, while others take advantage of grey areas, to only suffer later on. In the banking industry, the mis-selling of Credit cards led to billions of pounds in fines as it affected over 2 million customers.

But, regardless of where you stand concerning compliance risk, here’s how you can manage risks at different levels.

Little to No Compliance:

At the very least, you can establish a compliance risk team that looks to define, assess and potentially assign resources based on budget to manage such risks.

Ageing Compliance Process:

This approach uses the growth and changes in technology to help adapt and innovate upon existing compliance methods through the use of tools. It can be done by investing in one well-rounded system or different odds and ends to manage the various steps of the process.

Active Compliance Process:

Some compliance processes will require that an immense amount of documents be reviewed. This tedious exercise can be avoided by employing automation and leveraging artificial intelligence to help organise paperwork related to issues of compliance.

Valuable IP:

You can use digital communication monitoring systems to oversee text, emails, social media patterns and more to help manage employee communication to protect against compliance risk factors.

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Wrap Up

Regardless of the approach, you choose to employ; it should be clear why compliance risk and its management is essential to run a business properly, whether it is big or small. Compliance risk does not discriminate against business type or size, and instead, it requires necessary processes are in place to protect both customers and businesses; failure to do so can result in unwanted and potentially detrimental effects.

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