What Is the Compliance Department?

The compliance department ensures that a business adheres to external rules and internal controls. In the financial services sector, compliance departments work to meet key regulatory objectives to protect investors and ensure that markets are fair, efficient and transparent. They also seek to reduce system risk and financial crime.

These objectives are designed to support consumer confidence in the financial system. Financial services organizations also are subject to regulatory business rules that govern advertising, customer communications, conflicts of interest, customer understanding and suitability, customer dealings, client assets, and money as well as rule-breaking and errors.

Key Takeaways

  • The compliance department is tasked with closely watching that financial services businesses adhere to external regulations and internal controls.
  • It also identifies risks that an organization faces and advises on how to avoid or address them.
  • The 2008 financial crisis led to increased regulatory scrutiny and regulation, leading compliance departments to go from an advisory role to active risk management.

Understanding the Compliance Department

A compliance department typically has five areas of responsibility—identification, prevention, monitoring and detection, resolution, and advisory. A compliance department identifies risks that an organization faces and advises on how to avoid or address them. It implements controls to protect the organization from those risks. Compliance monitors and reports on the effectiveness of controls in the management of the organizations risk exposure. The department also resolves compliance issues as they arise and advised the business on rules and controls.

Compliance officers within the compliance department have a duty to their employer to work with management and staff to identify and manage regulatory risk. Their objective is to ensure that an organization has internal controls that adequately measure and manage the risks it faces. Compliance officers provide an in-house service that effectively supports business areas in their duty to comply with relevant laws and regulations and internal procedures. The compliance officer is usually the company’s general counsel, but not always.

Industry regulators authorize and supervise compliance rules through investigation, gathering and sharing information and imposing applicable penalties. Factors used to determine risk within an organization include the nature, diversity, complexity, scale, volume, and size of its business and operations.

Compliance departments play an active role in managing risk and reducing financial crime.

Special Considerations

The 2008 financial crisis led to increased regulatory scrutiny and regulation. This caused financial services organizations to increase the role of the compliance department from advisory to active risk management and monitoring. Compliance now provides practical perspectives on translating regulations into operational requirements.

This stronger risk culture includes timely information sharing, rapid escalation of emerging risks as well as willingness to challenge existing practices. Effective execution of these expanded responsibilities requires a deeper understanding of business and business practices. And, the structure of the compliance department has changed to combine business-unit based coverage with broader, shared expertise across the organization. Recent topics addressed by compliance departments include conduct risk, Banks Secrecy Act and Anti-Money Laundering (BSA/AML) risk, subcontractor risk, and overall risk culture management.

Requirements for a Compliance Department

If a company has overseas locations it must translate its compliance-related materials into that language. It should also seek input from foreign offices on the effectiveness of the company's training materials.

As well, the compliance department should conduct training for employees. There should also be a system for reporting compliance issues. That is, the code of conduct for the compliance department should lay out the process for employees.