Understanding the Impact of Regulatory Non-Compliance | Bank Automation News (2024)

Non-compliance with audit standards and requirements is detrimental to a bank or lender. For standards such as PCI, non-compliance can result in financial penalties or in a bank being unable to process credit card payments. The CCPA assesses civil penalties of up to $7,500 for each intentional violation. Additionally, some standards require public disclosure of violations and incidents. Such disclosures result in reputational harm and public impact.

While it is difficult to quantify the impact of non-compliance accurately, it is clear that it has far-reaching effects. Reputational risk is a significant concern for banks, as a negative reputation leads to lost customers, decreased revenue, and overall harm to the banks standing in the community.

In addition to penalties and fines, a company found to be non-compliant may face civil or criminal litigation. If a bank knowingly fails to comply with regulations they may be subject to punitive damages and significant fines. To avoid these negative outcomes, banks must take proactive steps to ensure compliance and effectively manage risk.

Internal audit scorecards, communications, and assessments are legally discoverable in court matters. They can be used to demonstrate a bank’s negligence or prior awareness of potential issues. Some banks engage consulting firms for their economic, financial, and strategic expertise to provide attorney-client privileged assessments to mitigate risks and become more compliant.

Be Proactive in Protecting Yourself

There are various strategies to protect yourself from audit, regulatory, and reputational risk. A combination of controls and monitoring, software-driven analysis, and awareness of penalties and their impact help organizations manage and reduce risk. By taking proactive steps to ensure compliance and address potential risks, banks can protect themselves and their employees from negative consequences.

  • Strict controls and monitoring: Enhanced visibility through operational security practices, spot checks and enhanced authentication controls can reduce or eliminate risk.
  • Software-driven analysis of multiple standards: Software applications take the hard work out of compliance, providing an intuitive, cost-effective interface capable of managing multiple requirements.
  • Crosswalks: Identification of standards and commonality enable banks to improve audit outcomes.
  • Awareness of penalties and impact: Non-compliance and disregard of requirements can severely impact organizations and their officers and employees. Public awareness of breaches and other incidents usually results in increased oversight and accountability.

Governance Trends to Watch

Throughout 2022, we saw mounting pressure on risk, legal, and compliance teams to improve coordination with line-of-business and other teams in the operations function. The three lines of defense – front-line business activities, risk and compliance, and internal audit remain a strong governance model. However, the recent siloing of functions limits the ability of controls to be fully integrated throughout the organization.

Reducing Risk

Risk reduction happens when IT and the business take appropriate actions. Compliance capabilities must shift from reporting to achieving outcomes. This is critical as organizational risk will likely be re-scoped in 2023 to include the broader partner channels and third-party vendors, increasing demand for this capability. Banks and lenders should increase integration and collaborate to reduce risks. To improve overall risk management, teams must emphasize outcomes over reporting, for example, by prioritizing the time to remediate risk over assessment frequency.

Compliance Management

Compliance requirements continue to evolve. Privacy regulations such as the California Consumer Privacy Act (CCPA) and industry-specific regulations such as the New York Department of Financial Services (NYDFS) and Cybersecurity Regulation (2018), are raising the bar. We see indications this pace will continue and accelerate. And, the systemic risks identified in 2022 will likely result in increased oversight and obligations.

So this year, legal and compliance teams should:

  • Prepare to scale up to meet compliance requirements and obligations.
  • Increase the use of automation and orchestration to enforce the policy.

Roadmap Recommendations

Start shifting from Reporting to Demonstrable Risk Reduction. Legal and compliance teams often excel at auditing, identifying, and reporting on risk. But continue working towards the shift from analysis to action by collaboratively reducing risk with other teams. To do this:

  • Bring legal and compliance objectives and key results (OKRs) into alignment with the business.
  • Integrate legal and compliance services, such as classification and service management.
  • Develop a business case process for risk reduction – by addressing concerns over increasing costs or reduced performance, for example.
  • Improve program metrics and executive reporting.

As an industry, we have the opportunity to transform the lives of millions of people. Informed has the power to drive industry collaboration and financial wellness for all. Come find me at the Bank Automation Summit to continue the conversation!

By Jessica Gonzalez

With more than 15 years’ experience in the financial services industry, including tenures at Santander Consumer USA and Visa, Jessica Gonzalez is now the Director of Lending Strategies at Informed.IQ.

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Understanding the Impact of Regulatory Non-Compliance | Bank Automation News (2024)

FAQs

What are the consequences of regulatory reporting non-compliance? ›

The consequences of regulatory non-compliance can be costly. Worker injuries and deaths, property damages, lost production, and jail time are just a few examples.

What are the implications of non-compliance for banks? ›

Reputational risk is a significant concern for banks, as a negative reputation leads to lost customers, decreased revenue, and overall harm to the banks standing in the community. In addition to penalties and fines, a company found to be non-compliant may face civil or criminal litigation.

What are 3 consequences of non-compliance? ›

Businesses that don't comply with regulations are at serious risk. They could face security breaches, loss of productivity, and reputational damage. Non-compliance might also lead to financial penalties, loss of clientele, disruptions in operations, and even regional lockouts.

What happens if a bank does not comply with regulations? ›

Consequences of Non-Compliance

Non-compliance can attract hefty financial penalties imposed by regulatory authorities. These penalties are often proportional to the severity of the violation and can significantly impact a bank's bottom line.

What are the problems with non-compliance? ›

Non-compliance can range from a simple mistake to criminal matters such as fraud. It can be accidental or deliberate. There are 6 different types of non-compliance: Error or mistake – a genuine mistake where there is no intention to gain something.

What is the most common implication of noncompliance? ›

Your company could incur big penalties, reputational damage, and/or legal action. Handling compliance tasks can be time-consuming, and it can feel burdensome. Business owners and HR professionals, however, should make it a priority to stay in compliance.

What happens if banks are not regulated? ›

Without bank regulation, banks would be free to engage in risky behavior that could lead to bank failures and a financial crisis. To prevent this, regulators must monitor banks' activities to ensure that they are sound and stable.

What are the risks of compliance in banking? ›

“Compliance risk” refers to the risk of regulatory sanctions, financial loss, or damage to reputation that may arise from a bank's failure to comply with laws, regulations, and industry standards related to that sector.

What is compliance violation in banking? ›

Compliance risk, which is often overlooked as it blends into operational risk and transaction processing, is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules & regulations, code of conduct, customer relationship rules or ethical standards.

What are complications of non-compliance? ›

Medical Complications: Non-adherence can lead to medical complications such as drug resistance, medication interactions, and adverse side effects. Higher Morbidity and Mortality Rates: Non-adherence can lead to worsening health conditions, leading to increased morbidity and mortality rates.

What happens if a financial institution fails to comply with KYC and AML regulations? ›

Restricted access to financial services

AML and KYC regulations require financial institutions to adhere to strict due diligence measures. Failure to comply with these requirements can result in restricted access to financial services, including banking facilities, payment processing, and investment opportunities.

What are the consequences of non-compliance with financial reporting standards? ›

Non-compliance can result in fines, lawsuits, and damage to the company's reputation. Moreover, failure to comply with accounting standards may also lead to an audit by regulatory bodies, causing disruption to normal business operations and potentially uncovering other compliance issues.

Who is responsible for regulatory compliance at a bank? ›

Bank compliance officers ensure that a bank's policies, procedures, and practices adhere to federal regulations. Their duties include advising financial administrators, accounting managers, and other bank employees about servicing customers within federal guidelines.

What do regulators do when a bank fails? ›

In the unlikely event of a bank failure, the FDIC acts quickly to protect insured depositors by arranging a sale to a healthy bank, or by paying depositors directly for their deposit accounts to the insured limit.

What happens if regulatory policies are violated? ›

Violations of regulatory requirements often result in legal punishment for individuals and organizations, including fines and debarment from future government programs and contracts.

What happens if you don't comply with regulations? ›

Sanctions include fines, imprisonment and disqualification.

What are the potential consequences of non-compliance with data protection regulations? ›

Fines and sanctions are the most obvious consequences of non-compliance. Companies that do not comply with data protection laws can expect to be fined heavily. Under the GDPR, fines of up to 4% of the company's global annual turnover or up to 20 million euros can be imposed.

What are the risks of regulatory reporting? ›

Risk Management

Efficient regulatory reporting assists financial institutions in more effectively identifying and managing risks. It enables organisations to evaluate their exposure to different types of risks, including credit, market, and operational risks, and take suitable measures to reduce them.

What are consequences for noncompliance to the law? ›

Prison sentences can be issued for individuals found to be in non-compliance with certain laws. These prison sentences will depend on the relevant jurisdiction of the offense and can range from several months to years in prison.

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