Most banking firms operate in a complex regulatory environment that requires them to focus on minimizing conduct risk, combating financial crime, and transparency. Initially, banks responded to the punitive regulatory environment through quick-fix programs, including a flurry of hiring and control. However, over time various approaches regarding regulatory compliance have emerged with banking organizations defining extensive compliance risk taxonomies that they use to inform target operating models. Such changes imply the start of compliance transformation in the banking industry.
Banking organizations should also embrace digitization during the transformation process by using smart technologies that provide essential performance improvements and imitate the use of human abilities like language use, learning, and informed decision making. Smart technologies have numerous vital applications regarding compliance, including offering support for routine tasks in client onboarding and analysis of data. The technologies also encourage efficiency and help workers to work effectively.
Development of a Compliance Target Operating Model
The banking organizations have to develop an approach that describes and classifies primary areas of risks including the ones that form financial crime risks like terrorism financing and money laundering, corruption and bribery, and sanctions and embargoes alongside forms of conduct risk including customer conduct, market conduct, and culture and ethics.
Moreover, in addition to banking organizations responding to the forms mentioned above of risk, the compliance function involves regulatory compliance that needs a detailed understanding of the insights of local and global rules and the authority to assign responsibilities to the involved departments. When banks have comprehensive risk taxonomy understanding, they can redesign the compliance target operating model hence clarify roles and responsibilities to create more reliable and standardized compliance infrastructure.
Optimized target compliance model consists of the following:
Governance and Organization
This requires that the target operating model ensures that the three lines of defense, including internal auditors, independent reviewers’ controls, and ultimate risk owners. It also provides organization setup and defines a governance structure for compliance operations. To support this element, bank organization executives should specify the relationship that exists between the compliance function and private business segments while taking into account the legal and jurisdictional variations across all sectors.
Compliance strategy offers a basis for the compliance function, responsibilities, rights, and set out objectives of banking organizations concerning the target compliance model. It also involves a compliance risk strategy suitable for conducting business concerning particular products, markets, and eligible consumers.
Compliance Risk Management
Compliance risk management forms the basis of the target operating model and offers a framework for managing the main risks related to compliance, including conduct and financial crime. It includes major areas like assessing risks and defining strategy, defining standards and monitoring regulatory requirements, advising and training, testing and controlling and measuring and reporting. Furthermore, effective compliance risk management should offer reliable infrastructure to organize and analyze data, ensure the right tools are implemented and support legal documentation.
Smart Technologies in Compliance Risk Management
Banking organizations have adopted the use of digital solutions in multiple lines of business entities. For effective compliance, the preferred tools include smart technologies essential for collecting and assessing large quantities of information and carry out related tasks. Smart technologies include applications like data mining, optical character recognition and learning which encompass collection, learning, analysis and action.
Assessment Framework for Smart Technologies
Smart technologies are segmented into particular capabilities and the tasks they can perform. The technologies and tasks include:
This includes tools that support basic analytics, depending on the defined rule sets. It includes alert generation following transaction monitoring and customer ratings. This is a medium-priority in the meantime.
Machine room includes a group of tasks and technologies aimed at facilitating standardization of activities resulting in significant efficiency advantages. Such applications include business management tools, robotic process automation, and speech and voice recognition. Machine room accounts for the largest part of smart technology development.
This encompasses a group of technologies and analytics essential for analyzing a large number of unstructured data sets to come up with new insights, including recognizing the pattern of transaction payments. Such applications include natural language processing and learning approaches. This comes after the rollout of the machine room and basic analytics.
Concerning the main compliance of risk management, every activity has distinct requirements.