The effective articulation of risk-based compliance in banks

Abstract

The concept of compliance has developed over recent years. Gone are the days when satisfactory compliance in a bank consisted of making sure that a set of rules provided by a regulator had been met and each could be ‘ticked off’ and that appropriate returns had been sent in. Now the accepted approach is one of ascertaining the risks facing the institution and adopting appropriate measures to manage them. Regulatory guidelines are a tool to this end. A good example of this are the FSA rules in relation to financial regulation which, through their aims, their content, their guidance notes and their structure, clearly determine exactly this approach. However, while dealing with compliance in this way forces the bank to engage in a more careful and precise analysis of the risks facing it, problems can arise.

The aim of this paper is to analyse how a bank can best succeed while approaching compliance as a risk-based issue. This is done while bearing in mind the various internal departments and external agencies that can impact on, or be impacted on by the procedures adopted. The paper considers the role of the regulator, compliance risk analysis itself and the relationship between the compliance department, other departments and external agents. It then goes on to consider the factors affecting risk, how compliance systems can best be built and shaped and how they can best be enforced. Finally, it considers the key issues that can be synthesised from this.