Understanding the Role and Duties of the Compliance Department

What Is the Compliance Department?

The compliance department plays a crucial role in financial services by ensuring adherence to external regulations and internal controls. It protects investors, maintains fair and efficient markets, and reduces financial crime. By identifying and mitigating organizational risks, the compliance department supports consumer confidence and manages regulatory risks, including advertising, conflicts of interest, and customer interactions.

Exploring the Responsibilities of a Compliance Department

A compliance department typically has five areas of responsibility—identification, prevention, monitoring and detection, resolution, and advisory. Compliance departments identify and advise on organizational risks. 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 help businesses comply with laws, regulations, and internal procedures. The compliance officer is usually the company’s general counsel, but not always.

Regulators establish and enforce compliance through investigations, sharing information, and imposing penalties. Factors used to determine risk within an organization include the nature, diversity, complexity, scale, volume, and size of its business and operations.

How the 2008 Financial Crisis Elevated Compliance Roles

The 2008 crisis led to more regulations, making compliance departments shift from advisory to active risk management. Compliance now provides practical perspectives on translating regulations into operational requirements.

A stronger risk culture now includes quick information sharing, rapid risk escalation, and the challenging of current practices. Effective execution of these expanded responsibilities requires a deeper understanding of business and business practices. Compliance departments now blend business-unit coverage with shared expertise across the organization. Compliance departments now focus on conduct risk, Banks Secrecy Act and Anti-Money Laundering (BSA/AML) risk, subcontractor risk, and managing overall risk culture.

Essential Compliance Department Needs and Procedures

Companies with overseas locations must translate compliance materials into the local 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.

The Bottom Line

The compliance department plays a crucial role in the financial services sector by ensuring adherence to external regulations and internal controls, thereby enhancing investor protection and market transparency. It identifies and manages risks, transitioning from merely an advisory position to active engagement in risk management and monitoring, particularly post the 2008 financial crisis. Compliance departments now stand at the forefront, addressing complex issues like conduct risk, Anti-Money Laundering, and global regulations, while providing practical implementations of regulatory requirements. A comprehensive compliance infrastructure, including employee training and effective reporting systems, is essential to protect an organization and maintain consumer confidence.