Compliance culture is an organization’s set of policies, practices, and behaviors that allows it to ‘play safe’ in its operation. Compliance culture in the financial service industry is how an organization implements and executes its compliance program to meet regulatory standards. It is usually based on values that promote ethical conduct and proper risk management.
Building an effective compliance culture requires creating a common set of values around what it means to be compliant. The goal is to create a shared understanding among all employees and stakeholders (especially third-party vendors) about the importance of complying with regulatory standards.
Compliance culture is not limited to international financial standards. It also involves local laws governing every aspect of operations, including transactional systems, business processes, and hiring practices.
Elements of an Effective Compliance Culture
Compliance culture takes time to build. It requires a deep commitment to risk management and continuous improvement from every employee in the organization. It also requires leadership at all levels of the organization to support compliance initiatives and drive them forward.
Compliance culture has two elements: people and processes. The people are the senior leaders or compliance consulting firms who define the culture. They are responsible for ensuring that employees understand what they need to do, how they should behave, and what they should expect from others.
The processes are integrated into the workflow to ensure that all stakeholders stay within legal boundaries so that the institution does not get in trouble with law enforcement agencies or other government agencies.
Key Five Areas of Compliance Culture that Revolve around ‘People and Processes.
1. Commitment from Senior Leaders
The senior managers must set the tone for compliance culture. They should be committed to compliance and value it as much as they value profit or growth. This includes both verbal support and financial investment in compliance consulting.
In today’s environment, it is not enough for senior managers to simply delegate responsibilities down the hierarchy — they must also take ownership of their divisions’ compliance initiatives. Senior leaders must demonstrate commitment by actively participating in key initiatives such as risk assessments and employee training programs. Furthermore, they should ensure that their direct reports are held accountable for implementing policies in their respective departments or regions.
Senior managers should support employees who have questions about how to perform their duties in light of new regulatory requirements or emerging risks in their area of responsibility. They should also create clear expectations around behaviors that support compliance efforts. A good way to set clear expectations is by creating a code of conduct for your organization or department (for example, a code of ethics).
2. Open and inclusive communication
For a strong compliance culture, it is recommended to develop effective communication processes for sharing information about compliance throughout the organization so everyone can access timely, accurate information. This includes ensuring that all employees know who their designated compliance officer is, how to contact them and what resources are available for dealing with compliance-related issues. In addition, it means establishing clear lines of communication among the compliance officers, business units, and departments within your organization.
3. Compliance culture monitoring systems
Compliance monitoring systems are essential to any compliance culture because they track all the activities that may lead to an incident, such as access violations, data breaches, and improper use of company assets. To do this, financial institutions can set up internal controls.
A financial institution that wants to build a strong compliance culture must focus on internal controls. These controls should be based on corporate governance principles, which include risk assessment methodologies and HMDA review for all departments of the organization (not just finance).
4. Training employees on relevant laws and policies
Training employees on compliance policies and procedures is an important part of any organization’s compliance strategy. Employees should be trained by top risk management consulting firms to understand their roles in maintaining compliance with applicable laws or guides, such as the five pillars of the BSA/AML program. This training should be ongoing and tailored to specific positions within the organization. For example, if your bank has branches in multiple states, each branch can have its training program that focuses on state-specific laws and regulations.
Employees should be trained on what to do if they suspect violations of laws or regulations have occurred or may occur in the future. They also need training on reporting suspected violations without fear of retaliation from their employers or others within the organization who may have been involved in the illegal activity themselves.
5. Internal Audit
Top AML consulting firms will always recommend internal audits for building a compliance structure. An effective internal audit process is critical for compliance success because it provides valuable insight into the company’s operations. The role of internal auditors is to provide a check and balance on the financial institution’s compliance with regulatory requirements and provide guidance on areas where more formalized controls can be implemented to reduce risk and improve operational efficiency.
Internal auditors help identify gaps in policies, procedures, and processes so they can be addressed before they become a problem for the company. They also provide documentation that can be used if there is ever an investigation or legal action against the institution.
Undoubtedly, compliance can be extremely difficult due to the ever-changing regulations of the financial services industry. However, the road to building effective compliance culture can be made easier with good leadership and a realistic view of the challenges ahead. So if you’re looking for advice on how to build a more effective compliance culture in your financial institution — or if you want help identifying key areas of concern — we’d love to help you.
RADD LLC offers multi-layered compliance consulting for financial services. We’ll help you keep your business safe and healthy by finding risks, providing solutions to minimize them, and working with you to establish records and tracking systems.Talk to us, now!