The Importance Compliance Management by Financial Institution

David Webb
June 19, 2020
88 Views

Today, banking executives have to consider two main factors that could affect their institution’s profitability: risk and compliance laws. Governments have tightened the rules on financial institutions to protect customers from unfair practices. Examples of new regulations that are shaping the industry are conduct-risk, which requires banks in the UK to check the severity of risks. It encompasses four main components: culture and governance, sales process, product design, and post-sale service.

In the US, the FFIEC creates guidelines for banks on how to use the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML). The law requires banks to report transactions above $10,000. The FFIEC updates the manual regularly, meaning that financial institutions must keep up those changes. Other notable regulations are third and fourth party risk and risk culture. Although the laws are different from one country to the other, one thing remains the same – all banks must follow compliance laws.

Although all companies must adhere to sector guidelines, banks have to be more careful. Regulatory authorities are more thorough with banks because of the following reasons:

• The 2008 global financial crisis was blamed on banks for giving shady loans. Ever since then, the government has tightened control over financial institutions. There are multiple guidelines that all banks must follow.

• Regulators faced public scrutiny in the past for being lenient on financial institutions. As a result, there are very strict when it comes to making sure that regulations are followed. Regulators will fine banks hefty sums for not following guidelines. In serious scenarios, the regulators may take banks to court and demand damages. That’s why banking executives are so keen on following rules. They know it can cost them.

• Banks are afraid of losing customers due to business closure. If there was gross misconduct on the bank’s part, the court can order them to permanently shut down.

Software for compliance management has become crucial to the survival of a bank. It is a special department, which monitors all bank activities to make sure that they are by the law. Some of the things that banks do to ensure they are compliant include:

• Suspicious customer behavior: Banks have to watch the customer to make sure they are not involved in illegal activities. For example, if a customer used to deposit small amounts of money in the past and now all of a sudden, they are transacting thousands of dollars every week, it’s suspicious. The customer could be involved in money laundering or any other illegal business. If the bank suspects that could be the case, they have to report the customer immediately.

• Transparent communication: The compliance management team must inform all departments about guideline measures. If one department is caught unawares, it could affect the rest of the workers.

• The compliance management team must also monitor all department activities to make sure that they in tandem with the regulations. For example, annual percentage rates or APRs must not go beyond a certain level. They should also not be too low. Departments should also document all their activities. Regulatory authorities can randomly visit the bank and ask for those documents.

• The compliance management team works around the clock to make sure that everything is done correctly. If there’s a regulatory deadline coming up, the team will send reminders to all involved departments.

Compliance with banking regulations has become mandatory for all banks. In the past, small financial institutions avoided setting up compliance management systems because of high costs. Today, it’s going to be costlier for a bank without proper compliance mechanisms. That’s because failure to follow regulations will result in huge fines and penalties.

 

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