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The Importance of Compliance Risk Assessment

In today’s rapidly evolving world the business complexity and risk are on the rise too. Compliance is critical for many industries such as finance, healthcare, banking and almost all companies beyond a certain size or publicly owned face compliance rules.

Every year companies spend significant time and resource on the compliant risk assessment process. As the compliance risk continues to be a focal point for regulators and penalties for violations can be huge. Non-compliance is practically a welcome mat for cybercrime, resulting in loss of reputation and financial disaster. Whichever industry you belong to you need to take adequate steps to ensure that compliance risk is adequately managed.

Compliance Risk Management

Non-compliance can result in material losses and exposures, which is referred to as compliance risk. Failure to behave by industry standards, legislation, or internal procedures might result in legal consequences. The most compelling risk is regulatory compliance because the statutes enacting the requirements typically carry heavy fines or even the threat of incarceration for non-compliance. The next category of compliance risk is considered industry norms. These standards are not rules or regulations, but rather best-prescribed practices.

The third tier of compliance risk is believed to be compliance with internal policies. Regulations and standards entail the creation of written regulations that control all aspects of a company’s operations. However, to ensure that compliance needs are completed, firms must ensure that employees follow the measures outlined in written policies.

Compliance risk is also known as integrity risk, and various compliance standards have been enacted to ensure that corporations operate fairly and ethically. Compliance risk is also known as integrity risk in this context.

Collective governance, risk management, and compliance discipline are stated to include compliance risk management. Noncompliance can result in the organization’s reputation being tarnished as well as lost business opportunities.

What is Compliance Risk?

Compliance risk is defined as the risk of legal or regulatory sanctions, financial loss, or reputational damage as a result of a banking organization’s failure to comply with applicable laws, regulations, rules, other regulatory requirements, or codes of conduct and other self-regulatory organisation (SRO) standards (applicable rules and standards).

Risk management is at the heart of compliance. The technique by which numerous compliance subjects of regulatory attention can be separated into risk areas is the easiest way to grasp this notion. By compiling a list of risks, the compliance officer will be able to get a high-level picture of all hazards that could potentially affect the company, as well as the ability to rate those risks in a way that allows the company to prioritise which risks focussing on.

Importance of Compliance Risk Assessment

#Time Management |

The majority of business owners do not have the time to read every regulation paper ever produced. Regulatory statutes are sometimes written in legalese, making it difficult to apply the restrictions in practice. Many rules are out of date and no longer apply to modern RIA operations and challenges. As a result, regulatory authorities are continually modifying and updating legislation, making it practically hard to stay on top of every compliance risk that a company confronts. That is why compliance officers need to identify and organise the areas of risk that are most likely to pose a threat to the company.

#Display Competency to Regulators |

The competency of the compliance officer is a big part of what regulators want to see in an audit or review. Even if every item in the firm’s policies and procedures isn’t properly addressed, the ability of the compliance officer to speak intelligently about the compliance programme gives the examiner confidence that effective monitoring is being carried out. Being able to communicate with regulators about how the compliance programme analyses and handles risks demonstrate a solid awareness of the “rationale” underpinning compliance principles.

#Protecting the Clients and the Firm |

Risks imposed on the firm have an impact on the clients, and vice versa. Clients entrust advisors with private, non-public information that contains intimate facts about their lives as well as a detailed financial picture. With that trust comes the fiduciary responsibility to act in the best interests of the client. Identifying areas of risk that may influence a firm’s compliance programme leads to the discovery of hazards that may have an impact on the firm’s clients, and eventually the RIA as a whole.

#Strategic Decision-Making |

Other parts of a RIA’s activities are influenced by compliance considerations. Understanding the compliance consequences of trading with discretion, for example, may influence the firm’s choice to grant discretionary trading access. For discretionary trading, the regulatory authority may have a minimum net capital requirement. If this is the case, this compliance idea has an immediate influence on the accounting demands of the company.

Alternatively, the state regulatory agency may object to hourly financial planning fees, calling them exorbitant in some situations. In this case, the advisor may choose financial planning models that do not require hourly fees to be paid. The hourly service will not be included when it comes time to develop the website. In this scenario, the compliance idea of fees and remuneration has a direct impact on website marketing.

To summarise, you must apply a strategy to adequately identify areas of risk that may jeopardise your organisation, your clients, and even your professional reputations while launching and running your firm. Knowing how to evaluate risks from a strategic standpoint will be crucial in decision-making processes that could make or break your company’s profitability. A risk assessment is the most effective way to accomplish this.

The Compliance Risk Management Program’s Key Components

A comprehensive compliance risk management programme must include five key elements:
Put a system in place
Your risk management program’s framework must include a way for discussing and documenting evaluations linked to:
The quantity of risk can be low, moderate, or high, including the methodology in assigning the risk ratings.
The quality of concerning how well the broad and management identifies, measures, controls, and monitors’ risk.
An approximate synopsis of the institution’s risk.
The direction of the risk like increasing, decreasing or unchanged.

Benefits of Compliance Risk Management

The benefits of getting compliance risk management are as follows:

Tailor compliance for dealing with the most significant risks.
Proactively mitigate the risks and compliance issues.
Higher visibility concerning compliance profile.
Best practices that are related to content library accessible within its application.
Improve efficiency and lower its costs.
Ensure systematic and consistent compliance across the enterprise.
Eliminate all the compliance errors and inconsistencies.
Preparing informed strategic decisions and also minimize business performance.


The Compliance Risk Assessment establishes a framework for assessing compliance risk and assigning risk ratings that best characterise the level of risk associated with applicable laws, regulations, rules, standards, or guidelines. As a result, the compliance risk management programme of a financial institution should be documented in the form of compliance policies and processes, as well as compliance risk management standards. Use Shergroup’s compliance risk assessment to find out and mitigate any business risks. We look forward to working with you.

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Last updated | 19 July 2023

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