What role does regulatory compliance play in the industry?

What role does regulatory compliance play in the industry?

Have you ever imagined your life without rules and regulations given by your parents? You will be thinking that it can be thrilling or exciting. However, the truth is that the thrill will last only for a few hours or days, and you will return to being confused and landing into unnecessary problems. The idea behind sharing this thought is that rules and regulations help you function better, as does regulatory compliance in financial institutions.

If there were no compliance regulations in the banking and finance sector, you wouldn’t have enjoyed the booming technology and high-end customer services in the banking world. These compliances help provide protection and security to financial institutions. Also, they have other benefits that make them crucial in the finance world.

What is Regulatory Compliance in the Finance Industry?

Financial regulatory compliance means financial services companies and banks follow laws and regulations. These laws can be related to insurance banks, investment banks, lenders, and other financial institutions. These regulations are more strict in the finance sector than in any other industry due to the need and reputation of finance. 

The financial compliance regulations include local laws and regulations according to their region of operation. 

Countries have different regulations depending on their citizens’ data, non-government organizations, processes, and stores. Eventually, it creates multiple requirements for financial institutions, especially those with an international presence. 

For example, suppose a financial institution operates in Turkey and China. In that case, it cannot run with a one-size-fits-all data protection approach to data protection because both Turkey and China have different data compliance regulations. Hence, financial regulatory compliance requires continuous tracking, and it changes with geographic location, people, and financial institutions.

What role does regulatory compliance play in the industry?

Although the compliance regulations in financial institutions are not just about data protection, there are other entities to it that depend on the institution itself. For example, in 2014, banks worldwide paid an estimated $65 billion as regulatory fines and penalties, according to an Infosys report. Many other financial-related issues govern the compliance regulations in this sector.

Regulatory Compliance for Financial Data Protection

Here are some of the financial data protection regulatory compliance for financial institutions:

General Data Protection Regulation (GDPR)

The GDPR is a European Union (EU) data protection law. The law is very strict, dealing with procedures to manage data in the EU and online privacy.

Payment Card Industry Data Security Standard (PCI DSS)

PCI DSS includes a list of financial data security guidelines useful in safeguarding customers’ data. The PCI DSS law standardizes the ideal method of processing, storing, and sending cardholder data.

Gramm-Leach-Bliley Act (GLBA)

The GLBA Act requires financial institutions to provide customers with details about their information-sharing practices. The GLBA Act also helps financial institutions to safeguard any sensitive data.


Laws for Financial Regulatory Compliance

Many laws regulate financial regulatory compliance. The following are some of the most common rules:

The Sarbanes Oxley Act (SOX)

The Sarbanes Oxley Act existed in the US after Enron, Tyco, and WorldCom scandals. The act is responsible for preventing corporate fraud and corruption. It focuses on how organizations disclose and record their financial information. They also need companies to install cybersecurity to protect financial data.

Anti-Money Laundering (AML) Directives

The AML directives prevent money laundering and financial support for terrorists. These directives also help create a stable regulatory environment across the European Union.


MiFID II is a European Union legislative framework regulating financial markets. The framework also protects financial investors. The framework is responsible for standardizing practices across the finance industry.

Anti-Money Laundering (AML) Directives

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Regulatory Compliance Checklist for financial institutions

The best way for financial institutions and banks to manage regulatory compliance is by following existing successful organizations expanding into new markets, and complying with the rules and regulations. Here are a few compliance checklists for all financial institutions:

  • PCI DSS compliance– The first step towards complying with regulations is following the PCI DSS law. It helps manage multiple things simultaneously, including setting a proper firewall, the automatic denial of unauthorized access, and a base level of storage encryption.
  • Encryption or tokenization – This process limits the number of people accessing regulated information for storage and transmission. 
  • Data redundancy– All financial institutions must use data redundancy for their regulated and non-regulated data. This way, the data will not be lost during a technical glitch or other problem. 
  • Safety comes first– You must never risk anything by transferring data abroad or opting for cheap or unsafe servers to store your organization’s data. It is ideal for storing data locally as it won’t cost you heavy fines and will comply with local regulations.
Benefits of Regulatory Compliance in Financial Institutions
  • Compliance officers in your organization– It is the best way to protect any financial organization’s data protection by using industry best standard practices. These officers can perform extensive logging, intrusion detection, defined vendor management, and clear hierarchies. Otherwise, you can choose people from your organization to look after different components of the compliance structure. 
Need for Regulatory Compliance in the Finance World

The current state of the world is a great push for financial institutions to gear up and adopt compliance techniques. Privacy, security, governing laws, etc., can pose severe challenges for financial institutions, directly or indirectly affecting these organizations’ customer service and revenue. Here are some of the reasons why regulatory compliance is necessary for the finance sector:

Data Privacy

Data breaches have been the most alarming situation in the financial sector. The banking and financial services company holds a lot of sensitive information about customers, third parties, etc., which must be completely secure. The above laws and regulations, like PCI DSS, etc., are crucial for consumer protection.


Cybersecurity is the practice of protecting systems, networks, and programs from digital attacks. The digital attacks include disclosure of information, theft, damage of electronic data, disruption or misdirection of services, ransomware, and accessing and destroying sensitive information. Cyber security focuses on protecting electronic assets and provides multiple layers of protection spread across computers, networks, programs, and data.

Financial institutions must have a cybersecurity compliance plan to prevent cyber threats. The compliance plan can include- performing regular security updates, ensuring zero insecure connections, routine backups, and having intrusion detection software as a proactive approach against cyber criminals.

Consumer Laws and Regulations

The best way to build consumer trust, maintain it, and track it is by following consumer laws and regulations. We have now understood the complications in a financial institution if you don’t abide by the rules and regulations. Hence, all financial organizations must follow consumer laws and regulations.

Employee Misconduct

The compliance team in a financial organization must update employees on changes to compliance requirements. All new employees must undergo training when company policies and procedures change. It will keep the employees updated and aware of employee misconduct’s consequences and help maintain the organization’s decorum.

Financial Crimes

Financial crimes are rising significantly daily. Hence, regulators expect financial organizations to take appropriate steps to combat financial crimes. It is ideal to gain knowledge about these crimes and put stringent measures to control them in your organization as the best way forward.

Corporate Governance

A financial organization can use a defined set of guidelines, practices, and rules that helps it to control, manage, and operate the business. It is a regulatory framework that allows financial institutions to cater to all major stakeholders.

Benefits of Regulatory Compliance in Financial Institutions

There are several benefits of maintaining regulatory compliance in a financial institution. It helps the organization mitigate risks like security breaches and data losses. They also help avoid disciplinary action that could lead to license revocations, damaged reputations, lost customers, financial penalties, fines, and losses. The following are some of the crucial benefits of complying with regulations in financial institutions:

  • It helps keep up with the constantly changing regulatory environment in finance. However, it can be challenging to continuously adapt and update regulations to meet federal, industry, and state standards. But a GRC platform with compliance programs is a great solution to help you manage things efficiently.
  • It helps protect your business’s resources and reputation, which may have been caused due to non-compliance. The major consequences could be revoking the license, penalties, losses, and breaking customer trust. By complying with the regulations and laws, you mitigate these risks and help with the optimal functioning of your organization.
  • It protects you from cybersecurity threats. Cybersecurity compliance helps your company to mitigate the risk of data breaches and malware attacks internally and externally. By maintaining cybersecurity compliance, you can protect the data privacy of your company, employees, and customers.
Cost of Regulatory Compliance in Financial Institutions
  • It improves the efficiency of your financial institution. Most regulatory compliance protocols applicable in the finance sector require structured data storage, streamlined business processes, and regular reports on business functions. Hence, to comply with the regulations, you have to adopt the above procedures in your system, which indirectly enhances the efficiency of your business and helps you reduce your operational costs.

Cost of Non-compliance in Financial Institutions

The fines and penalties for non-compliance in financial institutions are steep, making you consider investing in regulatory compliance instead.

In 2018, non-compliant companies had to bear a loss of $3.945 billion in penalties and $794 million in judgments related to SEC investigations and complaints. Moreover, FINRA imposed $61 million in fines. These numbers may horrify you, but the above numbers are just the icing on the cake because, in reality, the companies that function without regulatory compliance programs pay a higher price in several other ways.

Well, the financial burden is the only thing you lose when running a non-compliant organization. Persistent business disruption includes regulatory fines, lower productivity, less revenue, reduced customer trust, and operating expenses for remediation. These things have cost finance firms almost three times the cost of complying with regulations in recent years.

Another report states that the average cost of compliance was around $5.47 million, while the average cost of non-compliance was $14.82 million. In reality, the average cost of non-compliance has increased by more than 45% over the past ten years. You can also look for third-party compliance strategies to reduce the potential costs related to non-compliance.

Penalties aren’t the only cost of non-compliance in a financial institution. For example, suppose a finance organization violates many non-compliant actions. In that case, the FDA may take action against you, depending on the severity. Those actions are:

  • They will send warning letters that will include the violations, and they will seek relevant responses on the corrective action required to correct the issue
  • They can seize all your non-compliant products and prevent them from being sold
  • They can seek court injunctions to prevent companies from committing any violation
  • The financial organizations also must consider economic costs from market erosion, damage to reputation, and loss of customer trust, apart from litigation and compensation expenses. 
  • Also, all notices of non-compliance are posted on the FDA website, which every financial organization must view from time to time.

Impact of Non-Compliance on the Business

Of course, there are huge challenges while adopting regulatory compliance in your business. Still, the stakes of going non-compliant can be higher and much riskier. Despite compliance challenges, non-compliance can be disruptive because it can hamper a company’s reputation, stakeholders’ and customers’ trust, and many other things. Non-compliance can impact your finance business in the following ways:

  • Business disruption: Governing bodies can disrupt your business when found non-compliant. Further, you can only resume services when you implement a compliance management system per the industry’s norms. Instead of putting your finance firm through all these disruptions, it is ideal to opt for compliance regulations.
  • Data breaches: Non-compliance is one of the major risks for your company’s sensitive and confidential data. They are the primary reason for data breaches, loss, cyberattacks, or insider threats. Hence, compliance with regulations is the best way to avoid data breaches.
  • Reputational damage: Everyone always talks about the financial damage non-compliance can cause in the banking sector. However, the weight of a bad reputation is much higher than money loss. There are several ways to earn back the money you lost. However, it takes years together to get back your lost reputation. Therefore, think twice before going non-compliant in your business because you’re playing against the odds.
  • International operations: When you indulge in global operations without compliance, you risk much more than normal. Studies have shown that maintaining in-country compliance is economical. Hence, it is ideal for implementing regulatory compliance before you spread your wings overseas.
  • Revenue loss: We have already discussed how much financial loss non-compliance can cost you. It is almost 45% more expensive than implementing compliance laws and regulations in your financial firm. Also, it significantly impacts your business’ revenue.

Cost of Regulatory Compliance in Financial Institutions

Financial institutions must pay a reasonable price to adopt regulatory compliance in their system. According to Rice University’s Baker Institute for Public Policy, with the sanction of the Dodd-Frank Act, the US banks’ total non-interest expenses have increased by an average of more than $50 billion per year. 

The Competitive Enterprise Institute says that large firms are now reporting an average cost of compliance maintenance of up to $10,000 per employee. Deloitte projects that banks’ costs have increased by more than 60% than before. The Asian-Pacific, European, Middle Eastern, African, Latin American, and North American markets’ cost of maintaining financial crime compliance is $181 billion per year.

According to the Risk Management Association survey, 50% of respondents spend 6-10% of their revenue on compliance costs. Global banks and large brokers with over 20,000 employees can easily spend more than $200 million in compliance annually.

The growing financial numbers result from increasing customer demands and expectations, increased use of technology, digital payment channels, more cyber threats, and a rising financial crisis. Though the regulations aim to safeguard financial institutions against risk, rising complexity, and compliance costs, they are putting high pressure on financial institutions to adopt the digital transformation strategy.


The above details depict the importance of regulatory compliance in the finance sector. There are several risks associated with financial institutions, like data breaches, money laundering, consumer protection, financial inclusion, Bank Secrecy Act (BSA), sanctions, etc. Adopting regulations and laws that comply with industry standards is a great way to find a survival route for your business. By non-compliance, you are putting your firm at risk, as there can be severe actions that governing bodies can take. Moreover, you are also risking your company’s reputation, stakeholders’ and consumers’ trust, and huge money loss. You can never forget the fines and penalties a firm has to bear when found non-compliant. 

Adopting digital transformation into your system is the best solution to abide by compliance. Digital Transformation is a great banking and financial services initiative to provide a consumer-centric, accessible, faster, efficient, and secure approach. The constant technological advancements today led to the growth of cybercriminals in the banking and finance industry. The cyber threat is a great concern for most people; hence regulatory changes are made to address the issue. Regulatory changes can lead to implementing appropriate digital transformation strategies, analyzing risks, providing digital encryption and security, risk management protocols, etc. Hence, regulatory compliance plays a crucial role in the finance industry.

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