Needs of Risk and Regulatory Audit in Banking

Over The last decade, the banking world has faced unpredictable changes and challenges, resulting in a slew of compliance regulations. Banks of all sizes from non-public, commercial and private sectors are now more effectively concerned than ever about compliance risk management and regulatory audit procedure. New banking services have increased government scrutiny and intense focus on the requirements of regulatory compliance & risk management which has brought forth greater risks and a larger set of rules and regulations. Banking sector has also been forced to consider a fresh look at their compliance practices and technological infrastructure that supports them and to pursue a wide range of compliance and risk initiatives across the banking sector.

Regulators and government bodies are issuing newer and effective regulations to prevent future financial crises to crack the whip down on banking organizations that do not conform. As a financial outcome, today's scenario of the banking businesses is confronted with the phenomena of cross-industry regulations, consisting of hundreds of regulatory requirements and rules. Dealing with the hundreds of banking regulations and risk factors in a traditional manner is no longer cost-effective, efficient and reliable.

Need of Streamlined Risk Management & Regulatory Audit in Banks

In today’s stringent regulatory financial business obligation with new standards and mandatory regulations comes to an effect at a never-before pace, the need to manage the regulatory changes and updates ensure ongoing compliance with them has emerged as the banks major priorities. Also, the banks generally face enhanced compliance complexity from the growth of regulations, ad hoc approaches to compliance management can lead to significant risks. Because of the critical and complex nature of regulatory and compliance risk factors inherent to banking business activities, complex regulatory bodies in banking sectors should have in place a compliance-risk management approach and framework that makes it possible for the banking sector to identify, monitor and control risk factors. As a result, compliance risk management has come as a key business concern across the globe.

Compliance risks, which are generally overlooked as it related to operational risk and business transactions, are the major elements that refer to earnings or capital arising from violations of or non-conformance according to laws, regulations, code of conducts, customer responses, ethical standards and compliances. Sometimes the banking sector works on the basis of existing traditional based compliance and risk management frameworks which generally remain untested and changed. It affects the financial performance and decision making capacity of banks by raising the compliance risks. Compliance risk also increases in situations where the laws and regulations pertaining to certain banking products and services for the clients may be ambiguous or uncertain.

The need for an effective risk management framework also arises in the banking sector to monitor the integrity risk and control the organization to legal penalties, payment and obligations of damages, limitation in business opportunities, losing reputation, diminishing financial values and exploiting expanded business opportunities and potential due to voidable business contracts. Managing compliance risk has become a core skill that every bank needs to attain in today’s highly competitive and regulated environment. It is necessary to follow a consolidated-wide approach for compliance risk management efforts and implementation in complex banking organizations.

Risk-based Compliance Management

Traditionally, risk management and regulatory audit were treated as separate auditory procedures and disciplines. Risk based compliance management allows managers to deal with risk identification, mitigation, while compliance managers check and monitor compliance auditing. However, the traditional approaches are no longer cost-effective and efficient. Increasing compliance requirements call for strategies that are integrated with risk management and corporate objectives.

Risk based regulatory auditing approaches help bank managers to integrate and identify risk factors and significant risks in order to propose corrective actions to mitigate such factors. This way, regulators can increase compliance requirements to meet corporate level objectives and implement compliance regulations that really matters to banking sectors. If anyone, who may be adverse to the term of compliance may respond much more readily to risk. This framework may therefore provide banks with an effective means of getting management to understand and give an opportunity to consider compliance and regulatory requirements and priorities.

What is required for a successful risk and regulatory auditing?

A successful risk management and regulatory auditing program is essential for sound and vibrant banking system which contains following necessary components:

Active Top Management & Members Oversights: An effective and active board member and senior top management can efficiently focus on major insights and milestones of compliance risk management factors and processes.

Effective policies and procedures: Compliance risk management policies and procedures should be clearly defined and monitored consistently with the nature and complexity of banking transactions and other financial activities. Compliance risk analysis and comprehensive risk management: with effective risk identification factors and regulatory audit reporting, banking organizations can ensure that they have adequate management information systems and provide management with timely representation, financial reporting, KPIs and audit reports which enables establishment and execution of effective systems of internal controls.

Establishment of real time monitoring and reporting: Banking organizations should also ensure that they have adequate management information systems that provide management with timely and accurate compliance reports which enables internal controls and monitoring procedures to monitor essentials of transparency of financial transactions.

Test: Independent Testing should be conducted to verify that compliance-risk mitigation activities are in place and understanding as intended throughout the organization.

Importance of Regulating Risk & Regulatory Auditing in Banking:

Determination of Right Control: Once compliance risks are assessed and ranked, the appropriate control can be chosen with transparent and the right determination of regulatory control. It helps to prevent and detect risk by controlling and evaluating baking operations effectiveness.

Compliance Reporting: Compliance managers can effectively monitor the transparency of financial reporting and in the name of under pressure situations, banks can effectively control and evaluate the status of organizational compliance risks and controls. Effective control on regulatory auditing ensures and provides complete visibility into the compliance process with comprehensive aggregate reporting along with individual status tracking in real time.

Conclusion

Growing regulatory environment, higher business complexity and increased focus on accountability has led the banking industry to pursue risk and compliance transparency across the organization. However, these initiatives are totally coordinated in an effort to monitor the risk and understand the interdependent elements of financial accountability of the auditory process. Lack of effectiveness and proper compliance risk management can lead the banking organization to gross inefficiencies, duplication of efforts and blurred face of accounting responsiveness. Risk management and auditory process provides complete compliance solutions through complete control, enforcement and monitoring ability to coordinate and integrate with these initiatives and address above mentioned issues.