Compliance risk management can be considered as a sub-branch of compliance management and it involves identifying, assessing, and controlling the risks that your business might have to face. It compares regulations and industry standards while employing internal controls equipped to ensure that your business is compliant with all the relevant laws and regulations along with monitoring those risks involved to be sure that they’re effective on an ongoing basis.
Compliance risk management is a process of recording the material losses that your organization might incur or any danger that your organization is exposed to as a result of non-compliance like penalties, fines, reputational loss, or any kind of business loss.
Types of Compliance Risk
The major forms of compliance risk are factors of the operation that have to affect overall businesses. These include:
- Regulatory and Political Uncertainty: Political events substantially affect law and legal guidelines that may alter how enterprises have to be conducted. When the environment is uncertain, it may be understood that the kinds of policies that could have an impact also are unknown, and that can result in pressure on enterprise’ operations.
- Market Risk: Institutional managers have to continue to be aware of what’s going on inside the average marketplace to gauge risk, particularly while it comes to “safe alternatives” like electronically traded funds (ETFs).
- Conduct Risk: Compliance risk doesn’t just merely cope with outdoor forces, however, it additionally calls for employees to continue to be conscious and in keeping with codes of conduct. For example, sexual discrimination and harassment problems have internal as well as external effects that cannot be ignored.
- Conflicts of Interest: This difficulty in particular plagues the monetary enterprise as investment agents have to steer clear of performing in their best interest with insider data or setting their customers’ cash in locations that could cause a conflict of interest.
- Corruption: Businesses are accountable such that their employees don’t have interaction in or aren’t harmed by bribery or fraud.
- Quality: Product features and services that have to be created and presented must be consistent with particular standards, and failure to conform may bring about penalties, product seizure, or enterprise being shut down.
The Risks can be categorized according to their Impact on the Business
- Legal Impact:
If a business enterprise fails to conform with the legal requirements, then legal actions can be taken against it which can result in fines, penalties, imprisonment, product seizures, or debarment.
- Financial Impact:
Some outcomes that affect the business’s bottom line, lack of investor confidence, can be categorized as risks causing financial impact.
- Reputational Impact:
These are risks that affect client’s trust and loyalty or causes a lack of employee’s confidence in the organization. Once reputation is affected, it might also affect your business.
What is the difference between Compliance and Risk Management?
Compliance and Risk Management are intently aligned undoubtedly. Compliance with already established policies and guidelines facilitates shield companies from a lot of dangers, even Risk Management facilitates shield companies from dangers that might result in non-compliance. Ultimately, compliance and Risk Management assist companies to preserve their balance and integrity on a lot of levels. A business can’t have strong Risk Management software without compliance and the reverse is also true.
However, their variations are well worth noting since Compliance-associated functions and Risk Control-associated functions deserve precise methods and execution tactics.
Since non-compliance can cause high-priced fines and penalties, in addition to damaging the reputation, it ought to now no longer be undervalued. Still, it demands to make certain that the employer is obeying prescribed policies and guidelines. Risk control, on the other hand, ought to rely on evaluation as a way to stay clear of dangers or decide dangers well worth taking.
Compliance is prescriptive in nature and risk management predictive in nature and this explains why the previous is tactical and the latter is more strategic. With compliance, companies should adhere to policies and guidelines already in place. But when it comes to risk management the company ought to be capable of forecasting the dangers and spurring new and revolutionary strategies (in preference to subscribing to already set up policies) that decrease dangers or take gain in their upsides.
One can choose to employ whatever approach best suits the business but regardless of it, one must first be clear about why compliance risk and its management is essential to run a business properly and what every business needs in particular. Whether it is big or small all businesses must have a Compliance risk management program. Every business is equally exposed to compliance risk as it does not differentiate against business type or size and therefore it is not something that one can take lightly.