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Regulatory Compliance

Updated on May 2, 2024
Article byRutan Bhattacharyya
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Regulatory Compliance Meaning

Regulatory compliance refers to the process in business that involves adhering to the applicable policies, laws, procedures, standards, and regulations issued by regulatory bodies and governments. Companies fulfilling regulatory obligations indicate to stakeholders and customers that they operate with integrity, following the laws governing them.

Regulatory Compliance

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If an organization fails to ensure regulatory compliance, it may face legal punishment, which can include hefty fines. This process ensures that a business remains within the set boundaries of acceptable practices, which, in turn, ensures the security and safety of individuals or organizations that interact or collaborate with it.

Key Takeaways

  • Regulatory compliance refers to the process that businesses follow to comply with specific rules and regulations relevant to their operations. Generally, governments and certain regulatory bodies set these regulations. 
  • This process safeguards the interests of the business’s stakeholders. Moreover, it demonstrates a business’s integrity concerning its operations. 
  • There are various benefits to complying with the established standards and laws. For example, it helps organizations maintain a strong reputation. Moreover, it reduces the chances of data and security breaches. 
  • A noteworthy regulatory compliance issue is that businesses often fail to keep pace with technological advancements, which leads to compliance failure.  

Regulatory Compliance Explained

Regulatory adherence refers to the process of following particular guidelines, laws, standards, and procedures created by governments and industry-specific regulators. Carrying out this process is mandatory for organizations to maintain their licenses and avoid severe consequences, such as business disruption, reputation damage, revenue, losses, and penalties.

Some examples of regulatory bodies establishing compliance requirements in the United States include the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), and the Food and Drug Administration(FDA). 

Based on the jurisdiction and industry, regulations differ. They vary significantly. Companies with an international presence must comply with the rules and regulations that are specific to the nations they operate in. Certain industries, for example, healthcare and financial services, often need to adhere to complicated rules because of the impact they have on the economy

As an organization expands its operations, the regulations typically also increase in terms of volume and scale, often becoming complicated owing to multiple authorities’ overlapping jurisdictions. 

Requirements

Considering today’s complicated regulatory environment, organizations need to fulfill the following requirements: 

  • Grapple with the various costs, complexities, and overlaps concerning governance requirements. 
  • Deal with the increasing exposure to sophisticated, fast-mutating threats to data and information assets, which exploit a wide range of technical weaknesses or sensitivity within information technology or IT systems and loopholes in employee behavior and organizational procedures. 
  • Adhere to an extensive range of information-related regulations.

One must remember that the regulatory compliance process is ever-changing, and the rules that businesses need to follow vary across different locations and sectors. Moreover, the compliance requirements concerning some corporate activities and sectors are more regulated when compared to others. 

Examples

Let us look at a few regulatory compliance examples to understand the concept better. 

Example #1

Suppose in Country X, the capital market regulator DBC requires all asset management companies (AMCs) to follow specific rules and regulations. Among them, a noteworthy rule mandates the AMCs to make the portfolio holdings of all its mutual fund schemes public every month. That said, ABC asset management company failed to ensure regulatory compliance as it failed to report the portfolio holdings of three mutual fund schemes offered by it. 

As a result, the company had to pay hefty fines. Moreover, it was disallowed from accepting more investments into those 3 schemes for 1 month. 

Example #2

In February 2024, the Reserve Bank of India or RBI imposed substantial monetary penalties on Canara Bank and State Bank of India (SBI) as both banks failed to fulfill regulatory compliance requirements. RBI imposed a fine of ₹2 crore on SBI as the bank was unable to abide by the provisions of the Banking Regulation Act. Similarly, Canara Bank was slapped with a monetary blow worth ₹32.30 lakh as it was unable to follow multiple RBI directives. 

How To Ensure?

Let us look at the steps organizations can follow to ensure compliance. 

  1. Evaluate and review the current approach concerning the regulated process to spot shortcomings and create a plan to resolve the issues. 
  2. Next, form a dedicated compliance team and appoint a compliance officer. Moreover, make sure to clearly define who needs to ensure the organization follows all the necessary policies and regulations. This helps in driving execution.
  3. Establish clear compliance policies. Also, review them often, ensuring they adapt to the dynamic regulatory environment. 
  4. Ensure to capture as well as audit the approach, for instance, at the time of following requirements associated with anti-money laundering (AML). 
  5. Train the employees to help them comprehend their roles and responsibilities with regard to the regulatory compliance process. 
  6. Track the internal controls, ensuring that the business fulfills all regulatory requirements. 
  7. Measure the efforts. In other words, quantify the efforts. For example, determine the total number of breaches prevented. 

Importance

One can understand the importance of this process by going through the following points.

  • It plays a vital role in strengthening a business’s reputation in the market. 
  • The process can safeguard a company’s bottom line as it enables organizations to cut or avoid different types of costs, for example, the costs associated with recalling products or promotions that do not adhere to the rules issued by regulatory bodies or governments. 
  • It safeguards stakeholders and reduces the risk of security and data breaches
  • Compliant organizations are resilient with regard to changing regulations. This is because they typically have the necessary systems to adapt to the changes and fulfill the regulatory requirements. 
  • Businesses can improve their operational efficiency through the establishment of well-defined processes, systems, and procedures to ensure regulatory compliance. 

Challenges

Let us look at some regulatory compliance issues. 

  • Businesses can find it challenging to keep up with technological advancements. They fall behind on potential regulatory changes or emerging risks if they fail to keep pace.
  • Organizations often find it difficult to encourage their internal staff to sign up for the necessary training and play a role in ensuring that the organization follows compliance programs. 
  • Companies often find it difficult to hire for certain roles, for example, a chief complaint officer. The responsibility of such an officer is to ensure that the organization adheres to every mandated regulation. 
  • Another challenge faced by organizations concerning this process is the execution of compliance software for achieving and maintaining compliance. 

Regulatory Compliance vs Regulatory Affairs

The meaning of regulatory affairs and compliance can be confusing for one who is new to such concepts. They can clear all doubts that may arise by knowing the key differences between the two.  

Regulatory ComplianceRegulatory Affairs
It refers to the actions taken by any organization to adhere to the rules and regulations established by regulatory bodies and governments. It is a profession that governments developed to deal with a business’s adherence to the rules and regulations issued by them and regulatory bodies. 
Regulatory compliance specialists monitor whether a business’s products meet the standards set by the regulatory authorities and government.A regulatory affairs specialist ensures that a business keeps all employees licensed and secure. 

Frequently Asked Questions (FAQs)

What does a regulatory compliance officer do?

Usually, the tasks of such an officer include the following:

– Conducting audits regularly to evaluate compliance risk and managing it effectively through collaboration with the employees and the management team
– Serving as nodal authority to resolve every concerning compliance in the company
– Ensuring the business adapts to the changing regulatory requirements
– Enforcing certain disciplinary actions if violations of the compliance program or policy take place

How to improve regulatory compliance?

Some of the best practices to improve this type of compliance are as follows:

– Documenting all compliance processes
– Developing a compliance code of conduct, fostering ethical and fair practices
– Staying on top of the changes taking place in the regulatory environment at the industry as well as jurisdictional level
– Training employees through workshops to help them understand everything related to compliance
– Making preparations for regulatory audits

What is statutory and regulatory compliance?

Statutory compliance involves adhering to the rules and regulations set by a state or central government. On the other hand, regulatory compliance involves abiding by the rules set by a regulatory body and/or a government.

This article has been a guide to Regulatory Compliance & its meaning. We explain its examples, requirements, how to ensure it, & comparison with regulatory affairs. You may also find some useful articles here –

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