30 Apr 2021 Ankit Chadha

The Umbrella of Compliance Risk: Types, Assessment and How to Manage it

Compliance Risk | TRC Corporate Consulting

With the rapid growth in global regulations and accessibility, the compliance risk for businesses has also gone up, making compliance risk management incredibly important. Depending on your industry and trade, there will be rules and factors that will govern what your business is allowed or not allowed to do. You need to be aware of these rules and regulations to manage compliance for your business as usual.

Failing to comply with these regulations can lead to damaging effects for your business and cause financial penalties and even imprisonment. This is why it is incredibly important to be cautious of compliance risk and do everything in your power to avoid it.

Before we move ahead, let’s answer a fundamental question - What is compliance risk?

Compliance refers to the ideal practice of adhering to the regulations. Compliance risk, on the other hand, captures the financial or legal consequences of failing to adhere to these regulations.

Examples of Risk 

As mentioned above, compliance risks differ across industries, and this is why it is not possible to enlist all kinds of compliance risks you can face. However, with the below-mentioned examples, you can get a clear understanding of the kind of business practices you need to keep in mind in order to avoid compliance risk.

  1. Not Conducting Due Diligence on New Customers 

Businesses are needed to conduct a few necessary steps to make sure that a new customer is who they say they are, for example, by requiring proof of identification. A company can perform these steps themselves or hire a third party to do so.

  1. Not Reporting Suspicious Transactions 

Suspicious transactions must be brought to the attention of the government’s treasury. Suspicious activity can be referred to as large amounts of funds being credited or debited from an account.

Categories of Compliance Risk 

To get further clarification on governance risk and compliance, it can be categorised in four areas on the basis of impact type. Here we discuss those areas.

  1. Legal Impact

There are laws that can be used against your organisation if you fail to comply with the set rules and regulations. These laws can result in product seizures, penalties, fines, debarment or even imprisonment.

  1. Financial Impact

Financial outcomes are those instances that impact the bottom line of your business. This could include loss of investors, falling share prices or an impact on potential earnings.

  1. Reputational Impact 

A negative reputation is the outcome of a negative customer perception of the brand. This could be due to bad PR, employee conflict, or declining customer trust.

  1. Business Impact 

These are factors that disrupt the business from operating. Occurrences like trade embargos and plant breakdown can lead to negative business impact.

Common Types of Governance Risks and Compliance Risks 

Every business runs compliance risk at some point or the other. This is why it is important to understand compliance and risk management. Let’s discuss the common types of compliance risks that you can steer clear of.

  1. Regulatory and Political Uncertainty

The political party in power can influence regulations to a great extent. These parties can introduce laws that can completely change how your business functions. This can lead to uncertainty as there is no clarity on the type of rules that come under effect. This can lead to stress on the operation of the business.

  1. Data Protection 

With the expansion of technology and data storage, the rules surrounding data privacy and protection are also increasing. This means that organisations need to be mindful of the way they utilise their customers’ data and ensure that their practices are ethical. Failing to comply with these rules can lead to profound financial, reputational, and legal impact.

  1. Market Risk 

Business leaders are required to be aware of the overall market status to be able to gauge the potential risks in their industry. This helps them come up with safe alternatives and protect their business from falling into the traps.

  1. Conduct Risk

Compliance risk doesn’t just deal with external forces. It also requires your internal stakeholders to comply with the code of conduct. One example is sexual discrimination, or harassment issues can have serious consequences for your business and cause you to lose money, opportunities, and reputation.

  1. Corruption

Businesses are required to ensure that no one from their workforce engages in any form of bribery or fraud activities.

  1. Quality 

Maintaining quality standard is also one of the most serious compliance issues. Failure to comply with the set quality standard could result in financial penalties, product seizures and even complete business shut-down.

Governance Risk and Compliance Management for Your Business Based on Your Current Situation 

Some companies choose not to manage compliance risk and instead consider fines to be part of the business cost, while others take advantage of grey areas to only suffer later on. In the banking industry, the mis-selling of Credit cards led to billions of pounds in fines as it affected over 2 million customers.

Some businesses choose to ignore compliance and risk management and look at fines as a part of business costs. Some businesses also try to take advantage of the loophole, but this can lead to grave consequences in the longer run. But it is always advisable to be mindful of these compliance risks and try to manage them at different levels.

Here are a few ways in which you can manage compliance risks.

  1. Little to No Compliance 

You can have a designated compliance risk team that works to assess, define and even assign set resources to manage potential risks. This will leave you in a better position should your business face any compliance risk in the future.

  1. Ageing Compliance Process

This approach to compliance risk management utilises technological advancements to adapt to existing compliance methods. Through this approach, businesses leverage all available resources and invest in a well-rounded system to manage the different steps of the process.

  1. Active Compliance Process 

Certain compliances processes will need you to review and maintain large number of documents. A great idea to avoid spending man hours on this tedious task is to get it outsourced. Designated professionals will help you organise paperwork and avoid documentation related issues.

No matter which approach you go for, it should be clear by now that understanding compliance and risk management is essential to run your business effectively. Whether your business is big or small, a coming-of-age startup or a big corporation, you run the risk of non-compliance, and you require to manage these risks; failing to do so can result in severe detrimental effects.  We at TRC Corporate Consulting utilize proven, trusted, and tested solutions to manage the compliance risks faced by your business and offer tailored solutions which best fits the captioned entity’s profile.

Looking for an agency for efficient and effective compliance risk management? Contact us now!

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