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What Is Regulatory And Compliance Risk?

Compliance Risk

Does your organization have a firm grip on regulatory and compliance risks? This article will help you understand what regulatory and compliance risk is and the importance of a compliance risk management program.

It will also explain how compliance software can help you manage your risk in an easier and more effective way. What’s not to love about proper risk management? It can improve your operational resilience and push your business to success. Read on to find out more…

What is Regulatory and Compliance Risk?

You must understand what regulatory and compliance risk means before getting deeper into the ins and outs of risk.

Compliance risk is the possibility that you might break current laws or regulations. Maintaining compliance risk is a systematic approach. It can also be costly and challenging for companies.

Regulatory risk happens when new changes to laws and regulations might cause losses to your business. The changes could be so drastic that your current business activities could be illegal. Managing regulatory risk requires a forward-thinking strategy that monitors regulatory processes and public opinion. 

What is the Difference Between Compliance and Regulatory Risk?

Many businesses can experience compliance risks if they do not have an effective risk management system.  If you are still wondering what compliance risk is, here are some common areas where compliance risk can be an issue. 

  • Due diligence issues
  • Human errors
  • Inadequate controls (such as financial, leading to inaccurate financial reports)
  • Insufficient training of employees

On the other hand, regulatory risk can appear when a new regulation or law changes. This change might make some of your business activities illegal. Compliance costs could arise in fines or business disruption as your business adapts to the new changes. 

Regulatory Compliance Risk Examples

Regulatory compliance can apply to many diverse industries. You can read a more detailed article about the meaning of regulatory compliance here. Regulatory compliance requires businesses to adhere to strict rules and regulations. Here are some regulatory compliance risk examples and laws.

Compliance Risk Examples

Many different factors can affect business compliance. Here are a few common types of compliance risk:

  • Conflicts of interest
  • Conduct risk 
  • Corruption at work
  • Data Protection
  • Market Risk
  • Political and regulatory uncertainty
  • Quality

Regulatory Risk Examples

Here are some examples of regulations and laws that affect businesses, depending on their industry:

  • Antitrust Enforcement

Big Tech such as Amazon, Apple, Google, and Meta (Facebook) face regulatory risk from antitrust enforcement.

The regulations came after a public backlash on how these businesses conduct themselves. The antitrust laws aim to limit the market power of individual companies and create a level playing field.

  • California Consumer Privacy Act (CCPA) 

The CCPA is a data privacy law for California in the United States. It regulates how businesses handle the personal information of residents.

You can find out more about CCPA compliance and its obligations in this article. The law is similar to the General Data Protection Regulation (GDPR) in the European Union. 

  • Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Healthcare is one of the most complex and regulated sectors in the United States. HIPAA legislation provides data privacy protections and security provisions for safeguarding patients’ medical information.

HIPAA privacy rule penalties are severe, costing noncompliant companies thousands of dollars and the risk of imprisonment.

  • Sarbannes Oxley Act 2002

After multiple accounting scandals, the Sarbannes-Oxley Act forced the financial services industry to be more transparent in its dealings.

The act helps to stop fraudulent reporting and protect investors. Accounting procedures are now stricter, and lawbreakers face harsh penalties and imprisonment. 

What is the Risk Management Mechanism?

The risk management mechanism is a necessary tool to ensure organizations stay compliant. You must cover these four essential areas for an effective risk management program. 

  1. Avoid the risk 

No business can avoid any risks completely. That is because there are always risks in the world, both internally and externally, for businesses. However, you can be aware of it and try to minimize business risks as much as possible.

  1. Control the risk

It would help if you tried to control the risk. If you make steps to control the risk, you can lessen the impact of the risk overall. For example, you can train employees on how to behave should a particular risk happen.

  1. Accept the risk

Nobody wants to accept a risk, but an alternative might not exist. However, if you can plan for this possibility, you can have a “tolerable level” of acceptance. 

  1. Transfer the risk

You might not be able to transfer the risk, but if you can, it can help minimize the impact of the risk. You might be able to transfer the risk to a third party. You could use your insurance as a last resort, although this can be very costly. 

What is Financial Regulatory Compliance?

Regulatory compliance can be broken down into other areas, for example, financial regulatory compliance. Financial institutions (FIs) often have to deal with strict regulations related to disclosure, investment strategies, and liquidity requirements.

The non-compliance risk can be devastating for organizations. It is an absolute necessity for businesses to get it right.

Blockchain and Financial Regulatory Compliance

Blockchain is still a relatively new sector in the financial services industry. It’s fair to say it will have significant financial compliance challenges ahead of it.

2022 could see the beginning of financial rules and regulations in this area. Organizations using blockchain technology will have to ensure they have financial regulatory compliance. 

Why is the Compliance Risk Management Program Important?

You can not underestimate the importance of regulatory compliance.  Without it, your company is opening itself up to risks that could permanently affect the business.

An organized compliance risk management program is the best approach to ensure regulatory compliance. 

Instead of using a fragmented approach, try integrating the compliance risk management program as part of your business strategy.

It will make compliance management easier and more effective instead of sticking together disjointed areas later down the road.

Best Business Practice

Regulatory bodies do not deliberately sit around concocting laws and regulations to annoy businesses.

Regulatory requirements are a necessary part of the industry and help provide a safe and legal working environment. Companies that take risk and compliance seriously have stellar reputations in their respective industries.

Creating A Strong Compliance Risk Management Program

A compliance program that is going to work well for your business needs to be robust and hit four key areas:

  • Digital Automation – spending money on automation and digitizing compliance risk activities
  • Framework and culture – create a robust framework with a set compliance team that every employee knows
  • Governance – ownership of compliance issues and ensuring that compliance is part of the strategic business decisions
  • Processes and policies – constant improvement of tracking changes to regulatory obligations and any emerging compliance risks

How Would you Identify Risk in your Organization?

Taking a proactive approach to risk is the best way to identify risks in your organization. It’s certainly a case of leaving no stone unturned.

You can then have a better assessment of your risks and a higher chance of meeting the compliance regulations.

Use A Dedicated Risk And Compliance Team

It’s best to have a set compliance and risk management team. This dedicated team can carry out regulatory risk assessments for the business.

These trained professionals can identify and correct potential risks. Additionally, they can maintain records detailing everything they have done in this area.

Assess Your Level Of Compliance Risk

For every risk the team has identified, you need to allocate a level of risk. Then the team can put steps in place to ensure compliance for each risk.

You can do this process using relevant resources and defining everyone’s role in the risk management process.

For example:

  1. Collect information from different departments to determine how high each risk is, how likely it will happen and what effect it will have.
  2. Use data you have collected and software analytics to assess, manage and protect against the risks. You can set up a system to highlight potential risks before they happen.
  3. Let every employee know what their role is in managing risk. Define their responsibilities so that everybody works together as a risk management team.
  4. Carry out regular risk audits to assess how well the risk management process works. You can then fine-tune anything that does not work.

How Can Risks be Mitigated Through Compliance Software?

Many companies like to use their systems when it comes to risk management. However, legacy systems tend to be clunky, with millions of spreadsheets and no centralized database.

This old-fashioned system is slow to use and can be hard to manage as a company grows.

Risks need to be dealt with quickly, or you can find your business in real difficulty. Nobody wants to get on the wrong side of the regulators.

Using compliance software, you can lessen the impact of risks and speed up your compliance risk management. After the initial outlay, compliance software is an invaluable tool.

Benefits of Compliance Software

Here are a few benefits of compliance software:

  • It can lower your risk management costs
  • You can centralize all risk and compliance information
  • Compliance software can help with the due diligence of third parties
  • Collate business data to assess potential risks
  • It can improve collaboration in the organization across departments
  • Quick risk report generation
  • It can save time by eliminating manual processes
  • It can track everything, which makes audits easier
  • The compliance team can monitor new laws and regulations

The Bottom Line

Recent black swan events show how things can change overnight. Anything your business can do to mitigate your risks is worth doing.

Creating a risk management program is the natural starting point. It can help you find out where you stand and what you need to do to lower risks.

You can also take your risk management efforts further by using compliance software. It is a proactive approach to handling risk obligations, saving money, stress, and valuable time.

Your compliance team can rejoice in finally ditching manual spreadsheets and start enjoying the full benefits of automation.

Sally Leslie

Sally Leslie is the content editor for Planet Compliance and creates B2B Tech content for businesses, entrepreneurs, and startups. Sally is passionate about the changing world of technology for the future.

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