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What Is Compliance Risk Management?

8 min read
Apr 4, 2023

Compliance risk, or the risk that a financial institution will fall short of compliance requirements, is one of the greatest challenges facing financial institutions (FIs). FIs must comply with thousands of laws and regulations at both the federal and state level. This includes both existing laws and regulations as well as new and updated laws and regulations. Violating these laws or failing to follow internal policies designed to ensure compliance can have steep reputational, financial, and regulatory consequences. 

Compliance risk management is the process of proactively identifying, assessing, mitigating, and monitoring compliance risk. It’s not just checking the boxes on a compliance checklist. It’s regularly evaluating the risk different regulations, products, services, and activities pose to your institution’s ability to remain in compliance and then implementing and auditing compliance controls to keep risk in check.  

Managing compliance risk is essential to enterprise risk management (ERM), the framework a financial institution uses to holistically manage risk throughout the organization. This is done with a compliance management system (CMS). A compliance management system is the framework financial institutions use to ensure compliance with relevant laws, regulations, and industry standards. A CMS helps FIs identify and mitigate compliance risks, track compliance-related activities, and demonstrate to regulators that they have an effective program in place. 

The most effective way to implement these two frameworks is with risk and compliance software. Enterprise risk management software helps institutions identify and assess compliance risk, helping allocate limited compliance resources to the riskiest areas. Compliance management software for banks, credit unions, and mortgage companies helps FIs manage the compliance process so they can: 

  • Identify regulatory change
  • Implement compliance controls
  • Train staff
  • Track compliance activities
  • Document it everything 

Let’s take a closer look at the challenge of compliance risk management and how compliance risk management software can help, including Ncomply and Nrisk can help. 

The high cost of compliance risk at banks, credit unions and mortgage companies  

Compliance risk comes in many forms. A 2021 compliance survey conducted by Ncontracts and CBANC found the top four compliance risks identified by compliance officers are:

  1. BSA/AML (57 percent)
  2. Cybersecurity/ data security/privacy (50 percent)
  3. Compliance reviews and testing (38 percent)
  4. Fair lending (36 percent) 

These are just a few compliance risk examples. Recent enforcement actions show us other compliance and risk management fails.  

Compliance risk and enforcement actions at large banks

Enforcement actions cost the financial services industry billions of dollars. Just look at this sampling of big bank civil money penalties over 10 months. 

Compliance risk and enforcement actions at credit unions, community banks, and mortgage companies 

Compliance risk is not just a big bank problem.  

  • In January 2023 two Colorado credit unions refunded $4 million to customers and each paid a $100,000 civil money penalty to settle allegations they failed to refund GAP fees.  
  • A California mortgage lender was ordered by the CFPB in February 2023 to pay a $1 million civil money penalty for deceptive advertising.  
  • A Michigan bank was assessed a $6 million penalty by the OCC in September for fraud, BSA violations, and underwriting deficiencies related to a low-document mortgage loan program.  
  • An Oregon bank paid $425,000 in an FDIC civil money penalty related to RESPA.  
  • Seven banks paid a combined $442,000 in civil money penalties related to flood insurance between September 2022 and March 2023.  
  • Meanwhile, redlining enforcement has cost banks $40 million in the first three months of 2023 alone.  

Elements of an Effective Compliance Management System (and How Software Helps)

Many financial institutions struggle with compliance management, and not all compliance management programs get the job done. One third of financial institutions reported that examiners expressed concerns about their FI’s compliance management in the past 18 months, according to a recent CBANC survey. That figure rises to 39 percent for institutions that track governance, risk, and compliance (GRC) manually – relying on tools like spreadsheets and email instead of compliance risk management software. 

An effective compliance management system must address: 

  1. Policies and procedures: Written documentation outlining the organization's approach to compliance and how it will be achieved. 
  2. Regulatory change management. A process for effectively identify and implement regulatory change. 
  3. Compliance risk assessments: A documented approach to Identifying and evaluating potential areas of non-compliance and taking appropriate measures to mitigate those risks. 
  4. Training and communication: Tools for ensuring that all employees are aware of their obligations under relevant laws and regulations. 
  5. Monitoring and reporting: Methods for tracking compliance performance and reporting to senior management, the board, and regulators. 
  6. Complaint management: A system for identifying, logging, resolving, and analyzing consumer complaints.  
  7. Response and corrective action: A program that addresses compliance breaches promptly and takes appropriate remedial action to prevent reoccurrence. 

Many financial institutions streamline these activities with compliance management software. By implementing a compliance management software, organizations can demonstrate their commitment to a culture of compliance, reduce their exposure to legal and regulatory risks, strengthen their three lines of defense, and enhance their reputation with stakeholders.

Related: What Is Regulatory Change Management at Financial Institutions?

Top Compliance Risk Management Tips for Financial Institutions

Managing compliance risk can be a heavy lift for financial institutions. The good news is there are ways to make the job more manageable. 

Tip #1: There is no one-size-fits-all approach to risk management or compliance, so use that to your advantage and customize it to your size and risk tolerance.  

An appropriate risk management and compliance system for a smaller FI will look very different from the CMS of a larger, complex FI—and should be tailored to the institution based on complexity and risk tolerance. It may involve a compliance department, a compliance officer, a compliance committee or a combination of all three.  

Whatever model your FI chooses, the goal of your risk and compliance management should be to prevent consumer harm and include the basic building blocks of a CMS (board and management oversight and a compliance program with policies and procedures, monitoring and testing (compliance monitoring software can help), complaint resolution, and tailored training).  

The key focus should be foundational. Be consistent with risk management and compliance and leverage your work in your business decisions to get the most value from risk management activities.  

Tip #2: Have your compliance officer focus on the interpretation of regulation and guidance. 

Tracking new laws, regulations, and guidance is time-consuming, and a FI is much better served when a compliance officer focuses on interpretation. While there are plenty of technologies and partners that can track regulation, only your compliance officer can engage in in-depth analysis to understand how to best effectively and efficiently implement the rule at your FI. Removing tasks that may not require a compliance officer’s particular set of skills frees up their time to focus on higher-value tasks like interpretation and implementation.  

Tip #3: Seek out solutions designed exclusively for the financial services industry. 

Financial services is one of the most highly regulated in the U.S. Managing compliance risk means understanding the laws, regulations, and guidance the industry must follow. Solutions designed for the financial services industry are filled with expert, regularly updated content such as model risk assessments and plain-English summaries of complex regulations to lighten the compliance workload while increasing confidence in compliance risk management. 

Tip #4: There is no such thing as too small for ERM. 

ERM is essentially risk management that allows your FI to better identify opportunities ​in the market and enhance strategic decision making.​  

Many institutions lack the resources, management support, or data to conduct thorough testing. Other compliance officers worry their testing and review plan isn’t robust enough and requires more specific scoping and better monitoring. Address this issue by using your risk assessment to recognize which controls you are relying on the most to prevent the biggest risks and focus your testing and monitoring on those controls. When it’s impossible to do everything, focus on the most significant issues that present the most risk. ERM helps you do all these things.   

Tip #5: Try to attract a diverse board with great skills.  

The board sets a financial institution’s risk appetite and ensures strategy aligns with it. Attracting a diverse board gives an institution more perspectives on risk, including compliance risk. For instance, banks with female directors on the board are less likely to be fined by regulators, and when they are fined, the fines are smaller. 

Tip #6: Customer-facing technology is important, but don’t forget the back office.  

If your back office is still running tons of manual processes, your FI is at increased compliance risk due to employee mistakes. Seek out areas where your FI can automate back-office processes. Replacing manual processes with automation can save money, especially if a variety of staff members are spending significant amounts of money completing manual processes on a daily basis. 

Tip #7: Think about processes and people. 

Communication and organization are essential to compliance risk management. Where are policies, procedures, compliance risk assessments, regulatory implementation plans, training logs, and other related materials stored? How do you know you have the correct, most up-to-date version? How do you make materials accessible to everyone who needs it? How thorough is your audit trail? These questions must be answered for a program to be effective.

How Ncontracts compliance and risk management software and solutions can help

Managing compliance risk is essential to protecting financial institutions. Ncontracts’ secure, SaaS-based ERM solutions simplifies this process with automated software backed by a team of regulatory compliance attorneys and certified risk and compliance professionals that helps you: 

  • Reduce compliance risk  
  • Cut regulatory compliance research from hours to minutes 
  • Streamline change management by easily identifying applicable regulations and creating, tracking, and executing implementation plans
  • Ensure current policies and procedures are always accessible
  • Reinforce a culture of compliance and accountability
  • Promote continuous exam readiness
  • Enhance confidence in compliance risk management
  • Connect business lines and functions to measure and respond to compliance risk in real-time
  • Assess compliance risks and opportunities, make strategic decisions, and move quickly while staying within your risk tolerance.
  • Manage compliance risk more effectively without increasing headcount

Ncomply compliance management software at a glance  

Ncomply is an audit-ready, centralized compliance management software application that helps financial institutions proactively manage compliance and exam readiness on a continuous basis. 

Features include: 

  • Complete compliance management system that includes all necessary elements of a CMS 
  • Regulatory updates and sample action plans tailored to areas relevant to your institution 
  • Collaborative task management that tracks compliance activities all in one place 
  • Plain-English regulation summaries that makes it easy for anyone to quickly become a compliance and risk management expert.
  • Daily updated federal and state regulatory libraries searchable by product, service, regulator or topic
  • Comprehensive complaint management from individual form submissions to aggregate reporting
  • Policy management including version controls, automated review reminders, and regulation tagging
  • Continuous content and functionality enhancements
  • Unlimited users, storage and support
  • Centralized repository for all compliance-related documents, communication and activities
  • Multiple levels of reporting
  • Exam-ready reporting and organization
  • Sample checklists and policies
  • Knowledge base with over 100 training videos

Nrisk compliance risk management software at a glance  

Nrisk is a secure and highly-customizable ERM application that offer efficiency at every turn. It strengthens compliance and controls for more effective risk management that continuously evaluates, measures, and tracks risk.  

Features include:  

  • Model risk assessments for different regulations
  • Ability to assess financial and non-financial exposure
  • Prebuilt and configurable risk assessments
  • Natural language navigators and wizards to assess risk
  • Ability to assign and assess multiple controls per risk
  • Customizable hierarchies, risk ratings and reporting
  • Interactive dashboards and reporting
  • End-user portals for access control
  • Read-only access for designated users such as examiners
  • Setup and customization of business structure
  • Conversion and customization of existing risk data

Compliance risk management case studies 

Meet a Chief Risk Officer using Nrisk to build compliance risk controls linked to specific regulations and guidance. Nmarketing - Ncontracts Case Study Nrisk implementation - FNB.pdf - All Documents (sharepoint.com). 

Meet a Vice President of Integrated Risk using Ncontracts solutions to build a risk and compliance culture—while setting the stage for growth. RPM Suite Case Study Download (ncontracts.com) 


Ready to transform compliance risk management at your financial institution? Ncontracts’ powerful SaaS-based risk management and compliance solutions combine user-friendly, cloud-based software with expert services to provide you with the best-in-class risk and compliance management platforms. This knowledge as a service (KaaS) approach to compliance risk solutions can help you more efficiently and effectively manage compliance risk, giving you the tools you need to succeed.

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