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07.21.2020 Jacqueline Maduneme

The Banking Regulatory Compliance Checklist

Tighter regulations have challenged financial institutions. Today, organizations are forced to keep up with rapidly changing regulatory requirements. It's easy to fall behind, but the cost of a single misstep can be staggering.

With the right strategies in place, you can avoid costly mistakes, keep your institution running on all cylinders, outpace competitors, and build your reputation as a trusted enterprise. The question is, what regulatory compliance and risk management techniques should your organization institute to remain compliant?

We've compiled a list of the regulatory compliance best practices that your banking organization must align with to achieve sustained compliance success.

The Ultimate Regulatory Compliance Checklist

Adapting to change isn’t easy, but at least when you know what you and your company need to do to make positive changes, it will make your task less daunting.

Let’s take a look at four steps you need to take to keep your company in regulatory compliance.

1. Take Ownership of Your Risk-and-Control Framework

When a problem comes to light in any business, the first question is often, “Who is at fault?” It is also not uncommon for people to scramble to try to find a department or person to blame for the mistake.

Placing blame is a waste of time and resources. Those efforts could best be used in more productive and profitable ways. However, there is a simple solution to this problem that will save time and money for everyone involved — you need to enforce a process where risks are owned by the same department that creates the risk.

For example, organizations should have an Accounts Payable Department. If paychecks don’t go out, or there is a failure to pay any debts on time, it could lead to a company going under or falling behind in their financial obligations.

Typically, a company would manage its own “payroll failure” risk plans and assess regularly. Instead, it would make more sense to consolidate the possible risk of failure for identification, assessment, and management to the Accounts Payable Department.

Although this does make managing risks easier, in the long run, there are a couple of things you have to keep in mind:

  • Accounts Payable has responsibility for the risk of financial obligations and management, making it accountable for every company affected by using their services.
  • Every company affected by the Accounts Payable are still responsible for an “Accounts Payable Failure.” However, that responsibility is taken care of by making the Accounts Payable service accountable for the risks and its management to the standard required of that business unit.

It may seem challenging to manage, but it can be handled practically with these steps:

  • The failure enters into the register in the Accounts Payable service as an “Accounts Payable failure.” This is connected to the Accounts Payable service’s objective of “TO provide business units with relevant, reliable, and continuous Accounts Payable solutions.”
  • A service provider to companies should provide a type of visible source outlining the related risk and controls to each affected business unit. This system would communicate the level of risk and performance to impacted business units and illustrate how it’s managed.
  • The service providers and companies need to communicate a service level agreement with themselves and the service providers, which lays out the responsibilities and accountabilities.

“In terms of control ownership, this should lie with whichever department is responsible for the performance of the control. Where a control has multiple owners, each owner must clearly understand what part of the control they are responsible for, otherwise, responsibility will be lost between the cracks.” (Source)


New call-to-action2. Residual Risk Identification

Once a financial institution identifies and gives the proper controls to risks, there are often still residual risks to take into account. Inherent risks represent the amount of risk that exists in the absence of controls. However, residual risk is the amount of risk remaining after the controls are accounted for.

How do you identify residual risk?

Residual risk is part of your initial risk assessment. It's a summary conclusion of the overall level of risk that includes assessments about the inherent risk and the quality of risk management (i.e., quality of existing controls). You use the same assessment scales and methodology. However, You should take into account the number of influences needed to decrease the likelihood of an incident and/or make the impact of the risk smaller.

Managing residual risks can be done with these four options:

  • Avoid: Risk Avoidance means that the company decides either not to take engage in the business activity or, if already engaged in the activity, to disengage. For example, after the 2008 financial crisis, a lot of financial institutions decided to sell off their alternative investment business to focus on strengthening their core businesses because they didn't have the appetite for the regulatory and reputational risks that came with owning that line of business post-2008.
  • Accept: Risk acceptance is when the company decides to do nothing but continue to monitor the risk levels. There should be a formal process for risk acceptance with the rationale for acceptance clearly documented, and approval from the head of the business area accept the risk and independent risk or compliance officer. If risk is accepted, it should be reviewed at least annually to make sure that acceptance is still an appropriate response.
  • Transfer: Risk transfer generally means transferring the risk to an insurance company. Take for example the risk of theft or misappropriate of company assets. A company obviously would not decide to not hire employees for risk that an employee may steal from them, nor would a bank decide not to pen branches because of risk of bank robbery. Rather, they would take out insurance for those sorts of risk, and the insurance company bears the risk of the loss.
  • Mitigate: Risk mitigation is the response undertaken by most companies.

This system ensuring the mitigation of risks ensures that management is involved in making important decisions. Top management needs to know the risks to their company even after various mitigation methods have been applied.

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3. Integration With Risk Management Governance

Most financial institutions have a system in place that focuses on adhering to policies and regulations. It places focus on the stakeholders who put the processes and practices into the company or business to remain in compliance.

Top management needs to have policies and procedures to help know the risks their financial institutions have in place. This includes establishing various mitigation methods and improving the bottom line of the financial institution to maintain its viability.

With Integrated Risk Management, you implement a set standard of practices and processes. These are supported by a risk-aware culture to improve decision making and performance. You will hold everyone accountable instead of relying on the people who are putting practices into place to manage risks.

Everyone in the financial institution would be responsible for knowing the risks and outcomes of risks. This process starts with the high management positions and works its way down to those helping keep the financial institutions clean for the staff and consumers.

4. Measuring Progress and Refinements

Financial institutions have to make constant changes to keep up with the competition. One-time writing of policies and setting up the process will not do if financial institutions or other companies want the policies and procedures to work.

The only way to ensure that policies and procedures are working and staying in place is to regularly monitor and update them. Management should be asking themselves continually how they can best manage the impact of risks on their employees and to the company.

A compliance officer or firm hired by the financial institution would also help ensure that the policies set in place are being done. The person or firm would do wonders to keep everyone up-to-date on the procedures and best practices needed to follow to effectively mitigate risks. The system would also help keep everyone to the standard necessary to keep the financial institution running in top shape for everyone involved with them.

Risk Management in the 21st Century

Financial institutions have more restrictions on them than ever before. It’s important to make sure you have the right training and systems in place to recognize risks and take action.

The banking regulatory checklist above is the best business model for those who want to:

  • Keep up with other institutions.
  • Keep themselves in regulatory compliance.
  • Save time and valuable company resources.

But, just having a checklist and some written strategies isn’t enough. You need a solution that will help you regularly monitor compliance and allow you to see when problems are about to occur.

To help you quickly analyze your risk management and compliance program, we've created a simple self-assessment.

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Published by Jacqueline Maduneme July 21, 2020