Better practices for compliance management

The main compliance challenges

We know that businesses and government entities alike struggle to manage compliance requirements. Many have put up with challenges for so long—often with limited resources—that they no longer see how problematic the situation has become.

FIVE COMPLIANCE CHALLENGES YOU MIGHT BE DEALING WITH

01 COMPLIANCE SILOS
It’s not uncommon that, over time, separate activities, roles, and teams develop to address different compliance requirements. There’s often a lack of integration and communication among these teams or individuals. The result is duplicated efforts—and the creation of multiple clumsy and inefficient systems. This is then perpetuated as compliance processes change in response to regulations, mergers and acquisitions, or other internal business re-structuring.

02 NO SINGLE VIEW OF COMPLIANCE ASSURANCE
Siloed compliance systems also make it hard for senior management to get an overview of current compliance activities and perform timely risk assessments. If you can’t get a clear view of compliance risks, then chances are good that a damaging risk will slip under the radar, go unaddressed, or simply be ignored.

03 COBBLED TOGETHER, HOME-GROWN SYSTEMS
Using generalized software, like Excel spreadsheets and Word documents, in addition to shared folders and file systems, might have made sense at one point. But, as requirements become more complex, these systems become more frustrating, inefficient, and risky. Compiling hundreds or thousands of spreadsheets to support compliance management and regulatory reporting is a logistical nightmare (not to mention time-consuming). Spreadsheets are also prone to error and limited because they don’t provide audit trails or activity logs.

04 OLD SOFTWARE, NOT DESIGNED TO KEEP UP WITH FREQUENT CHANGES
You could be struggling with older compliance software products that aren’t designed to deal with constant change. These can be increasingly expensive to upgrade, not the most user-friendly, and difficult to maintain.

05 NOT USING AUTOMATED MONITORING
Many compliance teams are losing out by not using analytics and data automation. Instead, they rely heavily on sample testing to determine if compliance controls and processes are working, so huge amounts of activity data is never actually checked.

Transform your compliance management process

Good news! There’s some practical steps you can take to transform compliance processes and systems so that they become way more efficient and far less expensive and painful.

It’s all about optimizing the interactions of people, processes, and technology around regulatory compliance requirements across the entire organization.

It might not sound simple, but it’s what needs to be done. And, in our experience, it can be achieved without becoming massively time-consuming and expensive. Technology for regulatory compliance management has evolved to unite processes and roles across all aspects of compliance throughout your organization.

Look, for example, at how technology like Salesforce (a cloud-based system with big data analytics) has transformed sales, marketing, and customer service. Now, there’s similar technology which brings together different business units around regulatory compliance to improve processes and collaboration for the better.

Where to start?

Let’s look at what’s involved in establishing a technology-driven compliance management process. One that’s driven by data and fully integrated across your organization.

THE BEST PLACE TO START IS THE END

Step 1: Think about the desired end-state.

First, consider the objectives and the most important outcomes of your new process. How will it impact the different stakeholders? Take the time to clearly define the metrics you’ll use to measure your progress and success.

A few desired outcomes:

  • Accurately measure and manage the costs of regulatory and policy compliance.
  • Track how risks are trending over time, by regulation, and by region.
  • Understand, at any point in time, the effectiveness of compliance-related controls.
  • Standardize approaches and systems for managing compliance requirements and risks across the organization.
  • Efficiently integrate reporting on compliance activities with those of other risk management functions.
  • Create a quantified view of the risks faced due to regulatory compliance failures for executive management.
  • Increase confidence and response times around changing and new regulations.
  • Reduce duplication of efforts and maximize overall efficiency.

NOW, WHAT DO YOU NEED TO SUPPORT YOUR OBJECTIVES?

Step 2: Identify the activities and capabilities that will get you the desired outcomes.

Consider the different parts of the compliance management process below. Then identify the steps you’ll need to take or the changes you’ll need to make to your current activity that will help you achieve your objectives. We’ve put together a cheat sheet to help this along.

Galvanize

IDENTIFY & IMPLEMENT COMPLIANCE CONTROL PROCEDURES

  • 01 Maintain a central library of regulatory requirements and internal corporate policies, allocated to owners and managers.
  • 02 Define control processes and procedures that will ensure compliance with regulations and policies.
  • 03 Link control processes to the corresponding regulations and corporate policies.
  • 04 Assess the risk of control weaknesses and failure to comply with regulations and policies.

RUN TRANSACTIONAL MONITORING ANALYTICS

  • 05 Monitor the effectiveness of controls and compliance activities with data analytics.
  • 06 Get up-to-date confirmation of the effectiveness of controls and compliance from owners with automated questionnaires or certification of adherence statements.

MANAGE RESULTS & RESPOND

  • 07 Manage the entire process of exceptions generated from analytic monitoring and from the generation of questionnaires and certifications.

REPORT RESULTS & UPDATE ASSESSMENTS

  • 08 Use the results of monitoring and exception management to produce risk assessments and trends.
  • 09 Identify new and changing regulations as they occur and update repositories and control and compliance procedures.
  • 10 Report on the current status of compliance management activities from high- to low-detail levels.

IMPROVE THE PROCESS

  • 11 Identify duplicate processes and fix procedures to combine and improve controls and compliance tests.
  • 12 Integrate regulatory compliance risk management, monitoring, and reporting with overall risk management activities.

Eight compliance processes in desperate need of technology

01 Centralize regulations & compliance requirements
A major part of regulatory compliance management is staying on top of countless regulations and all their details. A solid content repository includes not only the regulations themselves, but also related data. By centralizing your regulations and compliance requirements, you’ll be able to start classifying them, so you can eventually search regulations and requirements by type, region of applicability, effective dates, and modification dates.

02 Map to risks, policies, & controls
Classifying regulatory requirements is no good on its own. They need to be connected to risk management, control and compliance processes, and system functionality. This is the most critical part of a compliance management system.

Typically, in order to do this mapping, you need:

  • An assessment of non-compliant risks for each requirement.
  • Defined processes for how each requirement is met.
  • Defined controls that make sure the compliance process is effective in reducing non-compliance risks.
  • Controls mapped to specific analytics monitoring tests that confirm the effectiveness on an ongoing basis.
  • Assigned owners for each mapped requirement. Specific processes and controls may be assigned to sub-owners.

03 Connect to data & use advanced analytics

Using different automated tests to access and analyze data is foundational to a data-driven compliance management approach.

The range of data sources and data types needed to perform compliance monitoring can be humongous. When it comes to areas like FCPA or other anti-bribery and corruption regulations, you might need to access entire populations of purchase and payment transactions, general ledger entries, payroll, and travel and entertainment expenses. And that’s just the internal sources. External sources could include things like the Politically Exposed Persons database or Sanctions Checks.

Extensive suites of tests and analyses can be run against the data to determine whether compliance controls are working effectively and if there are any indications of transactions or activities that fail to comply with regulations. The results of these analyses identify specific anomalies and control exceptions, as well as provide statistical data and trend reports that indicate changes in compliance risk levels.

Truly delivering on this step involves using the right technology since the requirements for accessing and analyzing data for compliance are demanding. Generalized analytic software is seldom able to provide more than basic capabilities, which are far removed from the functionality of specialized risk and control monitoring technologies.

04 Monitor incidents & manage issues

It’s important to quickly and efficiently manage instances once they’re flagged. But systems that create huge amounts of “false positives” or “false negatives” can end up wasting a lot of time and resources. On the other hand, a system that fails to detect high risk activities creates risk of major financial and reputational damage. The monitoring technology you choose should let you fine-tune analytics to flag actual risks and compliance failures and minimize false alarms.

The system should also allow for an issues resolution process that’s timely and maintains the integrity of responses. If the people responsible for resolving a flagged issue don’t do it adequately, an automated workflow should escalate the issues to the next level.

Older software can’t meet the huge range of incident monitoring and issues management requirements. Or it can require a lot of effort and expense to modify the procedures when needed.

05 Manage investigations

As exceptions and incidents are identified, some turn into issues that need in-depth investigation. Software helps this investigation process by allowing the user to document and log activities. It should also support easy collaboration of anyone involved in the investigation process.

Effective security must be in place around access to all aspects of a compliance management system. But it’s extra important to have a high level of security and privacy for the investigation management process.

06 Use surveys, questionnaires & certifications

Going beyond just transactional analysis and monitoring, it’s also important to understand what’s actually happening right now, by collecting the input of those working in the front-lines.

Software that has built-in automated surveys and questionnaires can gather large amounts of current information directly from these individuals in different compliance roles, then quickly interpret the responses.

For example, if you’re required to comply with the Sarbanes-Oxley Act (SOX), you can use automated questionnaires and certifications to collect individual sign-off on SOX control effectiveness questions. That information is consolidated and used to support the SOX certification process far more efficiently than using traditional ways of collecting sign-off.

07 Manage regulatory changes

Regulations change constantly, and to remain compliant, you need to know—quickly— when those changes happen. This is because changes can often mean modifications to your established procedures or controls, and that could impact your entire compliance management process.

A good compliance software system is built to withstand these revisions. It allows for easy updates to existing definitions of controls, processes, and monitoring activities.

Before software, any regulatory changes would involve huge amounts of manual activities, causing backlogs and delays. Now much (if not most) of the regulatory change process can be automated, freeing your time to manage your part of the overall compliance program.

08 Ensure regulatory examination & oversight

No one likes going through compliance reviews by regulatory bodies. It’s even worse if failures or weaknesses surface during the examination.

But if that happens to you, it’s good to know that many regulatory authorities have proven to be more accommodating and (dare we say) lenient when your compliance process is strategic, deliberate, and well designed.

There are huge benefits, in terms of efficiency and cost savings, by using a structured and well-managed regulatory compliance system. But the greatest economic benefit happens when you can avoid a potentially major financial penalty as a result of replacing an inherently unreliable and complicated legacy system with one that’s purpose-built and data-driven.

Click here to access Galvanize’s new White Paper

Fintech, regtech and the role of compliance in 2020

The ebb and flow of attitudes on the adoption and use of technology has evolving ramifications for financial services firms and their compliance functions, according to the findings of the Thomson Reuters Regulatory Intelligence’s fourth annual survey on fintech, regtech and the role of compliance. This year’s survey results represent the views and experiences of almost 400 compliance and risk practitioners worldwide.

During the lifetime of the report it has had nearly 2,000 responses and been downloaded nearly 10,000 times by firms, risk and compliance practitioners, regulators, consultancies, law firms and global systemically-important financial institutions (G-SIFIs). The report also highlights the shifting role of the regulator and concerns about best or better practice approaches to tackle the rise of cyber risk. The findings have become a trusted source of insight for firms, regulators and their advisers alike. They are intended to help regulated firms with planning, resourcing and direction, and to allow them to benchmark whether their resources, skills, strategy and expectations are in line with those of the wider industry. As with previous reports, regional and G-SIFI results are split out where they highlight any particular trend. One challenge for firms is the need to acquire the skill sets which are essential if they are to reap the expected benefits of technological solutions. Equally, regulators and policymakers need to have the appropriate up-todate skillsets to enable consistent oversight of the use of technology in financial services. Firms themselves, and G-SIFIs in particular, have made substantial investments in skills and the upgrading of legacy systems.

Key findings

  • The involvement of risk and compliance functions in their firm’s approach to fintech, regtech and insurtech continues to evolve. Some 65% of firms reported their risk and compliance function was either fully engaged and consulted or had some involvement (59% in prior year). In the G-SIFI population 69% reported at least some involvement with those reporting their compliance function as being fully engaged and consulted almost doubling from 13% in 2018, to 25% in 2019. There is an even more positive picture presented on increasing board involvement in the firm’s approach to fintech, regtech and insurtech. A total of 62% of firms reported their board being fully engaged and consulted or having some involvement, up from 54% in the prior year. For G-SIFIs 85% reported their board being fully engaged and consulted or having some involvement, up from 56% in the prior year. In particular, 37% of G-SIFIs reported their board was fully engaged with and consulted on the firm’s approach to fintech, regtech and insurtech, up from 13% in the prior year.
  • Opinion on technological innovation and digital disruption has fluctuated in the past couple of years. Overall, the level of positivity about fintech innovation and digital disruption has increased, after a slight dip in 2018. In 2019, 83% of firms have a positive view of fintech innovation (23% extremely positive, 60% mostly positive), compared with 74% in 2018 and 83% in 2017. In the G-SIFI population the positivity rises to 92%. There are regional variations, with the UK and Europe reporting a 97% positive view at one end going down to a 75% positive view in the United States.
  • There has been a similar ebb and flow of opinion about regtech innovation and digital disruption although at lower levels. A total of 77% reported either an extremely or mostly positive view, up from 71% in the prior year. For G-SIFIs 81% had a positive view, up from 76% in the prior year.
  • G-SIFIs have reported a significant investment in specialist skills for both risk and compliance functions and at board level. Some 21% of G-SIFIs reported they had invested in and/or appointed people with specialist skills to the board to accommodate developments in fintech, insurtech and regtech, up from 2% in the prior year. This means in turn 79% of G-SIFIs have not completed their work in this area, which is potentially disturbing. Similarly, 25% of G-SIFIs have invested in specialist skills for the risk and compliance functions, up from 9% in the prior year. In the wider population 10% reported investing in specialist skills at board level and 16% reported investing in specialist skills for the risk and compliance function. A quarter (26%) reported they have yet to invest in specialist skills for the risk and compliance function, but they know it is needed (32% for board-level specialist skills). Again, these figures suggest 75% of G-SIFIs have not fully upgraded their risk and compliance functions, rising to 84% in the wider population.
  • The greatest financial technology challenge firms expect to face in the next 12 months have changed in nature since the previous survey, with the top three challenges cited as keeping up with technological advancements; budgetary limitations, lack of investment and cost; and data security. In prior years, the biggest challenges related to the need to upgrade legacy systems and processes as well as budgetary limitations, the adequacy and availability of skilled resources together with the need for cyber resilience. In terms of the greatest benefits expected to be seen from financial technology in the next 12 months the top three are a strengthening of operational efficiency, improved services for customers and greater business opportunities.
  • G-SIFIs are leading the way on the implementation of regtech solutions. Some 14% of G-SIFIs have implemented a regtech solution, up from 9% in the prior year with 75% (52% in the prior year) reporting they have either fully or partially implemented a regtech solution to help manage compliance. In the wider population, 17% reported implementing a regtech solution, up from 8% in the prior year. The 2018 numbers overall showed a profound dip from 2017 when 29% of G-SIFIs and 30% of firms reported implementing a regtech solution, perhaps highlighting that early adoption of regtech solutions was less than smooth.
  • Where firms have not yet deployed fintech or regtech solutions various reasons were cited as to what was holding them back. Significantly, one third of firms cited lack of investment; a similar number of firms pointed to a lack of in-house skills and information security/data protection concerns. Some 14% of  firms and 12% of G-SIFIs reported they had taken a deliberate strategic decision not to deploy fintech or regtech solutions yet.
  • There continues to be substantial variation in the overall budget available for regtech solutions. A total of 38% of firms (31% in prior year) reported that the expected budget would grow in the coming year, however, 31% said they lack a budget for regtech (25% in the prior year). For G-SIFIs 48% expected the budget to grow (36% in prior year), with 12% reporting no budget for regtech solutions (6% in the prior year).

Focus : Challenges for firms

Technological challenges for firms come in all shapes and sizes. There is the potential, marketplace changing, challenge posed by the rise of bigtech. There is also the evolving approach of regulators and the need to invest in specialist skill sets. Lastly, there is the emerging need to keep up with technological advances themselves.

TR10

The challenges for firms have moved on. In the first three years of the report the biggest financial technology challenge facing firms was that of the need to upgrade legacy systems and processes. This year the top three challenges are expected to be the need to keep up with technology advancements; perceived budgetary limitations, lack of investment and cost, and then data security.

Focus : Cyber risk

Cyber risk and the need to be cyber-resilient is a major challenge for financial services firms which are targets for hackers. They must be prepared and be able to respond to any kind of cyber incident. Good customer outcomes will be under threat if cyber resilience fails.

One of the most prevalent forms of cyber attack is ransomware. There are different types of ransomware, all of which will seek to prevent a firm or an individual from using their IT systems and will ask for something (usually payment of a ransom) to be done before access will be restored. Even then, there is no guarantee that paying the fine or acceding to the ransomware attacker’s demands will restore full access to all IT systems, data or files. Many firms have found that critical files often containing client data have been encrypted as part of an attack and large amounts of money are demanded for restoration. Encryption is in this instance used as a weapon and it can be practically impossible to reverse-engineer the encryption or “crack” the files without the original encryption key – which cyber attackers deliberately withhold. What was previously viewed often as an IT problem has become a significant issue for risk and compliance functions. The regulatory stance is typified by the UK Financial Conduct Authority (FCA) which has said its goal is to “help firms become more resilient to cyber attacks, while ensuring that consumers are protected and market integrity is upheld”. Regulators do not expect firms to be impervious but do expect cyber risk management to become a core competency.

Good and better practice on defending against ransomware attacks Risk and compliance officers do not need to become technological experts overnight but must ensure cyber risks are effectively managed and reported on within their firm’s corporate governance framework. For some compliance officers, cyber risk may be well outside their comfort zone but there is evidence that simple steps implemented rigorously can go a long way towards protecting a firm and its customers. Any basic cyber-security hygiene aimed at protecting businesses from ransomware attacks should make full use of the wide range of resources available on cyber resilience, IT security and protecting against malware attacks. The UK National Cyber Security Centre has produced some practical guidance on how organizations can protect themselves in cyberspace, which it updates regularly. Indeed, the NCSC’s 10 steps to cyber security have now been adopted by most of the FTSE350.

TR11

Closing thoughts

The financial services industry has much to gain from the effective implementation of fintech, regtech and insurtech but practical reality is there are numerous challenges to overcome before the potential benefits can be realised. Investment continues to be needed in skill sets, systems upgrades and cyber resilience before firms can deliver technological innovation without endangering good customer outcomes.

An added complication is the business need to innovate while looking over one shoulder at the threat posed by bigtech. There are also concerns for solution providers. The last year has seen many technology start-ups going bust and far fewer new start-ups getting off the ground – an apparent parallel, at least on the surface, to the bubble that was around dotcom. Solutions need to be practical, providers need to be careful not to over promise and under deliver and above all developments should be aimed at genuine problems and not be solutions looking for a problem. There are nevertheless potentially substantive benefits to be gained from implementing fintech, regtech and insurtech solutions. For risk and compliance functions much of the benefit may come from the ability to automate rote processes with increasing accuracy and speed. Indeed, when 900 respondents to the 10th annual cost of compliance survey report were asked to look into their crystal balls and predict the biggest change for compliance in the next 10 years, the largest response was automation.

Technology and its failure or misuse is increasingly being linked to the personal liability and accountability of senior managers. Chief executives, board members and other senior individuals will be held accountable for failures in technology and should therefore ensure their skill set is up-to-date. Regulators and politicians alike have shown themselves to be increasingly intolerant of senior managers who fail to take the expected reasonable steps with regards to any lack of resilience in their firm’s technology.

This year’s findings suggest firms may find it beneficial to consider:

  • Is fintech (and regtech) properly considered as part of the firm’s strategy? It is important for regtech especially not to be forgotten about in strategic terms: a systemic failure arising from a regtech solution has great capacity to cause problems for the firm – the UK FCA’s actions on regulatory reporting, among other things, are an indicator of this.
  • Not all firms seem to have fully tackled the governance challenge fintech implies: greater specialist skills may be needed at board level and in risk and compliance functions.
  • Lack of in-house skills was given as a main reason for failing to develop fintech or regtech solutions. It is heartening that firms understand the need for those skills. As fintech/regtech becomes mainstream, however, firms may be pressed into developing such solutions. Is there a plan in place to plug the skills gap?
  • Only 22% of firms reported that they need more resources to evaluate, understand and deploy fintech/ regtech solutions. This suggests 78% of firms are unduly relaxed about the resources needed in the second line of defence to ensure fintech/regtech solutions are properly monitored. This may be a correct conclusion, but seems potentially bullish.

Click here to access Thomson Reuters’ Survey Results

Optimizing Your GRC Technology Ecosystem

Most organizations rely on multiple technologies to manage GRC across the enterprise. Optimizing a GRC technology ecosystem aligned with a defined GRC process structure improves risk-informed business decisions and achievement of strategic business objectives. This illustration outlines ways to continuously optimize your GRC technology ecosystem for

  • greater process consistency
  • and development of actionable information.

An integrated GRC technology ecosystem built on common vocabulary, taxonomy and processes enables

  • more accurate and timely reporting,
  • increased reliability of achievement of objectives
  • and greater confidence in assurance with less burden on the business.

Here are just a few of the key benefits:

Process and Technology Alignment

  • Common methods for core tasks, uniform taxonomies, and consistent vocabulary for governance, risk management and compliance across the organization
  • Risk-based actions and controls that ensure timely responses to changed circumstances
  • Standardized GRC processes based on understanding where in the organization each defined process takes place and how data is used in managing risks and requirements
  • Connected technologies as necessary to gain a complete view of the management actions, controls and information needed by each user

Governance Systems to include:

  • Strategy / Performance
  • Board Management
  • Audit & Assurance Tools

Risk Systems to include:

  • Brand & Reputation
  • Finance / Treasury Risk
  • Information / IT Risk
  • External Risk Content
  • Third Party Risk

Compliance Systems to include:

  • Policies
  • Helpline / Hotline
  • Training
  • EHS (Environment Health and Safety)
  • Fraud / Corruption
  • Global Trade
  • Privacy
  • Regulatory Change
  • AML (Anti Money Laundering) / KYC (Know Your Customer)

Enabling Systems to include:

  • Data Visualization
  • Analytics
  • Business Intelligence
  • Predictive Tools
  • External Data Sources

Protective Systems to include:

  • Information Security
  • Data Protection
  • Assets Control

Benefits and Outcomes

  • Enhanced tracking of achievement of objectives and obstacles
  • Connected reporting for board/management/external stakeholders
  • Timely understanding of impact from operational decisions
  • Actionable view of changes needed to meet regulatory requirements
  • Clear action pathways for resolution of issues and process reviews
  • Consistent risk assessments feeding into advanced analytics
  • Improved predictive capabilities to support strategic planning
  • Control testing and audit trails for response to regulators and auditors
  • Greater confidence in assurance with less burden on the business
  • Enterprise-wide, departmental and geographic control standards

OCEG

Tips for Optimization

1. Process Framework

  • Identify tasks appropriate for standardization and schedule implementation across units
  • Assess vocabulary used throughout organization for inconsistencies and establish rules
  • Adjust process model periodically to continue alignment with business objectives and activities

2. Technology Ecosystem

  • Periodically review GRC technologies for gaps and duplication of systems
  • Assess appropriateness of connection of systems for data sharing and user access
  • Maintain a current road map for re-purposing and acquisition of technologies

3. Outcome Management

  • Apply standard processes for resolution of issues and remediation of identified process framework or technology ecosystem weaknesses
  • Enhance reporting capabilities with refined report structure and delivery methods/schedules
  • Ensure all users apply the process framework and understand how best to use the technology

Click here to access OCEG’s illustration in detail

The future of compliance – How cognitive computing is transforming the banking industry

Paradigm shift in financial services regulatory compliance

The compliance landscape has changed rapidly and dramatically over the past 15 years, with the volume and complexity of new regulations rising unabated. Financial institutions have strained to keep pace with the onslaught of legislative and regulatory changes that arose in response to improper business practices and criminal activity. These changes caused the erosion of public confidence in global credit and financial markets and in the security of our banking system.

After the financial crisis of 2008, there was a sharp increase in enforcement actions brought by federal and state regulators in a broad range of cases involving financial and securities fraud, economic sanctions violations, money laundering, bribery, corruption, market manipulation, and tax evasion, leading to violations of the Bank Secrecy Act and OFAC sanctions1 According to Forbes, Inc., aggregate fines paid by the largest global banks from 2008 through August 2014 exceeded USD 250 billion. A February 2016 report issued by Bloomberg revealed that the toll on foreign banks since the 2008 crisis has been colossal with 100,000 jobs lost, USD 63 billion in fines and penalties, and a staggering USD 420 billion dollar loss in market capitalization.

In the wake of these enforcement actions and record-breaking penalties, financial institutions are under pressure to

  • rethink,
  • restructure,
  • and retool

their risk and compliance function to operate in the current environment. With regulators, investors and boards demanding increased global transparency, risk and compliance can no longer be tackled in geographical silos. Transforming the way compliance departments operate to meet the new reality requires an investment in talent and technology.

Spending on talent continues to rise as institutions hire more and more staff to shore up already sizeable compliance teams. At the end of 2014, Citigroup reported a compliance staff of 30,000. Some boards, analysts, and investors question the exploding costs of compliance yet recognize that any effort to reduce staff without demonstrable and measureable improvements in compliance processes and technology would almost certainly be viewed negatively by regulators. Headcount alone cannot solve today’s compliance challenges. One possible solution lies in transformative technology that enables a shift in the focus of compliance staff from that of information gatherers to information analyzers. In other words, it is time for a paradigm shift in the financial services industry and the way regulatory compliance departments operate.

Cognitive computing for compliance

Cognitive systems are trained by humans and learn as they ingest and interpret new information. Rather than being explicitly programmed, they learn and reason from their interactions with us and from their experiences with their environment. IBM® Watson® technology represents a new era in computing called cognitive computing, where systems understand the world in a way more similar to humans: through

  • senses,
  • learning
  • and experience.

Watson

  • uses natural language processing to analyze structured and unstructured data,
  • uses natural language processing to understand grammar and context,
  • understands complex questions
  • and proposes evidence-based answers,

based on supporting evidence and the quality of information found.

Cognitive computing is a natural fit for the regulatory compliance space because it can be used to accomplish the significant amount of analysis required to read and interpret regulations. The traditional process of distilling regulations into distinct requirements is a demanding and continuous undertaking. Compliance professionals must read hundreds of regulatory documents and determine which of the thousands of lines of text constitute true requirements. Given the same document to assess, different staff can arrive at different conclusions. In a manual environment, this adds another layer of issues to track while the parties resolve whether the identified text is or is not a requirement.

This work is usually performed on a continuous cycle and under the pressure of deadlines. The end-to-end process of identifying and finalizing the requirements inventory can be demanding and tedious. It is also traditionally encumbered by the heavy use of spreadsheets for tracking of regulations, requirements, internal decisions and statuses. Together, these conditions have the potential to negatively impact the work environment and can result in low morale and high turnover. Only when the human effort can shift from the tedium of manual processes (collect regulations, identify requirements, and track compliance issues through spreadsheets) to an automated solution will end-to-end visibility and transparency be realized. Cognitive computing technology can help an institution realign its approach from outdated information processing techniques to a state-of-the-art solution that enables this transformation.

IBM Watson Regulatory Compliance puts the power of cognitive computing into the hands of compliance professionals, giving them the capabilities needed to leverage data to help them manage risk and compliance requirements, and optimize data for more effective analysis. It is specifically tailored for compliance departments and offers, or in the future may offer, core functionalities that include:

  • Document ingestion
  • Requirements parsing and identification
  • Requirements decisioning and management
  • Categorization of requirements
  • Mapping of controls to requirements
  • Harmonization of risk frameworks
  • Interactive reporting and analytics
  • Automated audit trail
  • Automated requirements catalog
  • Centralized document library

Watson Regulatory Compliance is designed to help organizations use cognitive technology to transform key portions of their regulatory compliance processes that are traditionally performed manually.

IBM Cognitive

These enhancements, enabled by Watson, can potentially help an organization to reallocate resources to more value-added compliance and analytic activities for improved transparency across the compliance function.

A conceptual end-to-end approach for cognitive compliance and requirement management, to categorization, mapping of controls and standards, and analytics and reporting is presented in the following figure.

IBM Cognitive 2

Click here to access IBM’s White Paper

 

EIOPA: Peer review assessing how National Competent Authorities (NCAs) supervise and determine whether an insurer’s set­ting of key functions fulfils the legal requirements of Solvency II

The main task of the European Insurance and Occupational Pensions Authority (EIOPA) is to

  • enhance supervisory convergence,
  • strengthen consumer protection
  • and preserve financial stability.

In the context of enhancing supervisory convergence and in accordance with its mandate, EIOPA regularly conducts peer reviews, working closely with national competent authorities (NCAs), with the aim of strengthening both the convergence of supervisory practices across Europe and the capacity of NCAs to conduct high-quality and effective supervision.

In line with its mandate, the outcome of peer reviews, including identified best practices, are to be made public with the agreement of the NCAs that have been subject to the review.

BACKGROUND AND OBJECTIVES

Enhancing the governance system of insurers is one of the major goals of Solvency II (SII). The four key functions (risk management, actuarial, compliance and internal audit) as required under the SII regulation are an essential part of the system of governance. These key functions are expected to be operationally independent to ensure an effective and robust internal control environment within an insurer and support high quality of decision making by the management. At the same time it is also important that these governance requirements are not overly burdensome for small and medium-sized insurers. Therefore SII allows NCAs to apply the principle of proportionality in relation to compliance with key function holder requirements for those insurers.

Under SII, insurers may combine key functions in one holder. However, such combinations have to be justified by the principle of proportionality and insurers need to properly address the underlying conflicts of interest. Holding a key function should generally not be combined with administrative, management or supervisory body (AMSB) membership or with operational tasks because of their controlling objective. Thus, these combinations should rather occur in exceptional cases, taking into account a risk-based approach and the manner in which the insurer avoids and manages any potential conflict of interest.

This peer review assesses how NCAs supervise and determine whether an insurer’s setting of key functions fulfils the legal requirements of SII with a particular emphasis on proportionality. The peer review examines practices regarding:

  • combining key functions under one holder;
  • combining key functions with AMSB membership or with carrying out operational tasks;
  • subordination of one key function under another key function;
  • split of one key function among several holders;
  • assessment of the fitness of key function holders; and
  • outsourcing of key functions.

The period examined under the scope of this peer review was 2016 but also covered supervisory practices executed before 2016 in the preparatory stage of SII. The peer review was conducted among NCAs from the European Economic Area (EEA) on the basis of EIOPA’s Methodology for conducting Peer Reviews (Methodology).

Detailed information was gathered in the course of the review. All NCAs completed an initial questionnaire. This was followed by fieldwork comprising visits to 8 NCAs and 30 conference calls.

MAIN FINDINGS

The review showed that NCAs in general apply the principle of proportionality and that they have adopted similar approaches.

SUMMARY RESULTS OF THE COMPARATIVE ANALYSIS

  • Supervisory framework: Approximately half of NCAs use written supervisory guidance for the application of the principle of proportionality. Larger NCAs in particular use written supervisory guidance in order to ensure consistency of their supervisory practice among their supervisory staff.
  • Approach of NCAs: Most NCAs have a similar approach. NCAs assess the insurers’ choice of key function holders at the time of initial notification regarding the key function holder’s appointment. If any concerns are noted at this stage, for example regarding combinations or fitness, NCAs generally challenge and discuss these issues with the insurer, rather than issuing formal administrative decisions.
  • Combining key functions in one holder: This occurs in almost all countries. The most frequent combinations are between risk management and actuarial functions and between risk management and compliance functions. Combinations are most commonly used by smaller insurers but are also seen in large insurers. EIOPA has identified the need to draw the attention of NCAs to the need to challenge combinations more strongly, especially when they occur in bigger, more complex insurers, and to ensure that adequate mitigation measures are in place to warrant a robust system of governance.
  • Holding the internal audit function and other key functions: The combination of the internal audit function with other key functions occurs in 15 countries, although the frequency of such combinations is relatively low. Moreover, there were cases of the internal audit function holder also carrying out operational tasks which could lead to conflicts of interest and compromise the operational independence of the internal audit function. It is important to emphasise that the legal exemption of Article 271 of the Commission Delegated Regulation EU (2015/35) does not apply to the combination with operational tasks.
  • Combining a key function holder with AMSB membership: Most NCAs follow a similar and comprehensive approach regarding the combination of key function holder and AMSB member. In this regard, NCAs accept such cases only if deemed justified under the principle of proportionality. This peer review shows that two NCAs request or support combinations of AMSB member and the risk management function holder regardless of the principle of proportionality in order to strengthen the knowledge and expertise regarding risk management within the AMSB.
  • Combining key function holders (excluding internal audit function holder) with operational tasks: In nearly all countries combinations of risk management, actuarial and compliance key function holders with operational tasks occur, but such combinations generally occur rarely or occasionally. However, several NCAs do not have a full market overview of such combinations with operative tasks. Adequate mitigating measures are essential to reduce potential conflicts of interest when key function holders also carry out operational tasks. The most common combinations are the compliance function holder with legal director and the risk management function holder with finance director.
  • Splitting a key function between two holders: About half of the NCAs reported cases where more than one individual is responsible for a particular key function (‘split of key function holder’). The most common split concerns the actuarial function (split between life and non-life business). NCAs should monitor such splits in order to maintain appropriate responsibility and accountability among key function holders.
  • Subordination of a key function holder to another key function holder or head of operational department: This is observed in half of the countries reviewed. An organisational subordination can be accepted, but there needs to be a direct ‘unfiltered’ reporting line from the subordinated key function holder to the AMSB. In cases of subordination, conflicts of interest have to be mitigated and operational independence needs to be ensured including the mitigating measures concerning the remuneration of the subordinated key function holders.
  • Fitness of key function holders: Most NCAs assess the fitness of the key function holder at the time of initial notification and apply the principle of proportionality. Several NCAs did not systematically assess the key function holders appointed before 2016. These NCAs are advised to do so using a risk-based approach.
  • Outsourcing of key function holders: Most NCAs have observed outsourcing of key function holders. According to the proportionality principle, an AMSB member may also be a designated person responsible for overseeing and monitoring the outsourced key function. Eight NCAs make a distinction between intra-group and extra-group outsourcing and six NCAs do not require a designated person in all cases, which may give rise to operational risks.

BEST PRACTICES

Through this peer review, EIOPA identified four best practices.

  • When NCAs adopt a structured proportionate approach based on the nature, scale and complexity of the business of the insurer regarding their supervisory assessment of key function holders and combination of key function holders at the time of initial notification and on an ongoing basis. The best practice also includes supervisory documentation and consistent and uniform data submission requirements (for example an electronic data submission system for key function holder notification). This best practice has been identified in Ireland and the United Kingdom.
  • When an NCA has a supervisory panel set up internally which discusses and advises supervisors about complex issues regarding the application of the proportionality principle in governance requirements regarding key functions. This best practice has been identified in the Netherlands.
  • When assessing the combination of key function holder with AMSB member, EIOPA considers the following as best practice for NCAs:
    • To publicly disclose the NCA’s expectations that controlling key functions should generally not be combined with operational functions for example with the membership of the AMSB. Where those cases occur, NCAs should clearly communicate their expectation that the undertaking ensures that it is aware of possible conflicts of interest arising from such a combination and manages them effectively.
    • To require from insurers that main responsibilities as a member of the AMSB do not lead to a conflict of interest with the tasks as a key function holder.
    • To assess whether the other AMSB members challenge the key function holder also being an AMSB member.

This best practice has been identified in Lithuania.

  • When NCAs apply a risk-based approach for the ongoing supervision that gives the possibility to ensure the fulfilment of fitness requirements of KFHs at all times by holding meetings with key function holders on a regular scheduled basis as part of an NCA’swork plan (annual review plan). The topics for discussion for those meetings can vary, depending for example on actual events and current topics. This best practice has been identified in Ireland and the United Kingdom.

These best practices provide guidance for a more systematic approach regarding the application of the principle of proportionality as well as for ensuring consistent and effective supervisory practice within NCAs.

EIOPA NCA KFH

Click here to access EIOPA’s full report on its Peer Review

 

Keeping up with shifting compliance goalposts in 2018 – Five focal areas for investment

Stakeholders across the organization are increasingly seeking greater compliance effectiveness, efficiency, cost cutting, and agility in compliance activities to further compete in the expanding digital and automated world.

Organizations are being reinforced this way to continuously improve their compliance activities, because in the future, integration and automation of compliance activities is an imperative. To prepare for tomorrow, organizations must invest today.

When positioning your organization for the future, keep in mind the following five areas for investment:

1. Operational integration

Regulators are increasingly spotlighting the need for operational integration within a compliance risk management program, meaning that compliance needs to be integrated in business processes and into people’s performance of their job duties on a day-to-day basis.

When approaching the governance of managing compliance efforts, a more centralized, or a hybrid approach, strengthens the organization’s overall compliance risk management control environment.

2. Automation of compliance activities

The effectiveness of compliance increases when there is integration across an enterprise and successful automation of processes. Compliance leaders are turning toward intelligent automation as an answer for slimming down compliance costs, and becoming more nimble and agile in an ever-increasingly competitive world. When intelligent automation is on the table to support possible compliance activities, some important considerations must be made:

  • Compliance program goals for the future
  • Implementation dependencies and interdependencies
  • Determining how automation will and can support the business
  • Enhancing competitiveness and agility in executing its compliance activities

Automating compliance activities can also help augment resource allocation and realize greater accuracy by implementing repetitive tasks into the automation.

3. Accountability

Regulators increasingly expect organization to implement performance management and compensation programs to encourage prudent risk-taking. In fact, identified by the KPMG CCO Survey, 55% of CCOs identified “enhancing accountability and compliance responsibilities” as a top 3 priority in 2017.

It is essential that disciplinary and incentive protocols be consistently applied to high-level employees. To do so sends a message that seniority and success do not exempt anyone from following the rules.

4. Formalized risk assessments

Regulatory guidelines and expectations released in 2017 set forth specific focal areas that compliance leaders should ensure are covered in their risk assessments.

  • Evaluating the data needs of the compliance program can help the organization migrate to a more data-driven metrics environment in a controlled way.
  • Availability, integrity, and accuracy of data is needed to understand and assess compliance risks enterprise-wide. The use of data quality assessments to evaluate the compliance impact can help address this challenge.
  • Implementing a data governance model to share data across the 3 lines of defense is a good way of reassuring data owners and stakeholders that the data will be used consistent with the agreed upon model.
  • Further integration and aggregation of data is needed to avoid unintentionally ‘underestimating” compliance risks because of continuous change in measurement of compliance programs and data & analytics.
  • To maximize the benefits of data & analytics, leading organizations are building analytics directly into their compliance processes in order to identify risk scenarios in real time and to enhance their risk coverage in a cost-effective way.

5. Continuous improvement

Compliance efforts by organizations need to continuously evolve to ensure the control environment remains firm while risk trends appear, risks emerge, and regulatory expectations shift.

Compliance and business leaders must continuously improve their compliance activities in pursuit of greater effectiveness, efficiency, agility, and resiliency. Because by continuously improving, organizations can methodically position their organizations for the future.

KPMG

Click here to access KPMG’s detailed White Paper